Unassociated Document

We have audited the accompanying balance sheets of ArtSelect, Inc. (the Company) as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years then ended. 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 generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

ARTSELECT, INC.
Balance Sheets
December 31, 2005 and 2004
Assets	2005			2004
Current assets:
Cash and cash equivalents	$	283,415			391,098
Accounts receivable, less allowances of $65,686 and $77,851
in 2005 and 2004, respectively		653,135			606,232
Inventory		646,226			647,520
Prepaid expenses and other		31,980			33,589
Total current assets		1,614,756			1,678,439
Property and equipment, net		250,421			317,828
Software, net		404,301			325,134
Other		6,742			9,117
Total assets	$	2,276,220			2,330,518
Liabilities and Stockholders’ Deficit
Current liabilities:
Current portion of long-term debt	$	27,875			61,737
Accounts payable		729,679			795,700
Accrued expenses		252,498			331,427
Total current liabilities		1,010,052			1,188,864
Long-term debt		—			27,855
Series A redeemable convertible participating preferred stock,
$0.001 par value. Authorized 2,500,000 shares; issued and
outstanding 2,182,512 shares in 2005 and 2004 (redemption
amount of $1,459,612 and $1,394,136, respectively)		1,427,306			1,394,136
Series B redeemable convertible participating preferred stock
and stock purchase warrants, $0.001 par value. Authorized
5,499,041 shares; issued and outstanding 5,364,917 shares
in 2005 and 2004 (redemption amount of $8,123,728 and
$7,743,017, respectively)		7,943,924			7,743,017
Total liabilities		10,381,282			10,353,872
Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.001 par value. Authorized 40,000,000 shares;
issued and outstanding 25,120,815 and 8,374,887 shares
in 2005 and 2004, respectively		25,121			8,375
Additional paid-in capital		321,899			3,709
Accumulated deficit		(8,452,082	)		(8,035,438	)
Total stockholders’ deficit		(8,105,062	)		(8,023,354	)
Total liabilities and stockholders’ deficit	$	2,276,220			2,330,518
See accompanying notes to financial statements.

ARTSELECT, INC.
Statements of Operations
Years ended December 31, 2005 and 2004
	2005			2004
Gross sales	$	12,119,367			12,050,304
Less returns and adjustments		379,964			487,539
Net sales		11,739,403			11,562,765
Cost of goods sold		5,213,135			5,210,384
Gross profit		6,526,268			6,352,381
Selling, general, and administrative expenses		6,024,744			6,245,708
Depreciation and amortization expense		353,323			310,578
Income (loss) from operations		148,201			(203,905	)
Other income (expenses):
Interest income		2,853			7,371
Interest expense		(603,285	)		(10,120	)
Other		—			1,580
Total other expense		(600,432	)		(1,169	)
Net loss from continuing
operations before income tax
expense and discontinued operations		(452,231	)		(205,074	)
Income tax expense		—			—
Net loss from continuing
operations before discontinued
operations		(452,231	)		(205,074	)
Net loss from discontinued operations		—			(832,351	)
Net loss	$	(452,231	)		(1,037,425	)
See accompanying notes to financial statements.

ARTSELECT, INC.
Statements of Stockholders’ Deficit
Years ended December 31, 2005 and 2004
			Additional					Total
	Common		paid-in		Accumulated			stockholders’
	stock		capital		deficit			deficit
Balance at December 31, 2003		8,366		1,990		(6,522,035	)		(6,511,679	)
Stock options exercised		9		1,719		—			1,728
Accretion of Series A
preferred stock		—		—		(65,475	)		(65,475	)
Dividends on Series B
preferred stock		—		—		(410,503	)		(410,503	)
Net loss		—		—		(1,037,425	)		(1,037,425	)
Balance at December 31, 2004		8,375		3,709		(8,035,438	)		(8,023,354	)
Stock options exercised		—		26		—			26
Estimated fair value of common stock issued
to extend preferred stock redemption date		16,746		318,164		—			334,910
Expiration of Series B warrants		—		—		35,587			35,587
Net loss		—		—		(452,231	)		(452,231	)
Balance at December 31, 2005	$	25,121		321,899		(8,452,082	)		(8,105,062	)
See accompanying notes to financial statements.

ARTSELECT, INC.
Statements of Cash Flows
Years ended December 31, 2005 and 2004
	2005			2004
Cash flows from operating activities:
Net loss	$	(452,231	)		(1,037,425	)
Adjustments to reconcile net loss to net cash provided by
operating activities of continuing operations:
Loss from discontinued operations		—			832,351
Noncash interest expense related to preferred stock		603,285			—
Depreciation and amortization		353,323			310,578
Loss on sale of fixed assets		548			9,255
Changes in operating assets and liabilities:
Restricted cash		—			8,707
Accounts receivable		(46,903	)		48,828
Inventory		1,294			336,420
Prepaid expenses and other assets		3,984			(17,567	)
Accounts payable		(66,021	)		276,131
Accrued expenses		(78,929	)		(128,239	)
Net cash provided by operating activities
of continuing operations		318,350			639,039
Cash flows from investing activities:
Proceeds from sale of property and equipment		500			7,146
Purchases of property and equipment		(43,939	)		(93,784	)
Software development costs paid		(322,192	)		(245,963	)
Net cash used in investing activities of
continuing operations		(365,631	)		(332,601	)
Cash flows from financing activities:
Payments on accounts receivable with recourse		—			(81,774	)
Principal payments on long-term debt		(61,717	)		(56,841	)
Proceeds from warrants exercises		1,289			—
Proceeds from stock option exercises		26			1,728
Net cash provided used in financing activities
of continuing operations		(60,402	)		(136,887	)
Net operating cash flows from discontinued operations		—			(816,292	)
Net decrease in cash and cash equivalents		(107,683	)		(646,741	)
Cash and cash equivalents at beginning of year		391,098			1,037,839
Cash and cash equivalents at end of year	$	283,415			391,098

ARTSELECT, INC.
Statements of Cash Flows
Years ended December 31, 2005 and 2004
	2005		2004
Supplemental disclosure:
Cash paid during the year for interest	$	5,108		10,120
Supplemental disclosure of noncash financing activities:
Accretion of Series A preferred stock		65,476		65,475
Dividends on Series B preferred stock		415,009		410,503
See accompanying notes to financial statements.

The preparation of financial statements requires management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant, and equipment and valuation allowances for receivables and sales returns, inventories, and deferred income tax assets. Actual results could differ from those estimates.

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on specific past due balances and historical write-off experiences. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation, and FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic value-based method of accounting described above and has adopted only the disclosure requirements of FASB Statement No. 123, as amended. The following table illustrates the effect on net loss if the fair value-based method had been applied to all outstanding and unvested awards in each year:

The calculated fair value of stock options granted, following calculation methods prescribed by FASB Statement No. 123, uses the Black-Scholes option pricing model. Fair value per share was calculated on the date of grant using the minimum value method. The following additional weighted average assumptions were used: no dividends, volatility of 1%, a risk-free interest rate of 4.5% and 5.0% and an expected life outstanding of 10 years for the options granted in 2005 and 2004, respectively.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Revenue is recognized when the product is shipped and title is transferred to the customer. Revenue sold via the Company’s Web site and/or the Web site’s subdomains is recognized on a gross basis. Revenue sold through the customer’s distribution channels is recognized net of related costs. The Company bases its estimates for sales returns on historical experience and has not experienced significant fluctuations between estimated and actual return activity.

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This statement is a revision to Statement No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This statement will require measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock options. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. The Company will adopt this statement on January 1, 2006 under the modified prospective method of application. Under that method, the Company will recognize compensation costs for new grants of share-based awards, awards modified after the effect date, and the remaining portion of the fair value of the unvested awards at the adoption date.

In December 2004, the FASB issued FASB Statement No. 151, Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this statement, such items will be recognized as current-period charges. In addition, the statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement will be effective for the Company for inventory costs incurred on or after January 1, 2006. The adoption of this statement will not have a significant effect on the Company’s financial statements.

In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections. Statement No. 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. This statement will be effective for the Company for all accounting changes and any error corrections occurring after January 1, 2006.

In May 2003, FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued. This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The statement also includes required disclosures for financial instruments within its scope. For the Company, the statement was effective for instruments entered into or modified after May 31, 2003 and otherwise became effective as of January 1, 2004, except for certain mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the statement became effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company adopted FASB Statement No. 150 for its mandatorily redeemable preferred stock as of January 1, 2005 (note 8).

The Company currently utilizes the services of one independent artwork and framing supply company to manufacture and ship approximately 50% of the products ordered through the Company’s Web sites or through its customer’s distribution channels. The time and transition to switch to other providers, if necessary, could cause a disruption in services and operations of the Company.

	2005			2004
Deferred tax assets:
Charitable contributions	$	5,387			4,392
Bad debt allowance		24,961			29,583
Accrued vacation		7,789			12,344
Net operating loss carryforward		1,873,245			1,929,495
Gross deferred tax assets		1,911,382			1,975,814
Deferred tax liability:
Depreciation		33,165			35,625
Net deferred tax asset		1,878,217			1,940,189
Valuation allowance		(1,878,217	)		(1,940,189	)
Net deferred tax asset	$	—			—

At December 31, 2005, the Company has net operating loss carryforwards for federal income tax purposes of $4,929,593, which are available to offset future federal taxable income, if any, through 2022. The loss carryforwards expire in various amounts from 2020 through 2024. The utilization of the net operating loss carryforwards may be limited due to the provisions of Section 382 of the Internal Revenue Code relating to changes in ownership. The Company has provided a valuation allowance for its entire net deferred tax asset at December 31, 2005 as it is more likely than not that a deferred tax asset will not be realized due to uncertainty as to future utilization of its net operating loss carryforwards, due primarily to its history of operating losses. The change in valuation allowance between December 31, 2005 and 2004 was a decrease of approximately $61,972.

	2005		2004
Note payable to bank, due in monthly
installments ranging from $3,054 to
$3,345, plus interest at a rate
of 8.25%, with final payment due
February 2006	$	6,670		44,810
Note payable to bank, due in monthly
installments ranging from $1,886 to
$2,185, plus interest at a rate
of 8.25%, with final payment due
October 2006		21,205		44,782
Total long-term debt		27,875		89,592
Less current installments		27,875		61,737
Long-term debt, excluding
current installments	$	—		27,855

The Company has designated and authorized 10,000,000 shares as preferred stock with 2,500,000 shares designated as redeemable Series A convertible participating preferred stock (Series A stock) and 5,499,041 shares designated as redeemable Series B convertible participating preferred stock (Series B stock). The remaining 2,000,959 shares are undesignated. The Series A and Series B stock have full voting rights and are convertible at the option of the holder into common stock on a one-for-one basis, subject to certain adjustments. The Series B stock earns annual/cumulative dividends at 6% of the stated value per share. The Series A stock has no stated dividend, but would participate in any dividends paid on common stock.

Series A and Series B stock have a mandatory redemption provision whereby, upon demand by the holder, within 180 days subsequent to July 26, 2007, the Company is required to redeem the stock at a defined redemption price. The redemption price for Series A stock is the original purchase price plus 6% per annum. The redemption price for Series B stock is equal to the original purchase price plus any accrued and unpaid dividends. The carrying value of the Series A and Series B stock is being accreted to the defined redemption price over the period until the initial redemption date. The liquidation value of the Series A and Series B stock at December 31, 2005 is $1,459,612 and $8,123,729, respectively. The total liquidation value of the Series A and Series B stock on the July 26, 2007 redemption date is $10,353,160.

At December 31, 2005, and 2004, the liquidation preference value of the Series A and Series B stock totaled approximately $9,583,341 and $9,137,153, respectively. Liquidation preferences reside with the Series B holders first, secondly with the Series A holders, and then the common stockholders in the event of a liquidation, dissolution, or a winding up of the Company. In addition to the liquidation preference, Series A and B stockholders participate with the common holders in any remaining assets upon liquidation, up to a maximum of three times their initial investment. Aggregate cumulative preferred dividends in arrears on the Series B stock were $2,169,899 and $1,754,888 at December 31, 2005 and 2004, respectively.

In April 2000, as part of a short-term bridge financing agreement, warrants for 114,797 shares of redeemable Series B preferred stock were issued at an exercise price of $1.31. The fair value of the warrants at the date of grant was determined by a minimum valuation model to be $35,587, or $0.31 per warrant, and was expensed over the term of the agreement. The warrants expired unexercised in April 2005.

Both of these Series B issuances had revenue targets that were to have been achieved by June 2001. The targets were not achieved and the maximum of 773,043 (with exercise price of $0.01 a share) and 19,326 shares of redeemable Series B preferred stock purchase warrants were issued. Of these issued warrants, 773,043 have been exercised as of December 31, 2005. The remaining 19,326 warrants expired unexercised in April 2005.

On January 19, 2005, the Company’s shareholders approved the Further Amended and Restated Certificate of Incorporation according to which the mandatory redemption period of the preferred stock was advanced from the 180-day period beginning July 26, 2005 to the 180-day period beginning July 26, 2007. In consideration for this deferment, the Company made 17 million shares of common stock at $0.001 par value available for issuance to holders of preferred stock who signed the agreement by January 31, 2005. On January 31, 2005, the Company issued 16,745,516 shares of common stock to holders of preferred stock who signed the agreement. The common stock was recorded in the financial statements at a value of $334,910.

Effective January 1, 2005, the Company adopted FASB Statement No. 150, which requires the Company to classify its mandatorily redeemable preferred stock as a liability at the present value of the redemption amount, with changes in the fair value recorded through the statements of operations. As a result, the accretion of preferred stock was recorded as interest expense during 2005.

	2005			2004
Series A redemption amount	$	1,459,612			1,394,136
Unamortized discount related to issuance of common stock to
Series A stockholders		(32,306	)		—
	$	1,427,306			1,394,136
Series B redemption amount	$	8,123,728			7,743,017
Unamortized discount related to issuance of common stock to
Series B stockholders		(179,804	)		—
	$	7,943,924			7,743,017

In April 2000, the Company established a stock option plan (the 2000 Plan) pursuant to which the Company may grant stock options to employees and nonemployee consultants. The 2000 Plan authorized grants of options to purchase up to 2,250,000 shares of authorized but unissued common stock. In January 2005, the 2000 Plan was amended to increase the number of authorized grants of options to purchase up to 3,500,000 shares of authorized but unissued common stock. The exercise price for options under the 2000 Plan shall generally be at the stock’s fair market value on the grant date, and options must be exercised no later than 10 years from the grant date, unless otherwise specified. Specific option grants under the 2000 Plan, eligible individuals, vesting, and other terms and conditions are at the discretion of a committee of the board of directors.

				Weighted
				average
	Number of			exercise
	shares			price
Outstanding at December 31, 2003		2,243,696			0.29
Issued with $0.20 exercise price		262,500			0.20
Options forfeited		(1,219,397	)		0.31
Options exercised		(8,637	)		0.20
Outstanding at December 31, 2004		1,278,162			0.25
Issued with $0.02 exercise price		2,009,250			0.02
Options forfeited		(114,141	)		0.18
Options exercised		(412	)		0.06
Outstanding at December 31, 2005		3,172,859			0.11

		Options outstanding		Options exercisable
			Weighted
			average			Weighted
			remaining			average
	Exercise	Number	contractual	Number		exercise
	price	outstanding	life	exercisable		price
$	0.02	1,999,409	9.31	748,709	$	0.02
	0.11	100,000	3.08	100,000		0.11
	0.20	989,850	5.57	882,088		0.20
	1.04	33,600	4.81	33,600		1.04
	1.06	50,000	1.75	50,000		1.06
		3,172,859		1,814,397

ARTSELECT, INC

Notes to Financial Statements

December 31, 2005 and 2004

On October 31, 2004, the Company decided to cease to offer their World Art Works (WAW) product line. The inventories used in this product line were integrated into the Company’s other product lines and all remaining inventory from the WAW product line held in rep group showrooms was returned to the Company. As of December 31, 2005, all fixed assets used in the WAW product line are being used in the continuing operations of the Company.

The unaudited interim condensed financial statements of ArtSelect, Inc. have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position at March 31, 2006 and the results of operations and its cash flows for the three months ended March 31, 2006 and 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. These condensed consolidated financial statements should be read in conjunction with the audited financial statements included herein for the year ended December 31, 2005 and 2004.

ARTSELECT, INC.
Balance Sheet
Assets	March 31, 2006 (unaudited)
Current assets:
Cash and cash equivalents	$	304,616
Accounts receivable, less allowances of $65,296		572,204
Inventory		691,696
Prepaid expenses and other		49,526
Total current assets		1,618,042
Property and equipment, net		224,033
Software, net		397,865
Other		6,742
Total assets	$	2,246,682
Liabilities and Stockholders’ Deficit
Current liabilities:
Current portion of long-term debt	$	14,987
Accounts payable		698,350
Accrued expenses		147,857
Total current liabilities		861,194
Series A redeemable convertible participating preferred stock,
$0.001 par value. Authorized 2,500,000 shares; issued and
outstanding 2,182,512 shares		1,448,775
Series B redeemable convertible participating preferred stock
and stock purchase warrants, $0.001 par value. Authorized
5,499,041 shares; issued and outstanding 5,364,917 shares		8,077,467

Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.001 par value.		25,121
Additional paid-in capital		321,912
Accumulated deficit		(8,487,787	)
Total stockholders’ deficit		(8,140,754	)
Total liabilities and stockholders’ deficit	$	2,246,682

ARTSELECT, INC.
Statements of Operations (unaudited)
Three months ended March 31
	2006			2005
Net sales	$	3,105,969			3,135,228
Cost of goods sold		1,385,690			1,453,780
Gross profit		1,720,279			1,681,448
Selling, general, and administrative expenses		1,601,754			1,655,641
Income from operations		118,525			25,807
Other expenses, net		(154,230	)		(141,406	)
Net loss	$	(35,705	)		(115,599	)

ARTSELECT, INC.
Statements of Cash Flows
Quarter ended March 31
	2006 (unaudited)			2005 (unaudited)
Cash flows from operating activities:
Net loss	$	(35,705	)		(115,599	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:

Non cash interest expense related to preferred stock		155,012			142,170
Depreciation and amortization		92,578			90,641
Loss on sale of fixed assets		8,462			—
Changes in operating assets and liabilities:
Accounts receivable		80,931			(9,391	)
Inventory		(45,470	)		93,667
Prepaid expenses and other assets		(17,546	)		2,294
Accounts payable		(31,329	)		(163,298	)
Accrued expenses		(104,641	)		(97,488	)
Net cash provide by (used in) operating activities		102,292			(57,004	)
Cash flows from investing activities:
Purchases of property and equipment		(7,272	)		(6,079	)
Software development costs paid		(60,944	)		(84,635	)
Net cash used in investing activities		(68,216	)		(90,714	)
Cash flows from financing activities:
Payments on long-term debt		(12,888	)		(14,967	)
Other		13			20
Net cash used in financing activities		(12,875	)		(14,947	)
Net increase (decrease) in cash and cash equivalents		21,201			(162,665	)
Cash and cash equivalents at beginning of year		283,415			391,098
Cash and cash equivalents at end of year	$	304,616			228,433
Supplemental disclosure:
Cash paid during the year for interest	$	783			767

	2005			2004
Net loss, as reported	$	(452,231	)		(1,037,425	)
Stock-based compensation expense
determined under fair value-based
method, net of tax		(5,375	)		—
Net loss—pro forma	$	(457,606	)		(1,037,425	)

	2005		2004
Preframed art	$	134,536		173,178
Prints		121,024		115,341
Frame and shipping materials		236,508		241,172
Other		154,158		117,829
	$	646,226		647,520

	2005		2004
Property and equipment, at cost:
Furniture and equipment	$	719,432		684,254
Less accumulated depreciation		469,011		366,426
	$	250,421		317,828

	Continuing		Discontinued
	operations		operations
Year ending December 31:
2006	$	235,093		9,159
2007		103,294		—
2008		1,842		—
Total minimum lease payments	$	340,229		9,159

	2005			2004
U.S. federal income tax	$	(153,759	)		(352,725	)
Change in valuation allowance		(61,972	)		409,189
Meals and entertainment		6,186			7,718
Return to accrual adjustment		—			(57,608	)
Nondeductible interest expense		205,117			—
Other		4,428			(6,574	)
Provision for income taxes	$	—			—

	Page
Independent Auditors’ Report	1
Financial Statements:
Balance Sheets	2
Statements of Operations	3
Statements of Stockholders’ Deficit	4
Statements of Cash Flows	5
Notes to Financial Statements	6

	Ten months
	ended
	October 31,
	2004
Net sales	$	217,522
Loss from discontinued operations		(832,351	)