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 May
24, 2006, the last reported closing sale price of our common stock was $0.06 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  May  25,  2006.



                         TABLE  OF  CONTENTS

PROSPECTUS  SUMMARY                                                           1
RISK  FACTORS                                                                 4
USE  OF  PROCEEDS                                                             7
DETERMINATION  OF  OFFERING  PRICE                                            8
DILUTION                                                                      8
SELLING  SECURITY  HOLDERS                                                    8
PLAN  OF  DISTRIBUTION                                                        9
LEGAL  PROCEEDINGS                                                           10
DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS           11
SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS  AND  MANAGEMENT        11
INTEREST  OF  NAMED  EXPERTS  AND  COUNSEL                                   13
CAUTIONARY  STATEMENT  CONCERNING  FORWARD-LOOKING  STATEMENTS               13
DESCRIPTION  OF  BUSINESS                                                    14
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OR  PLAN  OF  OPERATION             17
DESCRIPTION  OF  PROPERTY                                                    23
CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS                           24
MARKET  FOR  COMMON  EQUITY  AND  RELATED  STOCKHOLDER  MATTERS              24
EXECUTIVE  COMPENSATION
FINANCIAL  STATEMENTS                                               F-1  -  F-25



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
-----------------  ----------------------


                                        2


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.

                                        3


                                  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.

                                        4


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.

                                        5


                         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.

                                        6


                                 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:

                                        7




                                                                                        
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.

                                        8




                                                                                                          
                                                                                                                       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.

                                        9


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  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
the  remaining  balance  was  settled  in  the  October  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 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  Brady's  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 stock and $10,000 to Lawrence
Brady,  Mark  Brady  and  their  counsel.

                                       10


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.

     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.

                                       11


         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


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

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

Common stock       Steven Jacobson                             4,005,317(a)(b)             7.9%
                   6600  E  Hampden  Ave
                   3rd  Floor
                   Denver,  CO  80224

Common stock       Myron Anduri                                3,208,149   (c)             6.5%
                   P.O.  Box  1051
                   Fairplay,  CO  80440


NOTES:

(a) Based on historical information and the fact that no Section 16 filings were
completed by Mr. Jacobson during 2005, although Company management has reason to
believe that Mr. Jacobson sold shares during 2005. Includes 300,000 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) Based on historical information and the fact that no Section 16 filings were
completed by Mr. Jacobson during 2005, although Company management has reason to
believe  that Mr. Jacobson sold shares during 2005. 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.

(c)  Includes  431,416  shares  and  250,000  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.



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

Common stock     Max Polinsky                                     925,000  (a)              2.0%
                 138  Portage  Ave.  East,  Ste. 406
                 Winnipeg,  Manitoba  R2COA1

Common stock     Patrick Gorman                                   675,000  (b)              1.4%
                 1666  K  Street  NW,  Ste  500
                 Washington,  D.C.  20006

Common stock     H. Douglas Saathoff                              948,324  (c)              2.0%
                 25106  Callaway
                 San  Antonio,  Tx  78258

Common stock     Myron Anduri                                   3,208,149  (d)              6.5%
                 PO  Box  1051
                 Fairplay,  CO  80440

Common stock     Directors and officers as a group              5,756,473                  10.8%

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  500,000  shares  under  options  exercisable  within  60  days.
(d)  Includes  431,416  shares  and  250,000  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. Based on historical
information  and  the  fact  that  no  Section  16 filings were completed by Mr.
Jacobson during 2005, although Company management has reason to believe that Mr.
Jacobson  sold  shares  during  2005.


                                       12


                           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,  2005  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, 2005 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.

                                       13


                             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. Utilizing our
proprietary  Nighthawk  control  board,  we  have designed a series of 'plug and
play'  devices  for  certain  common customer applications that 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. If our 'plug and
play'  devices do not fit a desired application, the Nighthawk control board can
be customized to fit into or alongside other devices that need to be controlled.
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 nine 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  (Utilities, Emergency Management and
IT/Telecommunications),  as  well  as  secondary  markets  (Irrigation,  Outdoor
Advertising,  Oil/Gas  and  Security)  for  its  products.

                                       14


TECHNOLOGY  AND  PRODUCTS

Nighthawk  products  have  been  in  service for over seven years. The Company's
installed  customer  base  includes  major  electric utilities, internet service
providers  and  fire  departments  in  over 40 states. Customers using Nighthawk
products  today include the Naval Air Warfare Center - Weapons Division, Mercury
Online Solutions, PECO Energy, Denver Fire Department, and Internet America. The
primary  distinguishing  feature of all Nighthawk products that is not shared by
its  competitors  across  the  various  markets  is its proprietary firmware and
software,  which  together  provide  the  intelligence  for  our  solutions. The
Company's  products  are  shipped  ready  for  use and are pre-programmed before
shipment  to  the  customer.

Nighthawk's  plug  and  play  products,  and the applications they are typically
utilized  for,  are  as  follows:

Utilities

CEO700:  Remote  power  connect/disconnect  of  customers  by electric utilities

PT1-LC:  Load  control  programs  utilized  by  electric  utilities

Emergency  Management

FAS8:  Firehouse  automation.  Upon  receiving  a  911  dispatch,  the FAS8 will
simultaneously  print  instructions,  activate  alarms, turn on lights, turn off
stoves,  open  bay doors and activate outdoor flashing lights within firehouses.

EA1: In-building alerting, including alarm activation and message display AL100:
remote  public  alerting

IT/Telecommunications

NH100:  Rebooting  or  on/off  applications  to  single devices like servers and
routers

NH8:  Rebooting  or  on/off  applications  for  up  to 8 individually controlled
devices

Using  the  proprietary Nighthawk control board, Nighthawk's products can be and
have  been  modified  to  fit  many  custom applications such as traffic control
signage and irrigation control. If a device needs to be turned on or off, we can
typically  develop  a  product  to  do  it.

Through  innovative  product  engineering  and  software,  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.
In  January  2006,  we  announced that the Company had signed both a value-added
reseller  agreement  and  a joint marketing agreement with Verizon Wireless. The
agreements  allow  Nighthawk to bundle access to Verizon Wireless's network with
Nighthawk products, and also calls for the two companies to collaborate on joint
marketing  opportunities.  Verizon Wireless operates an extensive paging network
throughout  the  United  States.  Verizon Wireless has agreed to provide airtime
access  to Nighthawk on that network on a wholesale basis, allowing Nighthawk to
mark  up  the  service  if  it  wishes  and sell Verizon Wireless airtime to its
customers,  who  then  utilize  the Verizon Wireless network to communicate with
their Nighthawk devices. The two companies are also working together to identify
customers  that  may  be  able  to  utilize  the  Verizon  Wireless  network  to
communicate  with  Nighthawk's  control  devices.

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.

                                       15


PATENTS  PENDING

The  Company  has two patent applications pending at the U.S. Patent Office: one
is  titled "Remote Disconnect Systems 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 one primary distinguishing feature that is not shared by our competitors
in  our  markets,  our proprietary firmware and software, which together provide
intelligent  solutions  for  our  customers.

Utility  competition.  The Company has several competitors for its CEO700 remote
power disconnect system. BLP Technologies makes a device that is very similar to
the  CEO700  which  also utilizes paging frequencies for activation. The Company
competes  with  BLP  Technologies directly for utility projects where either the
location  of  the  utility's customers or directives of the utility dictate that
paging technology must be used for remote connect/disconnect of customers. If we
are  able  to  secure  our  patent titled "Remote Disconnect Systems for Utility
Meters",  we  may  be  able  to preclude BLP from providing services using their
product,  which  is  called  X-PulseTM . Carina Technology, Inc. makes a utility
meter  that  it  reports  is  capable  of  reading  a  meter  and/or  remotely
disconnecting service utilizing cellular technology. Cellular technology/service
is  generally  more  expensive  than  paging technology/service, but affords the
utility  the ability to communicate to and from the meter and disconnect device.
This  would allow the user to connect/disconnect service to a customer, and take
a  meter  reading  as  well.

Rebooting  competition:  rebooting  of  computers,  routers  and  other  digital
equipment has historically utilized telephone lines or Internet-based technology
to  access  the  product.  Companies such as DataProbe, Inc., Western Telematic,
Inc.  and  American Power Conversion Corp. make devices that utilize these forms
of technology to communicate to their devices. 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. Our products also offer
an  'out  of  band'  solution,  meaning  that  our  customers utilize a separate
(paging)  network,  instead  of  their  own  existing network, to reboot devices
within  their  own  network.

Emergency  Management  competition:  this is an emerging market that has not yet
developed  product standards and therefore there is no identified competition as
of  the  date  of  this report. Historically, the Company has provided equipment
that  has  been  used  for  activating  signs for departments of transportation,
in-station  firehouse  alerting  which includes message printout, and activating
civil  defense  sirens.  The  Company  believes  that its existing technology is
well-suited  for in-building and in-house emergency alerting in combination with
alerting  of  first  responders.

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.

                                       16


During  2005,  the Company hired its first full time sales staff. This staff now
consists of one inhouse sales person who handles incoming customer inquiries and
makes  outbound  sales calls, as well as a full time account executive who calls
on  potential customers. In addition, the Company announced in January 2006 that
it  had  signed  a  joint  marketing agreement with Verizon Wireless. Under this
agreement, the companies will collaborate to identify, pursue and close mutually
beneficial  business  opportunities,  and  Verizon Wireless sales personnel will
introduce  Nighthawk  Systems  products  to  new  and  existing  customers.

                                    EMPLOYEES

As  of  December  31,  2005,  we  had  nine  full time employees. We believe our
relations  with  all  of  our  employees  are  good.

            MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FORWARD  LOOKING  STATEMENTS

Discussions  and  information  in this document, which are not historical facts,
should  be considered forward-looking statements. With regard to forward-looking
statements,  including  those  regarding  the  potential revenues from increased
sales, and the business prospects or any other aspect of Nighthawk Systems, Inc.
("the  Company"),  actual results and business performance may differ materially
from that projected or estimated in such forward-looking statements. The Company
has  attempted  to  identify  in  this  document  certain of the factors that it
currently believes may cause actual future experience and results to differ from
its  current  expectations.  Differences  may be caused by a variety of factors,
including  but  not  limited  to,  adverse economic conditions, entry of new and
stronger  competitors,  inadequate  capital  and the inability to obtain funding
from  third  parties.

The  following  information  should  be  read  in conjunction with the Company's
audited  financial  statements  for  the years ended December 31, 2005 and 2004.

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.

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
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  digital  network  components
-  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
-  In-station  firehouse  alerting
-  Turning  irrigation  systems  on  or  off
-  Turning  heating  or  cooling  equipment  on  or  off

                                       17


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 or Internet-based systems.
Opportunities  exist  for companies that provide intelligent wireless solutions,
as  telephone  lines are expensive and limited in availability and function, and
Internet-based  solutions  are  not  always  available or desirable. Nighthawk's
products  are  wireless,  and can be designed to work with a variety of wireless
media.  They  often offer an 'out of band' control solution - they function on a
different  network  than  the  item  to  be  turned  on  or  off.  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.

COMPARISON  OF  YEARS  ENDED  DECEMBER  31,  2005  AND  2004
REVENUE

The  components of revenue, including revenues from discontinued operations, and
their  associated  percentages  of  total  revenues,  for the fiscal years ended
December  31,  2005  and  2004  are  as  follows:

YEARS ENDED DECEMBER 31,
                            --------------------------------
                                2005                2004
                            -----------          -----------
Product Revenues
----------------------
Nighthawk NH100 & NH8   $   119,078    23%  $   186,492   31%
PT1 LC                        1,120     -        64,536   11%
PT 1000 & PT Boards         118,483    22%       99,256   16%
CEO 700                     157,470    30%      197,508   32%
Hydro 1                      76,975    15%            -    -
Other product                 5,651     1%       11,938    2%
Freight                       5,468     1%        6,848    1%
                        -----------  -----  -----------  ----
Total product revenues      484,245    92%      566,578   93%
Airtime sales                44,444     8%       43,602    7%
                        -----------  -----  -----------  ----
Total revenues          $   528,689   100%  $   610,180  100%
                        ===========  =====  ===========  ====

Revenues  from  continuing  operations  are made up of product sales and airtime
billed  to  customers  for  Nighthawk  Systems,  Inc.  products.  Revenues  from
continuing  operations  declined  $81,491  or  13%  between years. The Company's
revenues  have  historically  been  dependent on a handful of customers who have
each  placed  a  large order. These contracts originated in 2002, and production
under  these  contracts  stretched into 2004. In 2004, approximately $135,000 of
the  Company's  rebooting  product revenues were generated by a single customer.
While  this customer continued to order equipment throughout 2005, revenues from
this  customer  declined  to approximately $33,000 during 2005. During 2004, two
customers accounted for approximately $140,000 of the total CEO 700 revenues for
the  year.  These  two customers did not account for any CEO 700 revenues during
2005.  During  2004,  one customer accounted for almost all of the approximately
$65,000  in  revenues  from the sale of PT1 LC load control boards. During 2005,
the  Company  did not market this product, and generated only $1,120 in revenues
from  the  product.  Decreases  from the culmination of these three projects was
offset  partially by the approximately $76,000 sale of Hydro1 irrigation control
units as part of a government-funded project in the state of New Mexico early in
2005.  While  the  Company  anticipates  that it may sell more Hydro1 irrigation
control units in the future, it anticipates that such sales will remain 'project
oriented'  until  and  unless  it  decides to dedicate significant marketing and
sales  dollars  to  this  product.

In  an  effort  to  generate additional business from new customers, the Company
sought  financing  during 2004 which culminated in our funding relationship with
Dutchess  Private  Equities,  II,  L.P.  ("Dutchess").  Using  funding from this
source,  the  Company  hired  its  first full time sales staff consisting of two
people  early  in  2005.  Throughout  2005,  the  sales  staff  was charged with
generating new business opportunities for the Company's core products, the NH100
rebooting  device and the CEO700 whole house disconnect device. It also launched
a  new  website  during  2005  which  allows potential customers to send contact
information and product inquiries directly to the Company via the Internet. Even
though the Company did not actively market its rebooting devices during 2005, if
results  from the one major customer are excluded from both 2004 and 2005, sales
of  this  product  actually increased from year to year. New rebooting customers
were  added,  primarily  within the Wireless Internet Service Provider industry.
During  2005,  in  spite of long sales cycles typically associated with electric
utilities,  the  Company added over a dozen new utilities to its CEO700 customer
base.  More  importantly,  these  efforts  have  lead  to larger potential sales
opportunities within the electric utility industry. As of December 31, 2005, the
Company  had  submitted  bids  on  over  $6.0 million in potential product sales
within  the  industry,  and was in contact with entities that are planning large
deployments  over  the  next  18  months.

During  2005,  the  Company  continued  selling  it's  PT1000  control boards to
customers  for  a  variety  of  applications, including sign control for various
departments  of  transportation.  The  Company  also  sold several units to fire
departments  for in-house fire station alerting. This resulted in an increase in
PT1000  board  sales  between  years  of  approximately  $19,000.

Cost  of  goods  sold  declined approximately $69,000, or 16% between years, and
decreased  as  a percentage of product revenues from 72% in 2004 to 70% in 2005.
As  a  result,  the  Company's gross margin increased from 28% in 2004 to 30% in
2005.  While  lower  production  volumes  between  years  caused the decrease in
overall  cost  of  goods  sold, the Company's gross profit declined only 7% from
$171,707  in  2004 to $159,358 in 2005. Sales of the Hydro1, a relatively higher
margin  product,  in  2005,  as  well  as  changes  made  to the Company's NH100
rebooting  product  contributed to the increased gross margin between years. The
Company  sold  no  Hydro1  irrigation control units during 2004, and the Company
enhanced  the  design of its core rebooting product so that it is less expensive
to  produce  during  2005.

                                       18


Selling,  general  and  administrative  ("SG&A) expenses increased approximately
$636,000,  approximately  48%, from 2004 to 2005. During 2005, the Company spent
approximately  $300,000  on  public  relations services in an effort to increase
investor  awareness  of  the  Company,  and  to  promote  sales of the Company's
products.  The  Company's  ability  to  receive funding from its primary funding
source under agreements signed in August 2004 is dependent on both the price and
trading  volume  of  its  common stock. As such, the Company spent more money on
public relations efforts during 2005 than it did in 2004. The Company also spent
approximately  $285,000  more  on  salaries and wages during 2005 than it did in
2004. The Company hired a corporate controller who was employed during the first
9 months of the year before he resigned, and then hired a Vice President/General
Manager  in  early  October  2005.  In addition, as mentioned above, the Company
hired  its  first full time sales staff during 2005 that was employed throughout
the  year,  and  also contracted for marketing help throughout 2005. The Company
spent  approximately  $175,000  more  on sales and marketing efforts during 2005
than  it  did  during  2004.

Related  party  interest  expense  decreased  $42,601  between years because the
Company  converted  almost  all  related party debt to common stock during 2004.
Other  interest  expense  increased  approximately $711,000 between years due to
borrowings  between the Company and its primary funding partner, Dutches Private
Equities.  During  2005,  Dutchess  loaned  the  company  net  cash  proceeds of
$1,460,633  in the form of short-term promissory notes and long-term convertible
debentures.  The  promissory  notes have no stated interest rate but have a face
amount  greater than the funded amount. The notes are recorded by the Company at
the  discounted amount, and the difference between the face and funded amount is
recognized  as  interest  expense  over  the  life of the loan. During 2005, the
Company  recognized  approximately  $292,000  in  non-cash expense in amortizing
these  differences.  Outstanding  principal  balances  on  promissory notes that
matured  during  the  year  were rolled into new promissory notes or debentures,
plus a 10% penalty on the face amount of the note that expired. During 2005, the
Company  recognized  approximately $239,000 in such penalties, which it recorded
as  interest  expense.  The  convertible debentures carry interest rates of 10%.
Dutchess  also  received incentive shares on all new cash proceeds loaned to the
Company.  These  incentive  shares are recorded as prepaid interest and expensed
over  the  life  of  the  loan. During 2005, the Company amortized approximately
$241,000  in  incentive  fees  ,  which  was  also included in interest expense.

Airtime  sales  were  approximately $44,000 during both years presented. Airtime
access  to  communicate  to the Company's control devices represents a source of
recurring  revenue  to the Company unless the customer arranges for such service
on  their  own.  The  Company  typically  bills for airtime access on a prepaid,
quarterly  basis.  Even though the Company continued to add new customers during
2005,  airtime  billed  to  those customers was offset by revenues lost when the
Company's  largest  rebooting  customer  had  its  own asset management contract
suspended with a large company and therefore no longer needed airtime to service
that  company.

The  net  loss  for 2005 was $2,692,656, or $0.07 per share as compared to a net
loss  of  $1,377,395, or $0.05 per share in 2004. The increased net loss and net
loss  per  share  was  principally  the  result  of  non-cash  interest  expense
associated  with  the  Company's  funding  with Dutchess during 2005, as well as
public  relations  efforts  during the year. The addition of sales and marketing
personnel  and  related  activities  also  contributed  to  the  increase.

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. There
were  no  bill  and  hold items at December 31, 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 liabilities on the
balance  sheet  at  December  31,  2005,  is  approximately  $12,200.

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.

                                       19


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.

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OR  PLAN  OF  OPERATION

FORWARD-LOOKING  STATEMENTS

Discussions  and  information  in this document, which are not historical facts,
should  be considered forward-looking statements. With regard to forward-looking
statements,  including  those  regarding  the  potential revenues from increased
sales,  and  the  business  prospects  or any other aspect of Nighthawk Systems,
Inc.'s  business,  actual results and business performance may differ materially
from  that  projected or estimated in such forward-looking statements. Nighthawk
Systems, Inc. ("the Company") has attempted to identify in this document certain
of the factors that it currently believes may cause actual future experience and
results  to differ from its current expectations. Differences may be caused by a
variety  of  factors, including but not limited to, adverse economic conditions,
entry  of  new and stronger competitors, inadequate capital and the inability to
obtain  funding  from  third  parties.

The  following  information  should  be  read  in conjunction with the unaudited
condensed  consolidated  financial statements included herein which are prepared
in accordance with accounting principles generally accepted in the United States
of  America  for  interim  financial  information.

GENERAL

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.

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
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.

Applications  for  our  intelligent  products  include,  but are not limited to:
-  Rebooting  remotely  located  computer  equipment
-  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 2005, the Company hired its first full-time personnel that were dedicated
only  to  developing sales channels and sales opportunities Throughout 2005, the
sales  staff  was  charged  with  generating  new business opportunities for the
Company's  core  products, the NH100 rebooting device and the CEO700 whole house
disconnect  device.  It  also  launched  a  new website during 2005 which allows
potential  customers  to send contact information and product inquiries directly
to  the  Company  via  the  Internet.

                                       20


Even  though  the  Company  did not actively market its rebooting devices during
2005,  if  results  from  the one major customer are excluded from both 2004 and
2005,  sales of this product actually increased from year to year. New rebooting
customers  were  added,  primarily within the Wireless Internet Service Provider
industry.  During  2005, in spite of long sales cycles typically associated with
electric  utilities,  the Company added over a dozen new utilities to its CEO700
customer  base.  More  importantly,  these efforts have lead to larger potential
sales  opportunities  within  the  electric utility industry. As of December 31,
2005,  the  Company had submitted bids on over $6.0 million in potential product
sales  within  the  industry, and was in contact with entities that are planning
large  deployments  over  the  next  18  months.

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. There
were  no  bill  and  hold  items  at  March 31, 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  March  31,  2005,  is  approximately  $13,073.

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.

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 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.

COMPARISON  OF  THE  THREE  MONTHS  ENDED  MARCH  31,  2006  AND  MARCH 31, 2005
REVENUE

The  components  of  revenue and their associated percentages of total revenues,
for  the  three  months  ended  March  31,  2006  and  2005  are  as  follows:



                                                                  
                               Quarterly period ended March 31,
                                 ----------------------------
                                      2006           2005         Change %       Change $
                                 -------------  -------------  -------------  -------------
Revenues:
Rebooting products               $ 47,070  33%  $ 21,604  13%       118%      $ 25,466
Logic boards                       17,465  12%    25,853  15%       (32%)       (8,338)
Utility products                   47,998  34%    31,225  18%        54%        16,773
Emergency notification products    17,815  13%         -   -         n/a        17,815
Hydro 1                                 -   -     76,750  45%        n/a       (76,750)
Airtime sales                       8,045   6%    14,233   8%       (43%)       (6,188)
Other product                       1,392   1%       355   0%       292%         1,037
Freight                             1,602   1%     1,202   1%        33%           400
                                 -------------  -------------  -------------  -------------
Total revenues                   $141,387 100%  $171,222 100%       (17%)     $(29,835)



Revenues  for  the  three-month  period  ended  March  31, 2006 were $141,387 as
compared  to $171,222 for the corresponding period of the prior year, a decrease
of  17%  between  periods.  During  the  three  months ended March 31, 2005, one
customer, who purchased the Company's Hydro 1 product, represented approximately
46%  of  the  Company's  total  revenue.  This  sale  was  made  as  part  of  a
stated-funded  project  in  New Mexico, and the Company has not marketed or sold
Hydro  1's since that time. The Company does not consider the Hydro 1 to be part
of  its  portfolio  of  products  that it markets and sells on an ongoing basis.
Sales of the Company's core products (rebooting, utility, emergency notification
and  logic  boards)  increased  67% between the periods due to the marketing and
sales  efforts  launched  by  the  Company  during  2005. Sales of the Company's
rebooting  products  more than doubled, as the Company began focusing on selling
to  Wireless Internet Service Providers. Sales of utility products increased 18%
as  the  Company added new customers to its base during 2005 and the first three
months  of  2006. Utility customers typically order product on a test basis, and
then  reorder  on  a  recurring  basis  if  they  are pleased with the product's
performance.  Sales  of the Company's logic boards decreased between the periods
presented,  but  during  2005  the Company began selling FAS8 firehouse alerting
systems.  Fire  departments began buying the FAS8 instead of using the Company's
PT1000  logic  boards for their station alerting. The decrease in sales of logic
boards  of approximately $8,000 was more than offset by approximately $18,000 in
sales  of  FAS8's.

                                       21


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 $5,712 or 5% to $98,812 for
the three months ended March 31, 2006 from $104,524 for the corresponding period
of  the prior year but increased as a percentage of revenues between the periods
from  61%  in  2005  to  70%  in  2006.  As a result, the Company's gross margin
decreased  between the periods from 39% to 30%. This decrease is almost entirely
due  to  the sale of the higher margin Hydro 1 units during the first quarter of
2005.

Selling,  general  and  administrative expenses for the three months ended March
31,  2006  increased  by  $195,560  or  35%  to  $757,220  from $561,660 for the
three-month  period  ended  March  31,  2005.  This  increase  was  due  to  the
recognition  of  approximately  $180,000  in  noncash expenses from unregistered
stock  issuances  to  public  relations  firms.

Interest  expense  increased  $469,718  or  358% between the three-month periods
presented.  The  increase  was  due  to interest expense related to the Dutchess
notes  and  debentures,  several which were paid off during the first quarter of
2006  prior  to  their maturity date. When this occurs, the Company expenses any
unamortized  discount  associated  with  the debt being paid off, as well as any
unamortized  beneficial  conversion  expense, any unamortized expense associated
with  incentive shares issued with the debt, and any early redemption penalties.
During  the  first  quarter  of 2006, the Company recognized interest expense of
approximately  $153,000  related  to  the  beneficial  conversion  feature  of
debentures,  as  well  as approximately $192,000 in interest expense related for
the value of incentive shares issued to Dutchess in exchange for money loaned to
the  Company.  The  Company  also  recognized  approximately $77,000 in interest
expense  during the period in early redemption penalties on debentures that were
paid  off  during  the  period.

The  net  loss to common shareholders for the three-month period ended March 31,
2006  was $1,315,681 compared to $626,499 for the three-month period ended March
31,  2005.  The increase in net loss was due primarily to increased expenses for
public  relations  campaigns, and interest expense related to Dutchess notes and
debentures.

LIQUIDITY  AND  CAPITAL  RESOURCES
The  Company  incurred  a net loss of approximately $2.7 million during the year
ended  December  31,  2005  and  had a stockholders' deficit and working capital
deficiency  of  approximately  $2.5  million  and  $500,000, respectively, as of
December 31, 2005. The Company's financial statements for the three months ended
March  31,  2006 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
$1.3  million  during  the  quarter ended March 31, 2006 and had a stockholders'
deficit and working capital deficiency of approximately $2.1 million and $57,000
respectively,  as  of  March  31,  2006.

The Report of the Company's Independent Registered Public Accounting Firm on the
Company's  financial  statements  as of and for the year ended December 31, 2005
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.

Although  no  assurance  can  be  given  that  such  plans  will be successfully
implemented,  management's  plans  to  address  these  concerns  include:
-  Raising  working  capital  through  additional  borrowings.
-  Raising  equity  funding  through  sales  of  the  Company's  common  stock.
-  Implementation  of  the  Company's  sales  and  marketing  plans.

During  the  quarter ended March 31, 2006, cash used in operating activities was
approximately  $605,000. Net proceeds from the issuance of a note and debentures
to  Dutchess  were  $615,000.  Major  cash  outlays  during  the  quarter  were
approximately  $187,000  for  public  relations  efforts,  $171,000  for
payroll/employee benefits, $81,000 for inventory, $68,000 for consulting expense
and  $39,000  for  sales  and  marketing  efforts.

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 August 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.

                                       22


During  2005, Dutchess provided the Company with $1,461,133 in net cash proceeds
in  return  for convertible debentures and promissory notes totaling $2,621,469.
During  the  twelve  months  ended December 31, 2005, the Company also exercised
seventeen  (17)  puts  to  Dutchess  that produced cash proceeds of $342,477, of
which  $245,384  was  used  to  repay outstanding notes and accrued interest, in
exchange  for  the  issuance  of  3,819,654  shares.  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  aforementioned  funding  from  Dutchess was used to fund the cash shortfall
generated  from  operations  during  2005  of  approximately  $1.6  million.

The  Company issued 12,615,074 shares to Dutchess during the quarter ended March
31,  2006  which  was  used  to  pay  down $1,216,193 in debt during the period.

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 from or selling equity to
Dutchess  or  other  parties  to meet those obligations. 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.
The  aforementioned  funding  from  Dutchess was used to fund the cash shortfall
generated  from  operations  during  2005  of  approximately  $1.6  million.

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.

During 2005, the Company hired its first full-time personnel that were dedicated
only  to  developing  sales  channels  and sales opportunities. The Company also
developed  new  or  enhanced  existing  products  in  order  to better penetrate
targeted  markets.  As  a  result,  as  of  December  31,  2005, the Company had
developed a pipeline of potential sales opportunities that included in excess of
$6,000,000  for  which  it  had submitted formal bids. No assurance may be given
that  the  Company  will be successful in winning these bids or growing revenues
based  on  the  pipeline  of  opportunities.

The  Company's  strategic  initiatives  for  2006  include:
-  Capitalize  on  existing  enterprise  sales  opportunities
-  Cultivate  and  capitalize  on  indirect  sales  channels
-  Enhance  our  marketing  effort to support direct and indirect sales channels
-  Bundle  our  products with ancillary products and services to enhance revenue
opportunities
-  Develop  and  sell  a  device  that  functions on multiple wireless protocols
-  Form  an  advisory  board  with relevant industry expertise and relationships
-  Execute  on a strategic acquisition that is scalable and complementary to our
existing  business

                             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

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.

                                       23


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.

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, Max
Polinksy,  and  the company is affiliated with the father of Mr. Polinksy. 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.

            MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market  for  Common  Equity

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, 2005 and 2004, and the
first  quarter  of  fiscal  2006:

QUARTER  ENDED        HIGH     LOW          QUARTER  ENDED         HIGH     LOW
--------------        ----     ---          -------------          ----     ---
March  31,  2006      0.14     0.04
December  31,  2005   0.09     0.03         December  31, 2004     0.23     0.09
September  30,  2005  0.14     0.06         September  30, 2004    0.25     0.12
June  30,  2005       0.23     0.12         June  30, 2004         0.38     0.20
March  31,  2005      0.27     0.14         March  31, 2004        0.35     0.18

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

                                                                                             
                                     ANNUAL COMPENSATION       LONG TERM                PAYOUTS
                                                            COMPENSATION AWARDS
                                                   OTHER ANNUAL      RESTRICTED   SECURITIES UNDERLYING  LTIP        ALL OTHER
NAME AND PRINCIPAL POSITION YEAR  SALARY   BONUS  COMPENSATION ($) STOCK AWARD ($)   OPTIONS/SARS (#)   PAYOUTS($)  COMPENSATION ($)
--------------------------- ----  ------- ------- ---------------- --------------- -------------------- ----------  ----------------
H. Douglas Saathoff,
Chief Executive Officer (a) 2005 $115,000 $13,500             -                -                    -           -           -
                            2004 $120,000 $     -             -                -              500,000           -           -
                            2003 $115,000 $     -             -                -                    -           -           -

Myron Anduri, President (b) 2005 $115,000 $     -             -                -                    -           -           -
                            2004 $120,000 $     -             -                -              250,000           -           -
                            2003 $ 84,125 $     -             -                -                    -           -           -


NOTES:
(a)  H.  Douglas  Saathoff  was named the Chief Executive Officer in March 2003.
(b)  Myron  Anduri was named President in December 2003. In 2004, 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.

                                       24




                                                                                    
NAME       NUMBER OF SECURITIES         PERCENT OF TOTAL
OPTIONS/SARS GRANTED TO EMPLOYEES    UNDERLYING OPTIONS GRANTED  EXERCISE OR BASE PRICE   ($/SH)   EXPIRATION DATE
------------------------------------------------------------------------------------------------------------------


No  options  or  stock appreciation rights were granted to executive officers of
the  registrant  in  2004  or  2005.

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,
3,435,000  shares  of  common  stock  authorized to be issued under the Plan are
subject  to  outstanding  options already granted under the Plan and 935,000 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 EQUITY COMPENSATION
               NUMBER OF SECURITIES TO BE ISSUED UPON  WEIGHTED AVERAGE EXERCISE PRICE        PLANS (EXCLUDING SECURITIES
PLAN CATEGORY      EXERCISE OF OUTSTANDING OPTIONS         OF OUTSTANDING OPTIONS                REFLECTED IN COLUMN (A)
-----------------------------------------------------------------------------------------------------------------------------------
                                  (a)                                   (b)                                     (c)

Nighthawk Systems,
Inc. 2003 Stock
Option Plan
approved by
security holders              3,435,000                                $ 0.16                                 935,000
-----------------------------------------------------------------------------------------------------------------------------------


                             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.

                                       25


                              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, 2005, 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, 2005.
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 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, 2005, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31,  2005,  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  $2.7  million  during the year ended December 31, 2005, and has a
stockholders'  deficit  and  working  capital  deficiency  of approximately $2.5
million and $500,000, respectively, at December 31, 2005. 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 17, 2006, except for the last paragraph of Note 11 as to which the date is
April  14,  2006

                                     F-1



                                NIGHTHAWK SYSTEMS, INC.
                         CONDENSED CONSOLIDATED BALANCE SHEET
                                 DECEMBER 31, 2005

                                                                                                   
        ASSETS

Current assets:
     Cash                                                                                             $    91,205
     Accounts receivable, net of allowance for doubtful accounts of $750                                   83,205
     Inventories                                                                                           79,877
     Prepaids                                                                                             645,534
                                                                                                      ------------
               Total current assets                                                                       899,821
                                                                                                      ------------

Furniture, fixtures and equipment, net                                                                     13,431
Intangible and other assets                                                                                19,549
                                                                                                      ------------
                                                                                                      $   932,801
                                                                                                      ============


      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
    Accounts payable                                                                                  $   290,249
    Accrued expenses                                                                                      277,579
    Line of credit                                                                                         19,792
    Notes payable:
        Related parties                                                                                    14,394
        Other                                                                                             805,036
                                                                                                      ------------
               Total current liabilities                                                                1,407,050
                                                                                                      ------------

Long-term liabilities:
   Convertible debt                                                                                     2,064,836
                                                                                                      ------------
Commitments and contingencies

Stockholders' deficit:
    Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding                 -
    Common stock; $0.001 par value; 200,000,000 shares authorized; 46,477,158 issued and outstanding       46,477
    Additional paid- in capital                                                                         5,464,436
    Accumulated deficit                                                                                (8,049,998)
                                                                                                      ------------
               Total stockholders' deficit                                                             (2,539,085)
                                                                                                      ------------
                                                                                                      $   932,801
                                                                                                      ============

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


                                     F-2




                           NIGHTHAWK SYSTEMS, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                           YEARS ENDED DECEMBER 31,
                                                                            
                                                                         2005          2004
                                                                    ------------  ------------
Revenue                                                             $   528,689   $   610,180
Cost of goods sold                                                      369,331       438,473
                                                                    ------------  ------------
     Gross profit                                                       159,358       171,707

Selling, general and administrative expenses                          1,947,420     1,311,824
                                                                    ------------  ------------
     Loss from operations                                            (1,788,062)   (1,140,117)

 Interest expense
     Related parties                                                      2,055        44,656
     Other                                                              902,539       191,978
                                                                    ------------  ------------
Net loss                                                             (2,692,656)   (1,376,751)
Less: preferred stock dividends                                            (440)         (644)
                                                                    ------------  ------------
Net loss to common stockholders                                     $(2,693,096)  $(1,377,395)
                                                                    ============  ============
Net loss to common stockholders per basic and diluted common share  $     (0.07)  $     (0.05)
                                                                    ============  ============
Weighted average common shares outstanding - basic and diluted       39,094,751    27,674,693

          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, 2005 and 2004

                                                                                                
                                          Preferred Stock     Common stock
                                          --------------- -------------------     Additional     Special   Accumulated
                                          Shares  Amount    Shares     Amount   paid-in capital  Warrants    deficit        Total
                                          ------  ------  ----------  --------  ---------------  --------  -----------  ------------
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
consulting 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
placement fees & incentives                                  350,000       350           37,150                              37,500

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

Common stock issued for
investment agreement placement fee                         2,000,000     2,000           (2,000)                                  -

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)

Common stock issued for exercise of
Dutchess puts and warrants, including
commissions                                                4,105,616     4,070          358,079                             362,185

Common stock and warrants issued for cash                    750,000       750          116,750                             117,500

Common stock issued as incentive
on notes payable                                           3,777,500     3,777          333,498                             337,275

Common stock and options issued for
consulting and other services                              1,200,000     1,200          235,175                             236,375

Common stock issued as settlement
of lawsuit                                                   250,000       250           22,250                              22,500

Conversion of accrued liabilities
to common stock                                              313,100       313           56,307                              56,620

Conversion of debenture and accrued
interest to common stock                                   2,761,958     2,762          252,228                             254,990
Series A preferred dividend                                    2,487         2               (2)                                  -

Conversion of Series A Preferred
stock to common stock                    (5,000) (12,500)     50,000        50           12,450                                   -
Exercise of Special Warrants                               1,307,250     1,307          187,468  (188,775)                        -

Amortization of beneficial conversion
feature on notes payable                                                                  5,717                               5,717
Net loss                                                                                                    (2,692,656)  (2,692,656)
                                          ------  ------  ----------  --------  ---------------  --------  -----------  ------------
Balances, December 31, 2005                   -  $    -   46,477,158  $ 46,477  $     5,464,436  $      -  $(8,049,998) $(2,539,085)
                                          ======  ======  ==========  ========  ===============  ========  ===========  ============


                                     F-4



                      NIGHTHAWK SYSTEMS, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 TWELVE MONTHS ENDED DECEMBER 31,

                                                                                      
                                                                                  2005          2004
                                                                              ------------  ------------
Cash flows from operating activities:
      Net loss                                                                $(2,692,656)  $(1,376,751)
                                                                              ------------  ------------
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization                                                    6,438         7,707
   Bad debt expense                                                                 1,861           380
   Common stock issued for consulting and other services                          258,250       205,775
   Beneficial conversion feature                                                    5,717        92,465
   Common stock and warrants issued for interest                                   14,365        78,658
   Common stock issued as placement fee on notes payable                                -        37,500
   Common stock issued as settlement for lawsuit                                   22,500             -
   Note payable issued for consulting                                               8,283             -
   Loan discounts and warrants                                                    327,032        15,104
   Notes payable issued for penalty interest                                      251,636             -
   Shares issued as incentives on notes payable                                   275,142             -
   Stock options issued for consulting services                                    13,875       119,798
Changes in assets and liabilities, net of business acquisition:
  (Increase) in accounts receivable                                               (39,312)       (4,217)
   Decrease (increase) in inventories                                             (53,168)       48,620
   Decrease (ncrease) in prepaids                                                  10,329      (105,407)
   Increase in intangible and other assets                                         (5,807)       (5,084)
   Increase (decrease) in accounts payable                                       (132,005)       29,716
   Increase in accrued expenses                                                    84,869         3,852
                                                                              ------------  ------------
Total adjustments                                                               1,050,005       524,867
                                                                              ------------  ------------
Net cash used in operating activities of continuing operations                 (1,642,651)     (851,884)
                                                                              ------------  ------------

Cash flows from investing activities:
   Purchases of furniture, fixtures and equipment                                  (6,802)            -
                                                                              ------------  ------------
Net cash used in investing activities                                              (6,802)            -
                                                                              ------------  ------------

Cash flows from financing activities:
   Cash overdraft                                                                       -        (3,902)
   Proceeds from the sale of preferred stock                                            -        12,500
   Proceeds from notes payable, related parties                                         -        26,261
   Payments on notes payable, related parties                                      (1,008)      (36,318)
   Proceeds from notes payable, other and warrants                              1,461,133       585,000
   Payments on notes payable, other                                               (21,410)      (71,664)
   Payments on other related party payable                                              -       (25,000)
   Proceeds from sale of note                                                       3,000
   Proceeds from exercise of warrants                                              31,250
   Proceeds from exercise of puts, net of commissions                              89,075
   Proceeds from the issuance of special warrants                                       -       188,775
   Proceeds from the sale of common stock                                         117,500       237,350
                                                                              ------------  ------------
Net cash provided by financing activities                                       1,679,540       913,002
                                                                              ------------  ------------
Net increase in cash                                                               30,087        61,118
Cash, beginning balance                                                            61,118             -
                                                                              ------------  ------------
Cash, ending balance                                                          $    91,205   $    61,118
                                                                              ============  ============


                                     F-5



                     NIGHTHAWK SYSTEMS, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 TWELVE MONTHS ENDED DECEMBER 31,
                           (CONTINUED)

                                                                                      
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                                                                                  2005           2004
                                                                              ------------  ------------
Cash paid for interest                                                        $    38,717   $    26,228
                                                                              ============  ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Common shares issued as incentives for notes payable, other                   $   337,275
                                                                              ============
Common shares and options issued for prepaid consulting agreements            $   236,375
                                                                              ============
Conversion of accrued expenses to common stock                                $    56,620
                                                                              ============
Conversion of Series A preferred stock to common stock                        $    12,500
                                                                              ============
Conversion of Special Warrants to common stock                                $   188,775
                                                                              ============

Common shares issued as payments on notes payable, other                      $   245,384
                                                                              ============

Common shares issued for commissions on puts                                  $     5,568
                                                                              ============

Conversion of notes payable and accrued interest to common stock
   Notes payable                                                              $   240,625   $   224,390
   Accrued interest                                                                14,365        22,179
                                                                              ------------  ------------
Total amount converted                                                        $   254,990   $   246,569
                                                                              ============  ============
Preferred stock dividends issued in common stock                              $       440   $       644
                                                                              ============  ============

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


                                     F-6


                           NIGHTHAWK  SYSTEMS,  INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 2005 AND 2004

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.

GOING  CONCERN,  RESULTS  OF  OPERATIONS  AND  MANAGEMENT'S  PLANS

The  Company  incurred  a net loss of approximately $2.7 million during the year
ended  December  31,  2005  and  had a stockholders' deficit and working capital
deficiency  of  approximately  $2.5  million  and  $500,000, respectively, as of
December  31, 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  the  Company's  sales  and  marketing  plans.

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 August 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.

From  August  2004, when Dutchess first provided funding to the Company, through
December  31,  2005,  Dutchess  provided the Company with $1,960,633 in net cash
proceeds  in  return  for  convertible  debentures and promissory notes totaling
$2,621,469.  During  the twelve months ended December 31, 2005, the Company also
exercised  seventeen  (17)  puts  to  Dutchess  that  produced  cash proceeds of
$342,477,  of  which  $245,384  was  used to repay outstanding notes and accrued
interest,  in  exchange  for the issuance of 3,819,654 shares. 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.
For  more  information  on  the  transactions with Dutchess, please see Note 7 -
Notes  payable, Note 8 - Stockholders' deficit, and Note 11 - Subsequent events.
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.

                                     F-7


During 2005, the Company hired its first full-time personnel that were dedicated
only  to  developing  sales  channels  and sales opportunities. The Company also
developed  new  or  enhanced  existing  products  in  order  to better penetrate
targeted  markets.  As  a  result,  as  of  December  31,  2005, the Company had
developed a pipeline of potential sales opportunities that included in excess of
$6,000,000  for which it had submitted quotes at customers' requestsNo assurance
may  be  given  that  the  Company  will  be successful in winning these bids or
growing  revenues  based  on  the  pipeline  of  opportunities.

The  Company's  strategic  initiatives  for  2006  include:
-  Capitalize  on  existing  enterprise  sales  opportunities
-  Cultivate  and  capitalize  on  indirect  sales  channels
-  Enhance  our  marketing  effort to support direct and indirect sales channels
-  Bundle  our  products with ancillary products and services to enhance revenue
   opportunities
-  Develop  and  sell  a  device  that  functions on multiple wireless protocols
-  Form  an  advisory  board  with relevant industry expertise and relationships
-  Execute  on a strategic acquisition that is scalable and complementary to our
existing  business

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.

2.  SUMMARY  OF  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, 2005 or 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
expenses  on  the  balance sheet at December 31, 2005, is approximately $12,200.

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.

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 December 31, 2005, the Company had approximately $83,200 in accounts
receivable, net of the allowance for doubtful accounts. Approximately $39,106 of
this  balance,  or  47%,  was  from  three customers. Each balance was collected
subsequent  to  December  31,  2005.

During  2005,  two  customers  accounted  for approximately 12% and 15% of total
revenue,  respectively. During 2004, three customers accounted for approximately
26%,  20%  and  12%  of  sales,  respectively.

During  2005,  the Company's single largest supplier accounted for approximately
54%  of  the Company's purchases of pre-manufactured component materials. 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.  As  the pre-manufactured components are a crucial integral component
of  the  Company's  product,  the  loss  of  one  or more of the Company's major
suppliers  may  have  an  adverse  effect  on  the Company's ability to maintain
production  of  their  products  on  a  cost  effective  basis  in  the  future.

                                     F-8


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. If the patents
are  granted,  the  Company  will  then  begin  to 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, 2005.

ADVERTISING

Advertising  costs  are  expensed  as incurred. For the years ended December 31,
2005  and  2004,  advertising  costs  were  approximately  $9,600  and  $9,200,
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.

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, 2005 and
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

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.

                                     F-9


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, 2005 and 2004, the Company
recognized  approximately  $5,468  and  $6,900,  respectively,  as  revenue from
shipping  and handling fees. For the years ended December 31, 2005 and 2004, the
Company  recognized  approximately  $6,700  and $4,300, respectively, in cost of
sales  for  shipping  and  handling  fees.

RECLASSIFICATIONS

Certain  amounts  reported in the consolidated financial statements for the year
ended  December  31,  2004 have been reclassified to conform to the December 31,
2005  presentation.

SHARE-BASED  PAYMENT  TRANSACTIONS

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.

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  2005  and 2004, 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:



                                                                      
                                                            YEAR ENDED DECEMBER 31,
                                                            -----------------------
                                                         2005                      2004
                                                    --------------          ----------------
Net  loss  applicable  to  common  stockholders:
As reported                                         $ (2,692,656)           $   (1,377,395)
Total  stock-based  employee  compensation
expense  determined under fair value
based method for all employee awards, net                (20,265)                  (68,703)
                                                    --------------          ----------------
Pro forma net loss                                  $ (2,672,391)           $   (1,446,098)
                                                    ==============          ================

Net  loss  per  share:
As  reported:
Basic and diluted                                   $      (0.07)           $        (0.05)
Pro  forma:
Basic and diluted                                   $      (0.07)           $        (0.05)


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

                                2005          2004

Dividend yield                  0.00%         0.00%
Expected volatility         1.117 - 1.31      1.167
Risk-free interest rate         4.50%         4.50%
Expected life in years         2 years       2 years

                                      F-10


The weighted average fair value at date of grant for options granted during 2005
was  $0.086  The fair value at grant date for options granted in 2004 was $0.055
per  share  using  the  above  assumptions.

The weighted average fair value at date of grant for options granted during 2005
was  $0.086  The fair value at grant date for options granted in 2004 was $0.055
per  share  using  the  above  assumptions.
3.  FURNITURE,  FIXTURES  AND  EQUIPMENT
Furniture, fixtures and equipment consist of the following at December 31, 2005:

                       Equipment                     $  37,108
                       Furniture  and  fixtures          3,378
                       Software                          3,171
                                                     ----------
                                                        43,657
                       Less  accumulated  depreciation (30,226)
                                                     ----------
                                                     $  13,431
                                                     ==========


4.  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,  2005  and 2004 was approximately $29,600 each year.

LITIGATION

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.

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.

5.  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 $2,739,000
valuation  allowance  at  December 31, 2005 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 $972,000.
At  December  31,  2005,  the  Company  has  approximately  $7.45 million of net
operating  loss  carryforwards,  which  expire  from  2014 through 2025. 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:

                                      F-11


                            YEARS ENDED DECEMBER 31,

                                               2005          2004
                                          ------------  ------------
Deferred  tax  benefit
  Federal                                 $  (868,000)  $  (444,000)
  State                                      (134,000)      (69,000)
                                          ------------  ------------
                                           (1,002,000)     (513,000)
Increase  in  valuation  allowance          1,002,000       513,000
                                          ------------  ------------
                                          $         -   $         -
                                          ============  ============

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,  2005  and  2004  follows:
                            YEARS ENDED DECEMBER 31,

                                                   2005            2004
                                             --------------  ---------------
                                             AMOUNT     %     AMOUNT     %
                                             -------------------------------
Computed  "expected"  tax                    $(916,000)  34%  $(469,000)  34%
State  income  taxes,  net  of  federal
income  tax  benefit                           (88,000)  3%    (46,000)   3%
Increase  in  valuation  allowance           1,002,000  -37%    513,000  -37%
Non-deductible  expenses  and  other             2,000   0%      2,000    0%
                                             -------------------------------
                                             $       -   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. 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. The
deferred  tax  assets  and  associated  valuation  allowance  are  as  follows:
                            YEARS ENDED DECEMBER 31,

                                              2005          2004
                                         -------------  -------------
Deferred  tax  assets:
Net  operating  loss  carry  forwards    $  2,739,000  $  1,737,000
Valuation  allowance                       (2,739,000)   (1,737,000)
                                         -------------  -------------
Net  deferred  tax  assets               $          -  $          -
                                         =============  =============

6.  LINE  OF  CREDIT

The  Company  has  $19,792  outstanding  at  December  31,  2005 under a $20,000
unsecured  line  of credit with a bank. Borrowings under the line of credit bear
interest  at  an  annual  rate  of  10.25% at December 31, 2005. Interest is due
monthly.  The  line of credit is guaranteed by three stockholders and an officer
of  the  Company.

                                      F-12


7.  NOTES  PAYABLE

At December 31, 2005, notes payable consist of the following:



                                                                                                     
Related parties:
Note payable, officer; unsecured; interest at prime rate plus 5.5% (12.75 % at December 31, 2005);
due on demand                                                                                           $    9,555
Note payable, officer; unsecured; interest at 23.99%, revolving                                              4,839
                                                                                                        ----------
                                                                                                            14,394
                                                                                                        ==========
Other:
Convertible note payable to stockholder, 8% interest rate, in default as of the date of this
report, secured by all assets of the Company(1)                                                           $160,000
Notes payable to stockholder, 8% interest rate, in default as of the date of this report,
secured by all assets of the Company (1)                                                                  $165,000

Unsecured note with a financial institution, 17.24% interest rate, interest and principal
due monthly through November 2008                                                                           19,102
Dutchess note payable, $156,000 face amount,  no stated interest rate but with an implied
annual rate of 41.70%, due August 3, 2006                                                                  110,166
Dutchess note payable, $162,000 face amount,  no stated interest rate but with an implied
annual rate of 36.68%, due September 1, 2006                                                                54,916
Dutchess note payable, $150,000 face amount, no stated interest rate but with an implied
annual rate of 41.71%, due October 31, 2006                                                                129,167
Dutchess note payable, $198,000 face amount, no stated interest rate but with an implied
annual rate of 41.09%, due December 12, 2006                                                               166,685
                                                                                                        ----------
                                                                                                        $  805,036
                                                                                                        ==========

Long Term:
Dutchess convertible debenture, 10% interest rate, due October 3, 2010, implied annual rate of 13.5%    $  145,000
Dutchess convertible debenture, 5% interest rate, due December 1, 2010                                     500,000
Dutchess convertible debenture, 10% interest rate, due December 12, 2009                                 1,419,836
                                                                                                        ----------
                                                                                                        $2,064,836
                                                                                                        ==========

1)  Based  upon  discussions with the shareholder, who is a former board member,
the Company does not expect to receive a notice of default and to have the notes
called  by  the holder. However, no assurance may be given that this will be the
case.


During  2005, Dutchess loaned the company net cash proceeds of $1,461,133 in the
form  of  short-term  promissory notes and long-term convertible debentures. The
promissory  notes  have  no  stated interest rate but have a face amount greater
than  the funded amount. The notes are recorded by the Company at the discounted
amount,  and  the difference between the face and funded amount is recognized as
interest  expense  over  the life of the loan. Outstanding principal balances on
promissory  notes  that  matured during the year were rolled into new promissory
notes  or  debentures,  plus  a  10% penalty on the face amount of the note that
expired.  The  convertible debentures carry interest rates of 10%. Dutchess also
received  incentive shares on all new cash proceeds loaned to the Company. These
incentive  shares are recorded as prepaid interest and expensed over the life of
the  loan.  As  collateral  for the promissory notes, Dutchess holds put notices
which  it  may  exercise  in  order to pay down the note balances. The following
paragraphs  describe  activity  during  2005 on notes and debentures between the
Company  and  Dutchess.

                                      F-13


During  the  year,  Dutchess  was  issued  2,761,958  shares  of common stock in
exchange  for  converting  the  remaining  $254,990 in outstanding principal and
interest  on the $250,000 convertible debenture entered into during August 2004.
On  January  18,  2005,  Dutchess  loaned  the Company $225,000. The note had no
stated  interest  rate  but had a face amount of $270,000 and matured on May 18,
2005.  Dutchess was issued 250,000 incentive shares of unregistered common stock
for  the  note,  which made the implied annual interest rate on the note 194.5%.
The Company made payments of $140,633 on this note before the remaining balance,
plus  a  $27,000  penalty, was rolled into a note dated May 19, 2005. See below.
On  April 7, 2005, Dutchess loaned the Company $488,500 which generated net cash
proceeds  of $157,000 to the Company. The remaining $331,000 borrowed under this
note was a rollover of promissory note dated December 3, 2004 with a face amount
of  $300,000,  which  matured  on April 3, 2005. The note had no stated interest
rate but had a face amount of $586,200 and matured on June 7, 2005. Dutchess was
issued 250,000 incentive shares of unregistered common stock for the note, which
made  the  implied  interest  rate  on the note 121%. 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 Company made no payments on this note before
the  face amount of the note, plus a penalty and penalty interest of $73,954 was
rolled  into  a  note  dated  July  8,  2005.  See  below

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 matured on December 12,
2005.  Dutchess was issued 100,000 incentive shares of unregistered common stock
for  the  note,  which made the implied annual interest rate 73.70%. The Company
made no payments on this note before the face amount of the note, plus a penalty
of  $12,000 was rolled into a convertible debenture dated December 30, 2005. See
below.

On  May  19, 2005, Dutchess loaned the Company $200,000 which generated net cash
proceeds  of  $43,633 to the Company. The remaining $156,367 borrowed under this
note  was  a rollover of the remaining principle balance outstanding on the note
dated January 18, 2005, plus a penalty of $27,000, described above. The note had
no  stated  interest  rate  but  had  a  face  amount of $240,000 and matured on
December  19, 2005. Dutchess was issued 200,000 incentive shares of unregistered
common  stock  for  the note, which made the implied annual interest rate on the
note 71.55%. The Company made no payments on this note before the face amount of
the  note,  plus  a  penalty  of $24,000 was rolled into a convertible debenture
dated  December  30,  2005.  See  below.

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 matured on January 8, 2006.
Dutchess  was  issued  100,000 incentive shares of unregistered common stock for
the  note,  which  made the implied annual interest rate on the note 65.16%. The
Company made no payments on this note before the face amount of the note, plus a
penalty  of  $12,000  was rolled into a convertible debenture dated December 30,
2005.  See  below.

On  July  8, 2005, Dutchess loaned the Company $795,154 which generated net cash
proceeds  of $135,000 to the Company. The remaining $660,154 borrowed under this
note  was  a rollover of the remaining principle balance outstanding on the note
dated  April  7, 2005, plus a penalty and penalty interest of $73,954, described
above.  The  note  had no stated interest rate but had a face amount of $820,154
and  was  scheduled  to  mature on February 8, 2006. Dutchess was issued 285,000
incentive  shares  of  unregistered  common  stock  for the note, which made the
implied annual interest rate on the note 11.81%. The Company made no payments on
this  note  before  the  face  amount of the note, plus a penalty of $82,015 was
rolled  into  a  convertible  debenture  dated  December  30,  2005.  See below.
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.
Dutchess  was  issued  285,000 incentive shares of unregistered common stock for
the  note, which makes the implied annual interest rate 41.7% . The Company made
$30,667  in  payments  against  this note prior to December 31, 2005 through the
exercise  of  puts  under  its  investment  agreement.

On  September  1,  2005,  Dutchess  loaned the Company $135,000. The note had no
stated  interest rate but had a face amount of $162,000 and matures on September
1,  2006.  Dutchess  was  issued 285,000 incentive shares of unregistered common
stock  for  the  note,  which makes the implied annual interest rate on the note
36.68%. The Company made $89,084 in payments against this note prior to December
31,  2005  through  the  exercise  of  puts  under  its  investment  agreement.
On  October  3,  2005,  Dutchess loaned the Company $145,000 under a convertible
debenture  that  matures  on  October 3, 2010. The debenture has a stated annual
interest  rate  of  10%.  Dutchess  was  issued  362,500  incentive  shares  of
unregistered  common stock for the note, which makes the implied annual interest
rate  13.5%.  The Company did not make any payments against this debenture prior
to  December  31,  2005.

On  October  31, 2005, Dutchess loaned the Company $125,000. The promissory note
had  no  stated  interest  rate but had a face amount of $150,000 and matures on
10/31/06.  Dutchess  was  issued 460,000 incentive shares of unregistered common
stock  for  the  note,  which makes the implied annual interest rate on the note
41.71%.  The  Company  did  not  make  any  payments  against this note prior to
December  31,  2005.

On  December 12, 2005, Dutchess loaned the Company $165,000. The promissory note
had  no  stated  interest  rate but had a face amount of $198,000 and matures on
12/12/06.  Dutchess was issued 1,200,000 incentive shares of unregistered common
stock  for  the  note,  which makes the implied annual interest rate on the note
41.09%.  The  Company  did  not  make  any  payments  against this note prior to
December  31,  2005.

                                      F-14


On  December  30, 2005, Dutchess converted the outstanding principle balances on
notes  dated  May  12,  May  19,  June  8  and  July 8 2005, plus combined total
penalties  of  $130,015,  into  a  $1,419,836 convertible debenture that matures
December  30,  2009.  The debenture has a stated annual interest rate of 10%. No
incentive  shares  were  issued  for  this  debenture, and no payments were made
against  the  debenture  prior  to  December  31,  2005.

Effective  December  1, 2005, the Company entered into a twelve month consulting
agreement  with Dutchess Advisors LLC, an entity affiliated with Dutchess, under
which  Dutchess  Advisors  will  advise  the Company with respect to operations,
business  strategy  and  capital structure. As compensation under the agreement,
Dutchess  Advisors  will  receive  cash  compensation  of  $10,000  per  month.
Additionally,  Dutchess  Advisors  paid  the  Company  $3,000  for  a  $500,000
convertible  debenture  that  matures  on December 1, 2005 and carries an annual
interest  rate  of  5%.

8.  STOCKHOLDERS'  DEFICIT

PREFERRED  STOCK
The  Company  has  authorized  5,000,000  shares  of $0.001 par value, preferred
stock.  At  December  31, 2004 there were 5,000 shares of preferred stock issued
and  outstanding.  The Preferred Stock paid a 7% annual dividend, on a quarterly
basis,  in the form of Company common stock and was converted into 50,000 common
shares  of  the Company on June 30, 2005. Preferred stock dividends of $440 were
accrued during the year which are payable in 2,487 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.

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  for  sale 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  for  sale  and  this  person  is an accredited
investor.  No  underwriters  were  involved  in  the  sale.

During the year ended December 31, 2005, Dutchess was issued 2,761,958 shares of
common  stock  in  exchange for converting the remaining $254,990 in outstanding
principal and interest on the $250,000 convertible debenture entered into during
August  2004.  The  Company  also  issued  3,820,154  shares  of common stock to
Dutchess for the exercise of 17 puts totaling $342,477 during the year under its
investment agreement with Dutchess. Of this total,$245,384 in cash proceeds were
used  to pay down existing note balances, and the remaining $97,093 was used for
working  capital purposes. Dutchess also exercised 250,000 warrants and received
250,000  shares  of  common  stock in return for $31,250 in cash proceeds to the
Company.  Of  this total, $15,000 was used to pay down an existing note balance,
and  the remainder was used by the Company for working capital purposes. A total
of  3,777,500  incentive  shares  of  unregistered  common  stock were issued to
Dutchess  during  2005  in return for notes and debentures entered into with the
Company  during  the  year.

A  total  of  1,200,000  shares  of  common  stock  were  issued  during 2005 to
consultants and others in return for $230,525 in services, and 592,859 shares of
common  stock  were  issued  during  2005 in exchange for accrued liabilities of
$73,428.

During  2005,  1,307,250 common shares were issued upon the automatic conversion
the  Special Warrants issued in 2004. 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.

The  Company  recognized  5,717  of  beneficial  conversion  feature as interest
expense  during  2005  related  to  debentures  held  by  Dutchess.
Common  stock  warrant  transactions  during 2005 and 2004 are summarized below:

            WARRANTS                     WEIGHTED AVERAGE EXERCISE PRICE
            --------                     -------------------------------
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
Granted                                             -            -
Exercised                                     250,000          .13
Forfeited                                  (1,075,000)         .25
Other (a)                                  (2,010,050)        0.10
                                         --------------  ---------------
Outstanding at December 31, 2005            3,280,006    $    0.27
                                         ==============  ===============

                                      F-15


(a)  Based  on an agreement signed in 2003, one warrant holder could exercise up
to $200,000 in warrants 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, 2003, 500,000 warrants were included in
the  total  above. As of December 31, 2004, the holder had the right to exercise
up  to  2,010,050  warrants at $0.0995 each, so 1,050,050 warrants were added as
outstanding.  The  agreement expired in 2005, so the entire balance of 2,010,050
was  deducted  from  the  totals  during  2005.

9.  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  for  sale and this person is an accredited investor. No underwriters
were  involved  in  the  sale.

10.  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
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,  and 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  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.
During 2005, the Company granted a total of 550,000 options to employees vesting
in  thirds  over  a  three-year  period, and an additional 100,000 options which
vested  immediately  during  the  year.

The  following summarizes the stock option activity for the years ended December
31,  2005  and  2004:

                                    OPTIONS    WEIGHTED AVERAGE EXERCISE PRICE
                                    -------    -------------------------------
            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
                                  ===========
            2005
Outstanding at beginning of year   3,035,000            $   0.17
Options granted                      650,000                0.14
Options exercised                          -                   -
Options forfeited or expired        (250,000)               0.20
                                  -----------
Outstanding at end of year         3,435,000                0.16
                                  ===========
Options exercisable at year end    2,615,000                0.16
                                  ===========
Options available for grant
at end of year                       935,000
                                  ===========

11.  SUBSEQUENT  EVENTS

On  January  9,  2006,  Dutchess  loaned the Company an additional $245,000. The
promissory  note  has  no stated interest rate but has a face amount of $294,000
and matures on January 9, 2007. In connection with the note, Dutchess was issued
653,000  incentive  shares  of  unregistered  common  stock.

On  February  8,  2006,  Dutchess loaned the Company an additional $205,000. The
convertible  debenture  bears an interest rate of 10% and matures on February 8,
2011.  In connection with the note, Dutchess was issued 615,000 incentive shares
of  unregistered  common  stock.

On  March  16,  2006,  Dutchess  loaned  the Company an additional $185,000. The
convertible  debenture  bears  an  interest rate of 10% and matures on March 16,
2011.  In connection with the note, Dutchess was issued 444,000 incentive shares
of  unregistered  common  stock.

During  the  period  from  January  1,  2006 through April 10, 2006, the Company
exercised fourteen (14) puts to Dutchess totaling 13,226,916 shares for proceeds
of  $1,262,243.  The  proceeds  were used to repay portions of previously issued
notes  and  debentures  to  Dutchess.

                                      F-16



                                                 NIGHTHAWK SYSTEMS, INC.
                                         CONDENSED CONSOLIDATED BALANCE SHEET
                                                     MARCH 31, 2006

                                                                                                        
        ASSETS

Current assets:
     Cash                                                                                                  $   109,900
     Accounts receivable, net of allowance for doubtful accounts of $147                                        79,410
     Inventories                                                                                               160,832
     Prepaids                                                                                                  639,127
                                                                                                           ------------
               Total current assets                                                                            989,269
                                                                                                           ------------

Furniture, fixtures and equipment, net                                                                          19,908
Intangible and other assets                                                                                     19,548
                                                                                                           ------------
                                                                                                           $ 1,028,725
                                                                                                           ============


      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
    Accounts payable                                                                                       $   292,847
    Accrued expenses                                                                                           338,227
    Line of credit                                                                                              19,792
    Notes payable:
        Related parties                                                                                         13,947
        Other                                                                                                  381,322
                                                                                                           ------------
               Total current liabilities                                                                     1,046,135
                                                                                                           ------------

Long-term liabilities:
   Convertible debt                                                                                          2,104,836
                                                                                                           ------------
Commitments and contingencies

Stockholders' deficit:
    Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding                 -
    Common stock; $0.001 par value; 200,000,000 shares authorized; 66,579,232 issued and outstanding            66,579
    Additional paid- in capital                                                                              7,176,854
    Accumulated deficit                                                                                     (9,365,679)
                                                                                                           ------------
               Total stockholders' deficit                                                                  (2,122,246)
                                                                                                           ------------
                                                                                                           $ 1,028,725
                                                                                                           ============

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


                                      F-17



                              NIGHTHAWK SYSTEMS, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           THREE MONTHS ENDED MARCH 31,

                                                                            
                                                                        2006          2005
                                                                    ------------  ------------
Revenue                                                             $   141,387   $   171,222
Cost of goods sold                                                       98,812       104,524
                                                                    ------------  ------------
     Gross profit                                                        42,575        66,698

Selling, general and administrative expenses                            757,220       561,660
                                                                    ------------  ------------
     Loss from operations                                              (714,645)     (494,962)

 Interest expense:
     Related parties                                                        684           691
     Other                                                              600,352       130,627
                                                                    ------------  ------------
         Total interest expense                                         601,036       131,318
                                                                    ------------  ------------
Net loss                                                             (1,315,681)     (626,280)
Less: preferred stock dividends                                               -          (219)
                                                                    ------------  ------------
Net loss to common stockholders                                     $(1,315,681)  $  (626,499)
                                                                    ============  ============
Net loss per basic and diluted common share                         $     (0.02)  $     (0.02)
                                                                    ============  ============
Net loss to common stockholders per basic and diluted common share  $     (0.02)  $     (0.02)
                                                                    ============  ============
Weighted average common shares outstanding - basic and diluted       58,219,769    33,733,867

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


                                      F-18



                            Nighthawk Systems, Inc.
           Condensed Consolidated Statement of Stockholders' Deficit
                       Three months ended March 31, 2006

                                                                                                         
                                                                        Common stock        Additional
                                                                --------------------------    paid-in     Accumulated
                                                                   Shares        Amount       capital       deficit         Total
                                                                ------------  ------------  ------------  ------------  ------------
Balances, December 31, 2005                                      46,477,158   $    46,477   $ 5,464,436   $(8,049,998)  $(2,539,085)

Common stock issued for Dutchess  puts, net of commissions       12,615,074        12,615     1,142,768                   1,155,383

Common stock issued as incentive for notes payable                1,712,000         1,712       147,168                     148,880

Common stock issued for consulting services                       4,925,000         4,925       232,075                     237,000

Conversion of accrued expenses to common stock                      850,000           850        34,150                      35,000

Amortization of beneficial conversion feature on notes payable                                  153,269                     153,269

Net loss                                                                                                   (1,315,681)   (1,315,681)
                                                                ------------  ------------  ------------  ------------  ------------
Balances, March 31, 2006                                         66,579,232   $    66,579   $ 7,173,866   $(9,365,679)  $(2,122,246)
                                                                ============  ============  ============  ============  ============


                                      F-19



                                   NIGHTHAWK SYSTEMS, INC.
                     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                THREE MONTHS ENDED MARCH 31,

                                                                                               
                                                                                           2006         2005
                                                                                       ------------  ----------
Cash flows from operating activities:
      Net loss                                                                         $(1,315,681)  $(626,280)
                                                                                       ------------  ----------
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization                                                             2,384       1,681
   Employee options vested                                                                   2,988           -
   Loan discounts and warrants                                                             111,250      66,063
   Beneficial conversion feature                                                           153,269           -
   Common stock issued for consulting services                                             177,000      15,000
   Common stock issued for interest                                                         88,109           -
   Shares issued as incentives on notes payable                                            193,192      50,250
   Note payable issued for consulting services                                              24,850           -
   Amortization of prepaid consulting expense                                                    -     121,666
Changes in assets and liabilities:
   (Increase) decrease in accounts receivable                                                3,795     (35,754)
   (Increase) decrease in inventories                                                      (80,955)     (9,976)
   (Increase) decrease in prepaids                                                          (2,756)     23,596
   Increase (decrease) in accounts payable                                                   7,598     (38,739)
   Increase in accrued expenses                                                             29,841      24,275
                                                                                       ------------  ----------
Total adjustments                                                                          710,565     218,062
                                                                                       ------------  ----------
Net cash used in operating activities of continuing operations                            (605,116)   (408,218)
                                                                                       ------------  ----------

Cash flows from investing activities:
   Purchases of furniture, fixtures and equipment                                           (8,861)     (1,973)
                                                                                       ------------  ----------
Net cash used in investing activities                                                       (8,861)     (1,973)
                                                                                       ------------  ----------

Cash flows from financing activities:
   Proceeds from notes payable, related parties                                                  -         339
   Payments on notes payable, related parties                                                 (448)       (550)
   Proceeds from notes payable, other                                                      635,000     225,000
   Payments on notes payable, other                                                         (1,880)   (127,765)
   Payments on long term notes payable                                                           -     (13,399)
   Net proceeds from the sale of common stock, and the exercise  of puts and warrants            -     312,547
                                                                                       ------------  ----------
Net cash provided by financing activities                                                  632,672     396,172
                                                                                       ------------  ----------

Net (decrease) increase in cash                                                             18,695     (14,019)
                                                                                       ------------  ----------
Cash, beginning balance                                                                     91,205      61,118
                                                                                       ------------  ----------
Cash, ending balance                                                                   $   109,900   $  47,099
                                                                                       ============  ==========


                                      F-20



                               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (CONTINUED)

                                                                                              
Supplemental disclosures of cash flow information:                                 QUARTERLY PERIOD ENDED MARCH 31,
                                                                                           2006         2005
                                                                                       ------------  ----------

Cash paid for interest                                                                 $     8,269   $  18,312
                                                                                       ============  ==========
Supplemental disclosure of non-cash investing and financing activities:

Common shares issued as payments on notes payable, other                               $ 1,205,334
                                                                                       ============

Conversion of accrued expenses to common stock                                         $    35,000   $  56,620
                                                                                       ============  ==========

Conversion of notes payable and accrued interest to common stock
   Notes payable                                                                                     $  29,498
   Accrued interest                                                                                      1,752
                                                                                                     ----------
Total amount converted                                                                               $  31,250
                                                                                                     ==========

Preferred stock dividends issued in common stock                                                     $     219
                                                                                                     ==========

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


                                      F-21


                             NIGHTHAWK SYSTEMS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   THREE MONTHS ENDED MARCH 31, 2006 AND 2005
                                   (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  wireless  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 $1.3 million during the quarter
ended  March  31,  2006  and  had  a  stockholders'  deficit and working capital
deficiency  of  approximately $2.1 million and $57,000 respectively, as of March
31,  2006.  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:

-  Raising  working  capital  through  additional  borrowings.
-  Raising  equity  funding  through  sales  of  the  Company's  common  stock.
-  Implementation  of  the  Company's  sales  and  marketing  plans.

During  a  prior  year  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 August 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. Since entering into the arrangement
with Dutchess, the Company has utilized the arrangement to obtain enough cash to
cover  its  operating  cash  flow  deficits  on  a  monthly  basis.
For more information on transactions with Dutchess during the three month period
ending  March  31,  2006,  please  see  Note  3  -  Notes  payable.
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.

The  Company's  strategic  initiatives  for  2006  include:
-  Capitalize  on  existing  enterprise  sales  opportunities
-  Cultivate  and  capitalize  on  indirect  sales  channels
-  Enhance  our  marketing  effort to support direct and indirect sales channels
-  Bundle  our  products with ancillary products and services to enhance revenue
opportunities
-  Develop  and  sell  a  device  that  functions on multiple wireless protocols
-  Form  an  advisory  board  with relevant industry expertise and relationships
-  Execute  on a strategic acquisition that is scalable and complementary to our
existing  business

The Report of the Company's Independent Registered Public Accounting Firm on the
Company's  financial  statements  as of and for the year ended December 31, 2005
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.  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.

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 2005 filed with the Securities and
Exchange  Commission  (the  "SEC").

                                      F-22


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, 2005 or March 31, 2006.
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  March 31, 2006, is approximately $13,073.

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.

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  March 31, 2006, the Company had approximately $79,410 in accounts
receivable, net of the allowance for doubtful accounts. Approximately $34,000 of
this  balance  was from three customers, which was collected subsequent to March
31,  2006.

During  the  three months ended March 31, 2006, the Company had three individual
customers  that accounted for approximately 36% of total revenue. Each of theses
three  customers  accounted  for  10%  to 14% of total revenue. During the three
months  ended  March  31,  2005, one customer accounted for approximately 46% of
total  revenue.

During  the  three  months  ended  March 31, 2006, three suppliers accounted for
approximately  67%  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. If the patents
are  granted,  the  Company  will  then  begin  to 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 March 31, 2006.

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-23


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 quarter ended March 31, 2006 and
the year ended December 31, 2005, 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.

STOCK-BASED  COMPENSATION

During  the first quarter of fiscal 2006, the Company adopted the provisions of,
and  accounts  for  stock-based  compensation  in accordance with, the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 123
-  revised  2004 ("SFAS 123R") "Share-Based Payment" which replaced Statement of
Financial  Standards  No.  123  ("SFAS  123"),  "Accounting  for  Stock-Based
Compensation"  and  supersedes  APB  Opinion  No. 25 ("APA 25"), "Accounting for
Stock  Issued to Employees". Under the fair value recognition provisions of this
statement,  stock-based compensation cost is measured at the grant date based on
the  fair  value  of  the  award and is recognized as expense on a straight-line
basis  over  the  requisite  service  period,  which  is the vesting period. The
Company  elected  the modified-prospective method, under which prior periods are
not  revised  for  comparative  purposes.  The valuation provisions of SFAS 123R
apply to new grants and to grants that were outstanding as of the effective date
and  are  subsequently  modified.

4.  NOTES  PAYABLE


At March 31, 2006, notes payable consist of the following:

                                                                                                                      
Related parties:
Note payable, officer; unsecured; interest at prime rate plus 5.5% (12.24% at March 31, 2006); due on demand             $    9,554
Note payable, officer; unsecured; interest at 23.99%, revolving                                                               4,393
                                                                                                                         -----------
                                                                                                                         $   13,947
                                                                                                                         ===========

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, 17.24% interest rate, revolving                                                 17,222
Note payable, $198,000 face amount, no stated interest rate but with an implied annual rate of 41.09%,
  due December 12, 2006 (2)                                                                                                  39,100
                                                                                                                         -----------
                                                                                                                         $  381,322
                                                                                                                         ===========

Long Term:
Convertible debenture, 5% interest rate, due December, 2010                                                              $  500,000
Convertible debenture, 10% interest rate, due December,  2009                                                             1,419,836
Convertible debenture, 10% interest rate, due March, 2011                                                                   185,000
                                                                                                                         -----------
                                                                                                                         $2,104,836
                                                                                                                         ===========

1)     Based  on discussions with the shareholder, who is a former board member,
the Company does not expect to receive a notice of default and to have the notes
called  by  the  holder. However, no assurance may be give that this will be the
case.


On January 9, 2006, Dutchess loaned the Company $245,000. The note had no stated
interest  rate but had a face amount of $294,000 and matured on January 9, 2007.
Dutchess was issued 653,000 incentive shares of unregistered common stock valued
by the Company at $45,710 for the note, which was secured by put notices. During
the  three  month  period  ending March 31, 2006, Dutchess exercised put notices
valued at $294,000 to pay off the note and was issued 3,477,247 shares of common
stock  as  a  result.

On  February  8,  2006,  Dutchess  loaned the Company $205,000 in exchange for a
convertible debenture that was due February 8, 2011. Dutchess was issued 615,000
incentive  shares  of unregistered common stock valued by the Company at $58,770
for  the  debenture, which was secured by put notices. The debenture contained a
clause  calling  for  an early redemption penalty of 20%. During the three month
period  ending March 31, 2006, Dutchess exercised put notices valued at $246,000
to  pay  off  the debenture and the redemption penalty, and was issued 2,429,107
shares  of common stock as a result. The Company recorded the redemption penalty
as  interest  expense,  and also recorded $68,333 in interest expense during the
period  related  to  the  beneficial  conversion  feature  of  the  debenture.
On  March  16,  2006,  Dutchess  loaned  the  Company $185,000 in exchange for a
convertible  debenture  that  is due March 16, 2011. Dutchess was issued 444,000
incentive  shares  of unregistered common stock valued by the Company at $44,400
for  the  debenture,  which  is secured by put notices. The debenture contains a
clause  calling  for  an  early  redemption  penalty  of  20%.

                                      F-24


In  addition  to  the  activity  discussed  about, during the three month period
ending  March  31,  2006,  Dutchess exercised puts valued at $540,358 to pay off
three  notes  and  one  debenture,  plus  all  related  interest,  that had been
outstanding  at  December 31, 2005, and exercised puts valued at $135,835 to pay
down  a note that had been outstanding at December 31, 2005. Dutchess was issued
6,708,720 shares as a result of these transactions. The Company recorded $98,500
in  interest expense on these notes and debentures during the period, as well as
$83,908  in interest expense related to the beneficial conversion feature of the
debenture.

In total, the Company recognized a total of $153,269 in interest expense related
to  the  beneficial  conversion  feature  of  debentures  outstanding during the
period.

On  April  19,  2006,  Dutchess  loaned  the  Company $165,000 in exchange for a
convertible  debenture  that  is due April 19, 2011. Dutchess was issued 366,666
incentive  shares  of unregistered common stock valued by the Company at $33,000
for  the  debenture,  which  is secured by put notices. The debenture contains a
clause  calling  for  an  early  redemption  penalty  of  20%.
On  May  17,  2006,  Dutchess  loaned  the  Company  $130,000  in exchange for a
convertible  debenture  that  is  due  May 17, 2011. Dutchess was issued 690,000
incentive  shares  of unregistered common stock valued by the Company at $41,400
for  the  debenture,  which  is secured by put notices. The debenture contains a
clause  calling  for  an  early  redemption  penalty  of  20%.
Subsequent to March 31, 2006, Dutchess has exercised five puts valued at $97,288
in  order  to  pay  off  the  note  due  December  12, 2006, and to pay down the
debentures  issued  in December 2005 and March 2006. The Company issued Dutchess
1,414,713  shares  of  common  stock  as  a  result.

5.  STOCKHOLDERS'  DEFICIT

COMMON  STOCK
During  the quarterly period ending March 31, 2006, the Company issued 4,925,000
unregistered shares of common stock to consultants for services to be performed.
The Company recognized $177,000 in expense related to these contracts during the
period, and has recorded an additional $60,000 in prepaid expense related to one
of  the  contracts  as  of  March  31,  2006.  The  Company  also issued 850,000
unregistered  shares  of  common  stock  to a consultant for $35,000 in services
rendered  in  2004  and  2005.

                                      F-25