U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                                   (MARK ONE)
   [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                     OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
   [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934
                         COMMISSION FILE NUMBER 0-21713

                           PRISM SOFTWARE CORPORATION
                 (Name of small business issuer in its charter)

Delaware                                    95-2621719
-----------------------------------------   ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

15500-C Rockfield Blvd.
Irvine, California                          92618
-----------------------------------------   ------------------------------------
(Address of principal executive offices)    (Zip Code)

         Issuer's telephone number (including area code): (949) 855-3100

         Securities registered under Section 12(b) of the Exchange Act:
                                      None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                     Common Stock, par value $.01 per share


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


Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

The registrant's revenues for the year ended December 31, 2004 were $735,709.

The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 22, 2005 was approximately $420,282. The number of shares
outstanding of the registrant's only class of Common Stock, par value $.01 per
share was 141,591,534 on March 22, 2005. The common shares are traded on the OTC
Bulletin Board under the symbol "PSOF".

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

                       DOCUMENTS INCORPORATED BY REFERENCE

The Company will file a Definitive Information Statement for its next Annual
Meeting of Stockholders no later than 120 days after the close of the fiscal
year referenced above. Certain information required by Part III of this Form
10-KSB is incorporated herein by reference to such Definitive Information
Statement.





                                      INDEX

PART I
     Item 1.    Description of Business.
     Item 2.    Description of Property.
     Item 3.    Legal Proceedings.
     Item 4.    Submission of Matters to Vote of Security Holders.

PART II
     Item 5.    Market for Common Equity and Related Stockholder Matters.
     Item 6.    Management's Discussion and Analysis or Plan of Operation.
     Item 7.    Financial Statements.
     Item 8.    Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure.
     Item 8A.   Controls and Procedures.
     Item 8B.   Other Information.

PART III
     Item 9.    Directors, Executive Officers, Promoters and Control
                Persons; Compliance With Section 16(a) of the Exchange Act.
     Item 10.   Executive Compensation.
     Item 11.   Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters.
     Item 12.   Certain Relationships and Related Transactions.
     Item 13.   Exhibits.
     Item 14.   Principal Accountant Fees and Services.

Signatures


                                       2




                                     PART I

 ITEM 1. DESCRIPTION OF BUSINESS.

COMPANY OVERVIEW

Prism Software Corporation (the "Company") was organized under the laws of
Delaware in 1992. The Company specializes in enterprise document and content
management solutions. The Company's products and expertise lie in electronic
document formation, document management, and print stream conversion solutions.
The Company's customer base includes organizations that use its solutions in
managing high-volume, large scale document printing. These customers are in a
variety of markets, such as financial services, health care, service bureau
printing, government, education and manufacturing.

The Company distributes its products primarily in North America, through direct
sales, resellers, value-added resellers ("VARs") and printer manufacturers.
Marketing, sales, training and technical support are provided from its corporate
headquarters.

The Company's principal executive office is located at 15500-C Rockfield Blvd.,
Irvine, California 92618, and its telephone number is (949) 855-3100. The
Company's website is located at "www.prism-software.com." The information on the
Company's website is not a part of this Report.

CURRENT PRODUCTS

The following is a brief summary of the Company's primary products. More
detailed information about these products can be found on the company's website
at "www.prism-software.com." The information on the Company's website is not a
part of this Report.

     DOCFORM
     DocForm is a powerful, low-cost and easy-to-use software tool for the
     design, dynamic creation, and real-time delivery of all electronic
     documents, forms, and reports for every industry. Its primary purposes are
     to (1) reduce costs by eliminating pre-printed forms, (2) enable users to
     dynamically create complex and personalized documents and reports, and (3)
     create one-to-one personalized sales and marketing messages.

     DOCTRANSFORM
     DocTransform is the next generation and successor of the Company's
     PrintConsole Pro. DocTransform (1) manages corporate print and document
     output, (2) can transform various print stream formats into other formats,
     and (3) apply various modifying filters to print and data streams.
     Transforming print stream formats is of value to many organizations that
     want to utilize and redirect mainframe print streams designed for older and
     often outdated printers to newer, more modern printers.

                                       3




     DOCRECORD
     DocRecord is a powerful, low-cost and easy-to-use document management and
     archival software solution. Designed to be intuitive, DocRecord is helps
     reduce complexity and costs for businesses across all major industries.
     DocRecord is modular and scalable, allowing businesses to configure the
     solution that is the best fit for their current business challenge and
     update it over time as their needs change.


DEPENDENCE ON MAJOR CUSTOMERS

In the fiscal years ended December 31, 2004 and December 31, 2003, the three
largest customers in each year accounted for about 42% of the Company's sales in
those years, with one customer being among the three largest in each year. At
December 31, 2004 and 2003, the three largest accounts receivable totaled about
69% and about 83%, respectively, of total accounts receivable. The Company does
not have any long-term sales contracts with any of its customers.

RESEARCH AND DEVELOPMENT

For the fiscal years ended December 31, 2004 and December 31, 2003, research and
development expenses were approximately $293,000 (about 40% of net sales) and
approximately $262,000 (about 53% of net sales), respectively. None of the
research and development expenses in either fiscal year were borne directly by
customers.

INTELLECTUAL PROPERTY

The Company currently does not hold any patents and relies on a combination of
contract, copyright, trademark and trade secret laws, licenses and
confidentiality agreements and software security measures to protect its
proprietary intellectual property. Despite these precautions, the Company
believes that existing laws provide limited protection for the Company's
technologies. However, because of the rapid pace of technological change in the
Company's industry, the legal intellectual property protection for products is a
less significant factor in its success than the knowledge, abilities and
experience of the Company's employees, the frequency of its product
enhancements, the effectiveness of its marketing activities and the timeliness
and quality of its support services. There can be no assurance that the
Company's means of protecting its proprietary rights will prevent others from
misappropriating or otherwise gaining access to valuable information, such as
software source codes, or that others will not develop technologies similar or
superior to the Company's technologies. In addition, effective intellectual
property protection may be unavailable or limited in certain foreign countries.
The Company generally enters into confidentiality or license agreements with its
employees, consultants, customers and vendors and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others.

                                       4




The Company owns, licenses or has otherwise obtained the right to use certain
technologies incorporated in its products. While the Company believes that its
software products and proprietary rights do not infringe the rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Company or that any such claims will not require the Company to
enter into royalty or license arrangements or result in costly litigation,
regardless of the merits of the claims.

EMPLOYEES

As of March 22, 2005, the Company had 12 employees. The Company's employees are
not represented by any collective bargaining organization and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company's principal administrative, development, manufacturing and shipping
facilities are located in one facility in Irvine, California. The Company
believes its facilities are adequate for its current needs and that suitable
additional or substitute space will be available as and if needed.

ITEM 3. LEGAL PROCEEDINGS.

In November 2004, the Company reached a settlement to resolve in a mutually
satisfactory and voluntary manner a payment owed under a terminated agreement.
The other party had recently filed for arbitration of the matter.

In December 2004, the Company reached a settlement to resolve in a mutually
satisfactory and voluntary manner a dispute with its previous President, E. Ted
Daniels, regarding his prior employment with the Company.

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

None.

                                       5




                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Common Stock of the Company is quoted on the National Association of
Securities Dealers, Inc. ("NASD") OTC Bulletin Board ("OTCBB") under the symbol
"PSOF." The OTCBB is a quotation service for subscribing members and is
regulated by the Securities and Exchange Commission ("SEC") and the NASD. OTCBB
securities are traded by a community of market makers that enter quotes and
trade reports through a closed computer network. Set forth below are the high
and low traded prices of the Company's Common Stock during each quarter of the
fiscal years ended December 31, 2003 and December 31, 2004, as reported by a
leading provider of real-time financial and market data.

                                                    High       Low
                                                    ----       ---
           Quarter ended March 31, 2003            0.016      0.008
           Quarter ended June 30, 2003             0.016      0.007
           Quarter ended September 30, 2003        0.035      0.004
           Quarter ended December 31, 2003         0.027      0.010
           Quarter ended March 31, 2004            0.025      0.008
           Quarter ended June 30, 2004             0.028      0.008
           Quarter ended September 30, 2004        0.016      0.006
           Quarter ended December 31, 2004         0.019      0.006



As of March 22, 2005, there were approximately 379 stockholders of record of the
Company's Common Stock.

The Company has never paid cash dividends on its Common Stock and does not
intend to pay cash dividends in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Annual Report on Form 10-KSB. Except for the historical information
contained herein, the following discussion contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Annual Report on Form 10-KSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-KSB. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.

                                       6




RESULTS OF OPERATIONS

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003

For the year ended December 31, 2004, the Company reported a loss of
approximately $1,374,000, or $0.01 per common share, compared with a loss of
approximately $5,254,000, or $0.04 per share, for the fiscal year ended December
31, 2003. The loss decreased approximately $3,880,000 due primarily to the
following:

         o    Net sales increased approximately $245,000 primarily
              through the Company's reseller channel.

         o    Cost of sales increased approximately $13,000 from
              approximately $367,000, or about 75% of revenue, to approximately
              $380,000, or about 52% of revenue. The decrease in the cost of
              sales percentage was due primarily to a shift in the mix of
              products being sold.

         o    Total operating expenses increased approximately $353,000 due
              primarily to the costs of settling two legal disputes in 2004.

         o    In 2004, the Company recognized gains of 1) approximately $815,000
              from writing off certain debt and related accrued interest that
              was either forgiven or determined to be no longer enforceable, and
              2) approximately $117,000 from settling certain accounts payable
              and from writing off certain other accounts payable that were
              determined to be no longer enforceable. No such gains were
              recognized in 2003.

         o    Interest expense decreased approximately $3,069,000 due primarily
              to the following:

              1.   An expense of about $3,172,000 was recognized in 2003 from
                   amortizing a beneficial conversion feature on certain
                   convertible notes. No such expense was incurred in 2004. (See
                   "Liquidity and Capital Resources.")

              2.   An increase of approximately $103,000 in aggregate face value
                   interest expense due to an increase in the Company's
                   indebtedness.


LIQUIDITY AND CAPITAL RESOURCES

On December 31, 2004, the Company had cash and cash equivalents of approximately
$390,000. The principal source of liquidity in fiscal 2004 was approximately
$1,950,000 of additional borrowings.

Funds borrowed during fiscal 2003 are convertible into Common Stock at the
lenders' option. When $690,000 of such borrowings were made, the conversion rate
was lower than the quoted market price of the Common Stock. The value of this
beneficial conversion feature (discount) was limited to face value of such loan
and was fully amortized when the debt was incurred.

In addition, pursuant to the terms of a March 2003 debt restructuring agreement,
the conversion rate on borrowings of $78,000 made during fiscal 2003 and
$3,229,000 made prior to fiscal 2003 was reduced to a rate that was below the
quoted market price of the Common Stock at the time the original debt was
incurred. The value of this beneficial conversion feature (discount) was limited
to the face value of such loan and was fully amortized when the reduced
conversion rate went into effect.

                                       7




As of December 31, 2004, the aggregate unamortized discount on such loans was
$0. In 2003, the Company recorded approximately $3,172,000 as additional
paid-in capital and "Interest expense - stockholders."

Management anticipates that additional capital will be required to finance the
Company's operations. The Company believes that expected cash flow from
operations, borrowing, and the possible proceeds from sales of securities will
be sufficient to finance the Company's operations at currently anticipated
levels for a period of at least twelve months. However, there can be no
assurance that the Company will not encounter unforeseen difficulties that may
deplete its capital resources more rapidly than anticipated.

EFFECT OF INFLATION

The Company believes that inflation has not had a material effect on its net
sales or profitability in recent years.

FORWARD-LOOKING STATEMENTS; CAUTIONARY STATEMENT

Certain of the statements contained in this report, including those under
"Description of Business" and "Management's Discussion and Analysis or Plan of
Operation," and especially those contained under "Liquidity and Capital
Resources" may be "forward-looking statements" that involve risks and
uncertainties. All forward-looking statements included in this report are based
on information available to the Company on the date hereof and the Company
assumes no obligation to update any such forward-looking statements. The actual
future results of the Company could differ materially from those statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Annual Report on Form 10-KSB as well as
risks associated with managing the Company's growth. While the Company believes
that these statements are accurate, the Company's business is dependent upon
general economic conditions and various conditions specific to its industry and
future trends and results cannot be predicted with certainty.


ITEM 7. FINANCIAL STATEMENTS.

The financial statements of the Company are submitted as a separate section of
this Annual Report on Form 10-KSB.

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

None.

                                       8




ITEM 8A. CONTROLS AND PROCEDURES.

Under the supervision and with the participation of our Chief Executive and
Financial Officers, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days
of the filing date of this report. Based on this evaluation, our Chief Executive
and Financial Officers concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports under the Exchange
Act are processed and reported within the time periods specified by law. The
design of any such system of controls is based in part on assumptions about the
likelihood of future events, and there can be no assurance that any such system
of controls will succeed in all circumstances.

Since the date of the evaluation described above, there have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls.

ITEM 8B. OTHER INFORMATION.

None.


                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this item regarding directors and officers is
incorporated by reference to the Company's Definitive Information Statement to
be filed with the Securities and Exchange Commission in connection with its 2005
Annual Meeting of Stockholders (the "PROXY STATEMENT") under the heading
"ELECTION OF DIRECTORS." The information required by this item regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated by reference to the information under the caption
"COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT" contained in the Information
Statement. The information required by this item regarding the Company's code of
ethics is incorporated by reference to the information under the caption "CODE
OF ETHICS" contained in the Information Statement.

ITEM 10. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference to the
information under the caption "EXECUTIVE COMPENSATION" contained in the
Information Statement. With respect to the Company's option plans, additional
information on such plans is also included in the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-KSB.

                                       9




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

The information required by this item is incorporated by reference to the
information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS" contained in the Information
Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated by reference to the
information under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
contained in the Information Statement.

ITEM 13. EXHIBITS.

3.1.     Certificate of Incorporation of Prism Software Corporation ("the
         Company") (1) (Exhibit 3.1)

3.2.     Bylaws of the Company (1) (Exhibit 3.2)

3.3.     Amendments dated February 24, 1998 and May 5, 1999 to the Company's
         Certificate of Incorporation (2) (Exhibit 3.3)

3.4.     Amendment dated September 18, 2000 to the Company's Certificate of
         Incorporation (4) (Exhibit 10.1)

4.1.     Specimen Common Stock certificate of the Company (1) (Exhibit 4.1)

4.2.     Certificate of Designation of $5.00, 10% Class A Cumulative Convertible
         Preferred Stock, as amended to date (2) (Exhibit 4.3)

10.1.    Amended and Restated 1993 Stock Option Plan ("1993 Plan") (1) (Exhibit
         10.1)

10.2.    Form of Employee Installment Incentive Stock Option and Nonstatutory
         Stock Option Agreement pertaining to the 1993 Plan (1) (Exhibit 10.2)

10.3.    2000 Nonstatutory Stock Option Plan ("2000 Plan") (3) (Exhibit 10.1)

10.4.    Form of Stock Option Agreement pertaining to the 2000 Plan (3) (Exhibit
         10.2)

10.5.    Loan Agreement dated March 13, 2003 by and between the Conrad von Bibra
         Revocable Trust, Carl von Bibra and the Company (5) (Exhibit 10.1)

10.6.    Credit Agreement dated March 15, 2003 by and between the Conrad von
         Bibra Revocable Trust and the Company (5) (Exhibit 10.3)

10.7.    Security Agreement dated March 27, 2003 by and between the Conrad von
         Bibra Revocable Trust and the Company (5) (Exhibit 10.5)

10.8.    Code of Ethics adopted July 27, 2004 (6) (Exhibit 10.2)

10.9.    Long-term Loan Agreement dated December 30, 2004 by and between the
         Conrad von Bibra Revocable Trust, Carl von Bibra and the Company (7)
         (Exhibit 10.1)

                                       10




31.1     Certification of Chief Executive Officer Pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002

31.2     Certification of Chief Financial Officer Pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002

32.1     Certification of Chief Executive Officer and Chief Financial Officer
         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

         (1)  Incorporated by reference to the Exhibit identified in
              parentheses, filed as an exhibit in the Company's Registration
              Statement on Form SB-2 (SEC File No. 333-5450-LA).

         (2)  Incorporated by reference to the Exhibit identified in
              parentheses, filed as an exhibit in the Company's Annual Report on
              Form 10-KSB for the fiscal year ended December 31, 1998.

         (3)  Incorporated by reference to the Exhibit identified in
              parentheses, filed as an exhibit in the Company's Quarterly Report
              on Form 10-QSB for the quarter ended June 30, 2000.

         (4)  Incorporated by reference to the Exhibit identified in
              parentheses, filed as an exhibit in the Company's Quarterly Report
              on Form 10-QSB for the quarter ended September 30, 2000.

         (5)  Incorporated by reference to the Exhibit identified in
              parentheses, filed as an exhibit in the Company's Quarterly Report
              on Form 10-QSB for the quarter ended March 31, 2003.

         (6)  Incorporated by reference to the Exhibit identified in
              parentheses, filed as an exhibit in the Company's Quarterly Report
              on Form 10-QSB for the quarter ended June 30, 2004.

         (7)  Incorporated by reference to the Exhibit identified in
              parentheses, filed as an exhibit in the Company's Report on Form
              8-K for December 30, 2004.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item is incorporated by reference to the
information under the caption "PRINCIPAL ACCOUNTANT FEES AND SERVICES" contained
in the Information Statement.

                                       11




                                   SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                           PRISM SOFTWARE CORPORATION


Dated:  March 31, 2005                   /s/ David Ayres
                                         ---------------
                                             David Ayres, Director and President
                                             (Principal Executive Officer)



In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.



Dated:  March 31, 2005          /s/ David Ayres
                                ---------------
                                    David Ayres, Director and President
                                    (Principal Executive Officer)

Dated:  March 31, 2005          /s/ Michael Cheever
                                -------------------
                                    Michael Cheever, Treasurer
                                    (Principal Accounting and Financial Officer)

Dated:  March 31, 2005          /s/ Carl von Bibra
                                ------------------
                                    Carl von Bibra, Chairman and a Director

Dated:  March 31, 2005          /s/ Conrad von Bibra
                                --------------------
                                    Conrad von Bibra, Director and Secretary


                                       12







                           PRISM SOFTWARE CORPORATION

                              FINANCIAL STATEMENTS

                                DECEMBER 31, 2004



                                      F-1







           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTING FIRM
           ----------------------------------------------------------



The Board of Directors and Stockholders
Prism Software Corporation


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

We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States of America). Those standards
require that we plan and perform the audits 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of
December 31, 2004 and the results of its operations and cash flows for each
of the years in the two-year period ended December 31, 2004 in conformity with
generally accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company's continued operating losses, limited capital
and stockholders' deficit raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to this matter are also
described in Note 14. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




/S/ CACCIAMATTA ACCOUNTANCY CORPORATION

Irvine, California
March 18, 2005

                                      F-2




                           PRISM SOFTWARE CORPORATION
                                 Balance Sheet

                                                                   DECEMBER 31,
                                                                       2004
                                                                   -------------

                                     ASSETS

Current assets
Cash                                                               $    389,809
Accounts receivable, net of allowance
for doubtful accounts of $4,369                                          70,660
Inventory                                                                 5,600
                                                                   -------------
Total current assets                                                    466,069

Equipment, net                                                           36,836
Other                                                                    20,868
                                                                   -------------
                                                                   $    523,773
                                                                   =============


                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
Notes payable - stockholders                                       $     41,696
Accrued interest - stockholders                                          76,581
Accrued expenses - stockholders                                          30,203
Accounts payable                                                        232,926
Accrued expenses                                                        516,987
Deferred revenue                                                        298,061
                                                                   -------------
Total current liabilities                                             1,196,454
                                                                   ------------

Long-term liabilities
Notes payable - stockholders                                       $  9,049,838
Accrued interest - stockholders                                         644,943
Deferred revenue                                                          4,527

                                                                   -------------
Total long-term liabilities                                           9,699,308
                                                                   -------------

Commitments and contingencies                                                --

Stockholders' deficit
Preferred stock - 5,000,000 shares authorized, $.01 par value;
  Series A - 78,800 shares issued and outstanding                           788
Common stock - 300,000,000 shares authorized, $.01 par value;
 141,591,534 shares issued and outstanding                            1,415,915
Additional paid-in capital                                           11,394,263
Accumulated deficit                                                 (23,182,955)
                                                                   -------------
Total stockholders' deficit                                         (10,371,989)

                                                                   -------------
                                                                   $    523,773
                                                                   =============

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


                                      F-3





                              PRISM SOFTWARE CORPORATION
                               Statements of Operations


                                                            YEAR ENDED DECEMBER 31,
                                                        -------------------------------
                                                             2004             2003
                                                        --------------   --------------
                                                                   
Net sales
  Products                                              $     394,100    $     220,068
  Services                                                    341,609          270,770
                                                        --------------   --------------
                                                              735,709          490,838
                                                        --------------   --------------

Cost of sales
  Products                                                     27,574           18,023
  Services                                                    352,468          349,418
                                                        --------------   --------------
                                                              380,042          367,441
                                                        --------------   --------------
Gross profit                                                  355,667          123,397
                                                        --------------   --------------

Operating expenses
  Selling and administrative                                1,719,279        1,397,457
  Research and development                                    292,538          261,786
                                                        --------------   --------------
                                                            2,011,817        1,659,243
                                                        --------------   --------------
Loss from operations                                       (1,656,150)      (1,535,846)

Gain - settling or writing off debt and interest              814,591             --
Gain - settling or writing off accounts payable               117,282             --
Interest expense - stockholders                              (645,707)      (3,714,321)
Interest expense                                               (3,849)          (3,869)
                                                        --------------   --------------
Net loss                                                $  (1,373,833)   $  (5,254,036)
                                                        ==============   ==============

Basic and diluted net loss per common share             $       (0.01)   $       (0.04)
                                                        ==============   ==============

Basic and diluted weighted average
  number of common shares outstanding                     141,592,000      140,446,000
                                                        ==============   ==============

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


                                      F-4





                                                     PRISM SOFTWARE CORPORATION
                                                Statements of Stockholders' Deficit
                                               Years Ended December 31, 2004 and 2003



                                       SERIES A
                                    PREFERRED STOCK             COMMON STOCK           ADDITIONAL                          TOTAL
                                -----------------------  ----------------------------    PAID-IN        ACCUMULATED    STOCKHOLDERS'
                                  SHARES      AMOUNT        SHARES         AMOUNT        CAPITAL          DEFICIT         DEFICIT
                                ----------  -----------  -------------  -------------  -------------   -------------   -------------
                                                                                                 
Balance, December 31, 2002         78,800          788    139,591,534      1,395,915      8,242,193     (16,555,086)     (6,916,190)

  Intrinsic value of beneficial
     conversion feature              --           --             --             --        3,172,070            --         3,172,070

  Exercise of stock options          --           --        2,000,000         20,000        (20,000)           --              --

  Net loss                           --           --             --             --             --        (5,254,036)     (5,254,036)
                                ----------  -----------  -------------  -------------  -------------   -------------   -------------
Balance, December 31, 2003         78,800   $      788    141,591,534   $  1,415,915   $ 11,394,263    $(21,809,122)   $ (8,998,156)
                                ----------  -----------  -------------  -------------  -------------   -------------   -------------

  Net loss                           --           --             --             --             --        (1,373,833)     (1,373,833)
                                ----------  -----------  -------------  -------------  -------------   -------------   -------------
Balance, December 31, 2004         78,800   $      788    141,591,534   $  1,415,915   $ 11,394,263    $(23,182,955)   $(10,371,989)
                                ==========  ===========  =============  =============  =============   =============   =============


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



                                                               F-5





                                                       PRISM SOFTWARE CORPORATION
                                                        Statements of Cash Flows


                                                                                 YEAR ENDED DECEMBER 31,
                                                                                ---------------------------
                                                                                   2004            2003
                                                                                ------------   ------------
                                                                                         
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                                      $(1,373,833)   $(5,254,036)
  Adjustments to reconcile net loss to net cash used by operating activities:
    Loss on disposal of assets                                                          873          1,787
    Depreciation                                                                     16,913         13,124
    Gain - settling or writing off debt and interest                               (814,591)          --
    Gain - settling or writing off accounts payable                                (117,282)          --
    Amortization of beneficial conversion feature                                      --        3,172,070
    (Increase) decrease in assets
      Accounts receivable                                                           (24,037)       (12,307)
      Inventory                                                                      (5,149)            41
      Licenses and other assets                                                     (12,278)         1,655
    Increase (decrease) in liabilities
      Accounts payable                                                              (53,862)        52,898
      Accrued expenses                                                              772,661        664,149
      Deferred revenue                                                              197,331         (7,501)
                                                                                ------------   ------------
Net cash used by operating activities                                            (1,413,254)    (1,368,120)

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of equipment                                                             (29,425)        (8,634)
                                                                                ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of notes payable - stockholders                          1,950,000      1,381,000
  Payments on notes - stockholders                                                 (129,536)          --
                                                                                ------------   ------------
        Net cash provided by financing activities                                 1,820,464      1,381,000
                                                                                ------------   ------------
Net increase (decrease) in cash                                                     377,785          4,246

Cash, beginning of period                                                            12,024          7,778
                                                                                ------------   ------------
Cash, end of period                                                             $   389,809    $    12,024
                                                                                ============   ============

Supplemental disclosures:
  Cash paid for interest                                                        $      --      $      --
  Cash paid for income tax                                                      $      --      $      --

Non-cash investing and financing activities:
  Conversion of stockholders interest payable to notes payable                  $      --      $   737,938



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



                                                     F-6




                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------

     Organization
     ------------

     Prism Software Corporation (the "Company") was organized under the laws of
     Delaware in 1992. The Company specializes in enterprise document and
     content management solutions. The Company's products and expertise lie in
     electronic document formation, document management, and print stream
     conversion solutions. The Company's customer base includes organizations
     that use its solutions in managing high-volume, large scale document
     printing in a variety of markets.

     Concentrations of risk
     ----------------------

     In 2004 and 2003, the three largest customers in each year accounted for
     about 42% of the Company's sales in those years, with one customer being
     among the three largest in each year. At December 31, 2004 and 2003, the
     three largest accounts receivable totaled about 69% and about 83%,
     respectively, of total accounts receivable. The Company does not have any
     long-term sales contracts with any of its customers.

     Use of estimates
     ----------------

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect certain reported amounts and disclosures.
     Accordingly, actual results could differ from those estimates.

     Inventory
     ---------

     Inventory is reported at the lower of cost (determined on the
     first-in-first-out method) or market and consists principally of finished
     goods.

     Equipment
     ---------

     Equipment is recorded at cost. Depreciation is provided over the estimated
     useful lives of the related assets, generally three to five years, using
     the straight-line method.


                                      F-7



                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------

     Software Development Costs
     --------------------------

     Development costs related to new software products and enhancements to
     existing software products are expensed as incurred until technological
     feasibility has been established. After technological feasibility is
     established, any additional costs are capitalized in accordance with
     Statement of Financial Accounting Standards No. 86, "Accounting for the
     Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
     Company believes the establishment of technological feasibility occurs
     concurrently with the completion of software development. Accordingly, no
     costs have been capitalized as of December 31, 2004.

     Revenue recognition
     -------------------

     Revenues from the licensing of computer software products are recognized
     upon delivery of the products to customers, as there are no significant
     obligations remaining after the delivery date. Revenues related to service
     agreements are deferred and recognized in proportion to the amounts
     expected to be charged to expense for the services during the duration of
     the agreements; most service agreements are for 12 months. Payments are
     generally due within 30 days. Management's review of collectibility is an
     ongoing process, and reserves are made based on the Company's historical
     experience with each customer and its knowledge of each receivable.

     Income taxes
     ------------

     The Company accounts for income taxes under the asset and liability method.
     Deferred income taxes are recognized for the tax consequences of temporary
     differences by applying enacted statutory rates applicable to future years
     to the difference between the financial statement carrying amounts and the
     tax basis of existing assets and liabilities.

     Stock-based compensation
     ------------------------

     The Company has elected to continue to account for stock-based compensation
     using the intrinsic value method, as described in Accounting Principles
     Board Opinion 25. Accordingly, compensation is measured as the excess, if
     any, of the quoted market price of the Company's common stock at the date
     of grant over the amount an employee is required to pay to acquire the
     stock. Compensation costs reported in 2004 and 2003 were $0 and $0,
     respectively. Companies using APB 25 to report stock-based compensation are
     required under SFAS 123 to disclose the estimated fair value of options
     granted.

                                      F-8




                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------

     Stock-based compensation (continued)
     ------------------------------------

     As prescribed under SFAS 123, the Company used the Black-Scholes Option
     Pricing Model to estimate the fair value of the options granted in 2004 and
     2003 using the following assumptions.

                                                2004         2003
                                                ----         ----
                Expected life (years)        4 years      10 years
                Risk-free interest rate         3.5%        1.875%
                Volatility                      60%           50%

     Had the Company chosen to report the stock-based compensation at its
     estimated fair value, net loss and net loss per share would have increased
     slightly.

                                                       2004            2003
                                                   -------------   -------------
        Net loss
        As reported                                $ (1,373,833)   $ (5,254,036)
        Estimated fair value of compensation             (4,798)         (7,729)
                                                   -------------   -------------
        Pro forma                                  $ (1,378,631)   $ (5,261,765)

        Basic and diluted loss per share
        As reported                                $      (0.01)   $      (0.04)
        Pro forma                                  $      (0.01)   $      (0.04)

     Cash and equivalents
     --------------------

     The Company considers all liquid investments with a maturity of three
     months or less from the date of purchase that are readily convertible into
     cash to be cash equivalents. Balances in bank accounts may, from time to
     time, exceed federally insured limits. The Company believes that its loss
     exposure is limited.

     Advertising costs
     -----------------

     Advertising costs are expensed as incurred. During 2004 and 2003,
     advertising costs totalled approximately $19,100 and 19,600, respectively.

     Basic and diluted net loss per share
     ------------------------------------

     Basic net loss per share is based upon the weighted average number of
     common shares outstanding. Diluted net loss per share is based on the
     assumption that all dilutive convertible shares and stock options were
     converted or exercised. Dilution is computed by applying the treasury stock
     method. Under this method, options and warrants are assumed to be exercised
     at the beginning of the period (or at the time of issuance, if later), and
     as if funds obtained thereby were used to purchase common stock at the
     average market price during the period.


                                      F-9



                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------

     Fair value of financial instruments
     -----------------------------------

     The fair value of the notes payable to stockholders and related accrued
     interest cannot be determined due to the related party nature of the
     obligations.

     Research and development costs
     ------------------------------

     Research and development costs are charged to expense as incurred.




                                      F-10



                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------

     Recent accounting pronouncements
     --------------------------------

     In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based
     Payments ("SFAS 123R").  SFAS 123R requires all share based payments to
     employees, including grants of employee stock options, to be recognized in
     the income statement based on their fair values.  The Company is required
     to adopt the new standard in the first interim period beginning after
     December 15, 2005. The Company has not yet determined the impact, if any,
     of the adoption of SFAS 123R on its financial statements.

     In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
     Assets, an amendment of APB Opinion 29 ("SFAS 153").  SFAS 153 requires
     that exchanges of nonmonetary assets be measured based on the fair values
     of the assets exchanged, and eliminates the exception to this principle
     under APB Opinion 29 for exchanges of similar productive assets.  The
     Company is required to adopt the new standard in the first interim period
     beginning after June 15, 2005. The Company does not expect the adoption of
     SFAS 153 to have a material effect on its financial statements.




                                      F-11



                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


2.   EQUIPMENT
---------------

     Furniture and equipment                                      $      28,864
     Computer equipment and software                                     71,068
                                                                  --------------
                                                                         99,932

     Accumulated depreciation and amortization                          (63,096)
                                                                  --------------
                                                                  $      36,836
                                                                  ==============

     Depreciation expense charged to operations in 2004 and 2003 was $16,913 and
     $13,124, respectively.

3.   ACCRUED EXPENSES
----------------------

     Wages and benefits                                           $     303,386
     Sales commissions                                                   95,779
     Other                                                               72,822
                                                                  --------------
                                                                  $     471,987
                                                                  ==============

4.   NOTES PAYABLE
-------------------

     Stockholders
     ------------

     9% to 10%, past due August 1996, unsecured                   $      41,696

     5%, due March 1, 2007, secured by the Company's assets           1,950,000

     5%, convertible into common stock at $.01 per
     share at holders' option (limited to a maximum
     of 94,488,356 shares), due March 1, 2007, secured
     by the Company's assets                                          7,099,838
                                                                  --------------
                                                                  $   9,091,534
                                                                  ==============

     Maturities are summarized as follows:

     2005                   $      41,696
     2006                               0
     2007                       9,049,838
                            -------------
                            $   9,091,534
                            =============


                                      F-12




                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004



4.   NOTES PAYABLE (CONTINUED)
------------------------------

     Certain portions of the $7,099,838 borrowings described above contain a
     beneficial conversion feature equal to or less than the face value of each
     applicable borrowing, which is reflected in additional paid-in capital in
     the accompanying financial statements. During 2004 and 2003, $0 and
     $3,172,070, respectively, of this beneficial conversion feature was
     amortized and included as part of the caption "Interest expense
     stockholders" in the accompanying statements of operations.

     During 2004, the holders of the secured debt described above, in exchange
     for the Company making principal payments on certain unsecured debt and for
     securing their remaining unsecured debt, 1) forgave approximately $30,000
     of unsecured debt principal and approximately $525,000 of accrued interest,
     2) extended the due date of their secured debt to March 1, 2007 and 3)
     limited the number of shares of common stock into which their debt could be
     converted.

     During 2004, the Company recognized a gain by writing off approximately
     $127,000 of debt held by other holders which was determined to be no longer
     enforceable, and approximately $133,000 of accrued interest on such debt.


5.   PREFERRED STOCK
--------------------

     The Company has authorized 5,000,000 shares of $0.01 par value preferred
     stock, of which 100,000 shares have been designated as $5.00 Series A 10%
     cumulative convertible preferred stock (Series A).

     The holders of Series A are entitled to receive, when and as declared by
     the Company's Board of Directors (the Board), cumulative annual dividends
     of $0.50 per share commencing upon issuance and payable semi-annually.
     Series A has a liquidation preference of $5.00 per share plus any accrued
     but unpaid dividends. Series A is redeemable at the Company's election upon
     30 days' notice at a price per share of $5.50 plus accrued but unpaid
     dividends thereon. The 78,800 shares of Series A outstanding at December
     31, 2004 are currently convertible at the election of the holders into
     3,419,920 shares of common stock. The conversion rate is subject to the
     adjustments set forth in the certificate of designation for Series A based
     on the current market price of the Companys common stock. The holders of
     the Series A are entitled to cast one non-cumulative vote per share of
     Series A in all matters presented to the shareholders, and the majority of
     holders of Series A, voting as a class, have certain protective rights
     relating to their dividends and preference rights. No amounts have been
     accreted in relation to the Series A redemption as the likelihood of the
     Company electing to repurchase is remote.

     At December 31, 2004, the amount of undeclared dividends in arrears on the
     Series A was $494,250 ($6.27 per share).


                                      F-13




                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


6.   COMMON STOCK
-----------------

     In 2003, the Company issued 2,000,000 shares of common stock to its
     then-current President and Chief Executive Officer upon the exercise of
     options.


7.   STOCK OPTIONS
------------------

     1993 Stock Option Plan
     ----------------------

     The Company's 1993 Stock Option Plan provides for the issuance of options
     to employees, directors, officers, and advisors of the Company to acquire
     up to 630,000 shares of the Company's common stock. Options issued under
     this plan are generally granted at estimated market value, vest at varying
     rates and expire within ten years from the date of grant or within 90 days
     after termination of employment. As of December 31, 2004, options for
     65,000 shares of Common Stock were reserved for issuance upon exercise of
     outstanding options. Except as to options previously granted and
     outstanding under it, the 1993 Stock Option Plan terminated on
     February 1, 2003.

     2000 Stock Option Plan
     ----------------------

     The Company's 2000 Stock Option Plan provides for the issuance of options
     to employees, directors, officers and advisors of the Company to acquire up
     to 3,000,000 shares of common stock. Options issued under this plan are
     generally exercisable at 85% of the market value on the date of grant, vest
     over three years and expire within ten years from the date of grant or
     within 90 days after termination of employment. As of December 31, 2004,
     none of the options available for grant under the 2000 Plan had been
     exercised, 1,520,000 shares of Common Stock were reserved for issuance upon
     exercise of outstanding options and 1,480,000 shares of Common Stock
     remained available for grant thereunder. Except as to options previously
     granted and outstanding under it, the 2000 Stock Option Plan will terminate
     on May 4, 2010.



                                      F-14




                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


7.   STOCK OPTIONS (CONTINUED)
------------------------------

     E. Ted Daniels Options
     ----------------------

     In December 2004, as part of the Company's settlement with E. Ted Daniels,
     its previous President, the Company granted Mr. Daniels non-qualified
     options to purchase 1) 1,400,000 shares of the Companys Common Stock and
     2) potential additional shares of Common Stock equal to 4% of new shares of
     Common Stock issued through December 15, 2005 (with certain limitations).
     As of December 31, 2004, none of these options available for grant had been
     exercised, 1,400,000 shares of Common Stock were reserved for issuance
     upon exercise of such outstanding options, and the exercise price was
     $0.01 per share. These options will terminate on December 15, 2008.

     Stock option activity for the years ended December 31, 2004 and 2003
     follows:


                                     WEIGHTED                 WEIGHTED                  WEIGHTED
                                      AVERAGE                  AVERAGE                   AVERAGE
                       FINANCING      OPTION        1993       OPTION         2000       OPTION
                        OPTIONS       PRICE         PLAN        PRICE         PLAN        PRICE
                       ----------   ----------   ----------   ----------   ----------   ----------
                                                                           
December 31, 2002         197,093         2.00     253,600          1.45      915,000        0.05

Granted                      --             --          --            --    1,000,000        0.03
Expired or Cancelled         --             --    (173,600)         1.99     (195,000)       0.05
Exercised                    --             --          --            --           --          --
                       ----------   ----------   ----------   ----------   ----------   ----------
December 31, 2003         197,093         2.00      80,000          0.27    1,720,000        0.04
                       ----------   ----------   ----------   ----------   ----------   ----------
Granted                      --             --          --            --           --          --
Expired or Cancelled     (197,093)          --     (15,000)         0.65     (200,000)       0.05
Exercised                    --             --          --            --           --          --
                       ----------   ----------   ----------   ----------   ----------   ----------
December 31, 2004            --             --      65,000          0.18    1,520,000        0.04
                       ==========   ==========   ==========   ==========   ==========   ==========

table split - see below


                                     WEIGHTED                 WEIGHTED
                         OTHER       AVERAGE       E. TED      AVERAGE
                       MANAGEMENT    OPTION       DANIELS      OPTION
                        OPTIONS       PRICE       OPTIONS       PRICE
                       ----------   ----------   ----------   ----------

December 31, 2002       2,000,000           --          --            --

Granted                        --           --          --            --
Expired or Cancelled           --           --          --            --
Exercised              (2,000,000)          --          --            --
                       ----------   ----------   ----------   ----------
December 31, 2003              --           --          --            --
                       ----------   ----------   ----------   ----------
Granted                       --            --    1,400,000         0.01
Expired or Cancelled          --            --          --            --
Exercised                     --            --          --            --
                       ----------   ----------   ----------   ----------
December 31, 2004              --           --    1,400,000         0.01
                       ==========   ==========   ==========   ==========

     The following information applies to options outstanding at December 31,
     2004:

                                                         WEIGHTED
                                                         AVERAGE             WEIGHTED                               WEIGHTED
                                                        REMAINING             AVERAGE                                AVERAGE
                                    NUMBER           CONTRACTUAL LIFE        EXERCISE             NUMBER            EXERCISE
                                 OUTSTANDING             (YEARS)               PRICE           EXERCISABLE            PRICE
                               -----------------   ---------------------  ----------------   -----------------   ----------------

1993 stock option plan                   65,000             3                      $ 0.18              65,000             $ 0.18
2000 stock option plan                1,520,000             8                      $ 0.04           1,520,000             $ 0.04
E. Ted Daniels options                1,400,000             4                      $ 0.01           1,400,000             $ 0.01
                               -----------------                                             -----------------
                                      2,985,000                                                     2,985,000
                               =================                                             =================



                                                               F-15





                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

8.   WARRANTS
-------------

     The Company issued 2,500,000 warrants in 2001 in relation to a private
     placement offering. All such warrants expired during 2004.


9.   BASIC AND DILUTED NET LOSS PER SHARE
-----------------------------------------

     The following table illustrates the reconciliation of the numerators and
     denominators of the basic and diluted loss per share computations.

                                                         2004           2003
                                                     ------------   ------------
     Numerator
     ---------
       Net loss                                      $(1,373,833)   $(5,254,036)
       Preferred dividends                               (39,400)       (39,400)
                                                     ------------   ------------
       Net loss                                      $(1,413,233)   $(5,293,436)
                                                     ============   ============

     Denominator
     -----------
       Basic and diluted weighted average
       number of common shares outstanding
       during the period                              141,592,000    140,446,000
                                                     ------------   ------------

     Basic and diluted net loss per share            $     (0.01)   $     (0.04)
                                                     ============   ============

     The following incremental common shares associated with outstanding
     options, warrants and convertible debt are not included in the denominators
     above as their effect would be anti-dilutive:

                                    EQUIVALENT NUMBER OF
                                       COMMON SHARES
                                      AT DECEMBER 31,
                              ---------------------------------
                                   2004               2003
                              ---------------   ---------------
     Options                       2,985,000         1,997,093
     Warrants                              0         2,500,000
     Convertible debt             94,488,356       755,598,167



                                      F-16





                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

10.  INCOME TAXES
-----------------

     The Company recognizes deferred tax assets and liabilities for temporary
     differences between the financial reporting and tax bases of its assets and
     liabilities. Deferred tax assets are reduced by a valuation allowance when
     deemed appropriate.

     The Company has deferred tax assets of approximately $8,063,000 at December
     31, 2004 relating to its net operating losses. The Company provided a 100%
     valuation allowance for these deferred tax assets. Accordingly, the Company
     recorded no benefit for income taxes during the periods presented. During
     2004 and 2003 the Companys valuation allowance increased approximately
     $175,000 and approximately $2,021,000, respectively.

     At December 31, 2004, the Company has net operating loss carryforwards for
     federal tax purposes of approximately $17,918,000, which will expire
     beginning in 2005 through 2024.


11.  COMMITMENTS AND CONTINGENCIES
----------------------------------

     Leases
     ------

     The Company moved its offices in August 2004. The new office lease expires
     August 31, 2007, with options to extend for up to two additional three-year
     terms. The initial monthly rent is $5,177. In 2004 and 2003, rent expense
     was $73,465 and $98,433, respectively.

     Minimum annual lease payments at December 31, 2004 are as follows:

     2005                   $      63,060
     2006                          65,884
     2007                          45,178
                            -------------
                            $     174,122
                            =============


12.  LEGAL PROCEEDINGS
----------------------

     In November 2004, the Company reached a settlement to resolve in a mutually
     satisfactory and voluntary manner a payment owed under a terminated
     agreement. The other party had recently filed for arbitration of the
     matter.

     In December 2004, the Company reached a settlement to resolve in a mutually
     satisfactory and voluntary manner a dispute with its previous President, E.
     Ted Daniels, regarding his prior employment with the Company.

     The effects of both such settlements are reflected in the accompanying
     financial statements at December 31, 2004, and totalled $310,000.



                                      F-17




                           PRISM SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

13.  ACCOUNTS PAYABLE
---------------------

     During 2004, the Company recognized a gain of approximately $117,000 from
     settling certain accounts payable and from writing off certain other
     accounts payable that were determined to be no longer enforceable.


14.  GOING CONCERN
------------------

     The Company's continued operating losses, limited capital and stockholders'
     deficit raise substantial doubt about its ability to continue as a going
     concern. Management's plans to continue strengthening the Company's
     financial condition and operations include: restructuring the Company's
     debt and other liabilities, monitoring costs and cash flow activities,
     expanding operations through potential cooperative ventures, continuing to
     upgrade sales and marketing efforts and upgrading customer service and
     product development efforts. The Company also intends to continue raising
     capital to fund its operations, but no assurance can be given that such
     funding will be available.


                                      F-18