Edgar Filing: NIGHTHAWK SYSTEMS INC

FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 333-120179

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

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

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

The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board or in
negotiated transactions during the term of this offering. Our common stock is
quoted on the Over-the-Counter Bulletin Board under the symbol NIHK.OB. On
November 18, 2004, the last reported closing sale price of our common stock was
$0.125 per share.

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD PURCHASE SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.

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

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

The date of this prospectus is December 3, 2004.

TABLE OF CONTENTS

PROSPECTUS SUMMARY 2
RISK FACTORS 6
USE OF PROCEEDS 10
DETERMINATION OF OFFERING PRICE 11
DILUTION 11
SELLING SECURITY HOLDERS 12
PLAN OF DISTRIBUTION 13
LEGAL PROCEEDINGS 15
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 15
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 16
INTEREST OF NAMED EXPERTS AND COUNSEL 18
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS 19
DESCRIPTION OF BUSINESS 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 23
DESCRIPTION OF PROPERTY 29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 31
EXECUTIVE COMPENSATION 31
FINANCIAL STATEMENTS F-1 - F-30

PROSPECTUS SUMMARY

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

OUR COMPANY

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

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

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

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

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

HOW TO CONTACT US

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

SALES BY OUR SELLING STOCKHOLDERS

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

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

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

Total common stock being registered 52,864,500 shares

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

Total common stock being registered 52,864,500 shares

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

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

THE OFFERING

Common stock offered 52,864,500 shares

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

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

OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE

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

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

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

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

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

Total 81,487,018

(1) Assumes no:

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

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

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

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

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

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

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

(b) August 10, 2005

THE DEBENTURE OFFERING

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

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

We expect to continue to incur losses in the foreseeable future as we expend
substantial resources on sales, marketing and research and development of our
products. From the effective date of our reverse merger in February 2002 up to
the end of the second quarter of the present fiscal year, we have incurred
cumulative losses of $4,500,320. If we continue to incur losses, the price of
our shares can be expected to fall. We may continue to incur substantial and
continuing net losses beyond the next six months. We may never generate
substantial revenues or reach profitability.

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

Our auditors, Gelfond Hochstadt Pangburn, PC, included an explanatory paragraph
in their Report of Independent Registered Public Accounting Firm on our December
31, 2003 consolidated financial statements indicating that as of March 12, 2004,
there is substantial doubt about our ability to continue as a going concern. We
will require additional funds in the future, and any independent auditors report
on our future financial statements may include a similar explanatory paragraph
if we are unable to raise sufficient funds or generate sufficient cash from
operations to cover the cost of our operations. The existence of the explanatory
paragraph may adversely affect our relationship with prospective customers,
suppliers and potential investors, and therefore could have a material adverse
effect on our business, financial condition and results of operations.

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

There is currently limited experience upon which to assume that our business
will prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities. We
may not be able to continue to sell additional securities. We expect to raise
funds in the future through sales of our debt or equity securities until a time,
if ever, that we are able to operate profitably. We may not be able to obtain
funds in this manner or on terms that are beneficial to us. For the six months
ended June 30, 2004 we used funds in our operations of approximately $413,000.
Using that as a basis for estimating cash requirements for the next twelve
months, our cash needs would approximate $816,000 through June 30, 2005. Our
inability to obtain needed funding can be expected to have a material adverse
effect on our operations and our ability to achieve profitability. If we fail to
generate increased revenues or fail to sell additional securities you may lose
all or a substantial portion of your investment.

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

During the year ended December 31, 2003, two orders from Mercury Online
Solutions and one order from Alabama Municipal Electric Authority generated 47%
and 31% of our revenues, respectively. Several orders from Mercury Online
Solutions represented 44% of our revenue during the six month period ended June
30, 2004, and we still had approximately $70,000 remaining to be billed to
Alabama Municipal Electric Authority as of June 30, 2004 under their order. If
either of these two customers stop generating orders for us altogether, and we
are unable to obtain comparable orders from other customers, our revenues would
decrease and our business could fail.

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

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

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

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

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

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

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

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

RISKS RELATED TO OUR INDUSTRY

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

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

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

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

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

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

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

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

RISKS RELATED TO THIS OFFERING

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- provide a written agreement to the transaction.

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

USE OF PROCEEDS

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

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

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

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

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

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

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

Working capital and general
corporate expenses 1st $3,000,000 $2,500,000 $2,000,000 $900,000
Expansion of internal operations 2nd $2,000,000 $1,000,000 $381,250 $56,250
Potential acquisition costs(1) 3rd $4,506,250 $1,256,250 $- $-
---------------- ---------------- ---------------- ----------------
$9,506,250 $4,756,250 $2,381,250 $956,250
================ ================ ================ ================
(1) From time to time we evaluate opportunities to make acquisitions of assets or businesses that we believe would help us
achieve our goal of profitability, but we are not currently planning any material acquisitions.

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

DETERMINATION OF OFFERING PRICE

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

DILUTION

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

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

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

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

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

(2) Represents conversion price under Debenture Agreement.

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

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

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

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

SELLING SECURITY HOLDERS

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

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

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

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

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

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

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

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

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

PLAN OF DISTRIBUTION

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

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

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

- at prices related to prevailing market prices, or

- in negotiated transactions, or

- in a combination of these methods of sale; or

- any other method permitted by law.

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

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

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

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

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

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

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

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

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

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

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

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

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

LEGAL PROCEEDINGS

Charles McCarthy vs. Nighthawk Systems, Inc., Case no CV03-5406, Second Judicial
District Court, County of Washoe, State of Nevada. In May 2003, we were sued by
a former Board member seeking recovery for the value of 350,000 shares, or
$209,500, and $120,000 due his firm under a retainer agreement between Peregrine
Control Technologies, Inc. and his firm. The former Board member had previously
signed a settlement agreement with us in which he agreed to cancel all potential
claims against us and our directors in return for 150,000 unregistered shares
trading at a value of $0.60 or higher. In October 2004 we reached an agreement
with Mr. McCarthy to settle the case. Under the Settlement Agreement and
Release, we will pay McCarthy $55,000 in three payments over the course of one
year from the date of the settlement.

Lawrence Brady and Mark Brady vs. Peregrine Control Technologies, Inc., et al.,
District Court, City & County of Denver, Colorado. In April 2004, we, along with
the current officers and board members and several of our former directors, were
sued by a former director and his son for, among other things, breach of
contract for unlawful termination and failure to provide stock. The alleged
breaches and other claims all stem from their service as our director and chief
financial officer, respectively, for part of 2001 and part of 2002. The
aggregate amount of damages claimed is not specified. We filed a counterclaim
against the Bradys for non-performance and breach of fiduciary duties. This
counterclaim was allowed to proceed by the court over the objection of the
Bradys.

DIRECTORS, EXECUTIVE OFFICERS, SIGNFICANT EMPLOYEES AND CONTROL PERSONS

The following table sets forth the name, age, positions, and offices or
employments for the past five years as of November 18, 2004, of our executive
officers and directors. Members of the board are elected and serve for one year
terms or until their successors are elected and qualify. All of the officers are
appointed by the Board.

NAME AGE POSITION

H. Douglas Saathoff 42 Chief Executive Officer and
Chief Financial Officer
Max Polinsky 46 Director and Chairman of the
Board
Patrick A. Gorman 39 Director
Myron Anduri 48 President
Eric Berg 49 Vice President-Engineering

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

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

Mr. Gorman was elected a member of the Board in April 2002. He is the managing
director of Gorman and Associates, Inc., a strategic consulting firm for
corporate and government affairs. Mr. Gorman's focus at Gorman and Associates
includes law and the legislative process, communications, government relations,
and operations. Over the last 10 years, he has advised corporations,
non-government organizations, non-profits, and individuals on issues pertaining
to criminal law, the environment, telecommunications, international trade, fund
raising, community development, media relations, and alternative dispute
resolution. Mr. Gorman is a member of the Advisory Board of New Media
Strategies, Inc., an Internet service provider focused on public relations,
communications, and viral marketing. Mr. Gorman is also a Board member of the
Echo Hill Campership Fund, a local non-profit whose mission is to send the
neediest, very low-income, inner-city youths to camp on the Chesapeake Bay. Mr.
Gorman is admitted to practice law in Maryland and the District of Columbia.

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

Mr. Berg joined us in 1999 as our Vice President - Engineering. Mr. Berg spent
more than 25 years in the engineering field specializing in design and
development. From 1987 to 1998 he held numerous project engineering positions at
SCI Systems, the third largest contract manufacturer of printed circuit boards
in the world. His responsibilities focused on design and management for projects
relating to hand-held satellite receivers, computers, and military avionics.
From 1979 to 1987 Mr. Berg was employed by Aydis Corporation as a design and
development engineer, designing computer interfaces for various minicomputer
platforms, integration engineering for new products and hardware and software
for in-house test equipment used in pulse code modulation telemetry equipment
for the U.S. Space Shuttle program. Mr. Berg received a B.S. in Electrical
Engineering from the University of Maine, and completed graduate level
coursework in both Electrical Engineering and Technical Management.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information concerning the beneficial
ownership of our outstanding classes of stock as of November 18, 2004, by each
person known by us to (i) own beneficially more than 5% of each class, (ii) by
each of our Directors and Executive Officers and (iii) by all Directors and
Executive Officers as a group. Unless otherwise indicated below, to our
knowledge, all persons listed below have sole voting and investment power with
respect to their shares of common stock except to the extent that authority is
shared by spouses under applicable law.

The number of shares of common stock issued and outstanding on November 18, 2004
was 30,622,518 shares. The calculation of percentage ownership for each listed
beneficial owner is based upon the number of shares of common stock issued and
outstanding on November 18, 2004, plus shares of common stock subject to options
held by each person on November 18, 2004 and exercisable within 60 days
thereafter. The address for officers and directors is: c/o Nighthawk Systems,
Inc., 10715 Gulfdale, Suite 200, San Antonio, TX 78216.

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

Steven Jacobson 3,775,654 (a), (b) 12.3%
6600 E Hampden Ave
3rd Floor
Denver, CO 80224

Max Polinsky 525,000 (c) 1.7%

Patrick Gorman 175,000 (d) 1.0%

Eric Berg 66,667 (f) 1.0%

H. Douglas Saathoff 564,996 (e) 1.8%

Herbert I. Jacobson
1011 S. Valentia St.,
#87 Denver, CO 80247 2,721,800 (g) 8.9%

Myron Anduri 3,608,486 (h) 11.6%

Tomas Revesz 3,996,894 (i) 11.7%
P.O. Box 2498
McAllen, TX 78502

Directors and officers 6,017,049 19.1%
as a group

NOTES:

(a) Includes 150,000 shares under options, which vest within 60 days, and
2,525,654 shares held under in an irrevocable voting agreement with Myron Anduri
which was executed on September 8, 2003 and which will survive for a period of
five years from that date. Pursuant to the Voting Agreement, Mr. Anduri has the
right to vote the proxy of said shares on all matters submitted to a vote of the
shareholders with the single exception of votes on any proposal to change fifty
one percent or more of the ownership of the Company. Steven Jacobson was Chief
Executive Officer and a director until March 2003, at which time he became a
salaried employee. He is no longer employed by us.

(b) Includes 550,000 shares held in trust for Aaron Guth that expires on
June 11, 2006 and 550,000 shares held in trust for Adam Guth that expires on
March 31, 2009. Steven Jacobson acts as trustee for both, and has all rights
afforded any shareholder, including voting rights, until the trusts expire.

(c) Includes 200,000 shares that are owned by Venbanc, Inc., of which Mr.
Polinsky is a partner, and 75,000 shares under option that vest November 13,
2004.

(d) Includes 75,000 shares underlying options that vest November 13, 2004.

(e) Includes 166,667 shares underlying options exercisable as of January 1,
2004.

(f) All are shares underlying options which vest in thirds on each of three
successive anniversaries following the grant of these options.

(g) Includes 1,255,900 shares held in the name of Herbert Jacobson's wife,
Sharon Jacobson.

(h) Includes 1,082,832 shares (including 431,416 shares underlying warrants and
options) owned directly by Mr. Anduri and 2,525,654 shares held under an
irrevocable voting agreement with Steve Jacobson which was executed on October
23, 2003 and which will survive for a period of five years from that date.
Pursuant to this agreement, Mr. Anduri has the right to vote the proxy of said
shares on all matters submitted to a vote of the shareholders with the single
exception of votes on any proposal to change fifty one percent or more of the
ownership of the Company. Mr. Anduri receives no economic benefits from the
shares subject to this Voting Agreement.

(i) Includes an estimated 2,857,143 shares from a warrant to exercise up to
$200,000 in stock at a price equal to 50% of the average closing price of
Nighthawk stock for the ten day period preceding the exercise of the warrants,
exercisable at any time up to March 31, 2005, and 750,000 shares that are
convertible under a promissory note. These shares are convertible at any time.

DESCRIPTION OF COMMON STOCK

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

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

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

INTEREST OF NAMED EXPERTS AND COUNSEL

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

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The consolidated balance sheet as of December 31, 2003 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the two-year period ended December 31, 2003 included in
this Form SB-2, have been audited by Gelfond Hochstadt Pangburn, P.C.,
independent registered public accounting firm, as stated in their report
appearing herein.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

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

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

DESCRIPTION OF BUSINESS
HISTORY

We incorporated as TPI, Inc., under the laws of the State of Utah on April 26,
1983. In 1985, we changed our location from Utah to Nevada and our name to
Connections Marketing Corp. In July 1992, our shareholders voted to change our
name to LSI Communications, Inc.

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

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

In November 2001, we sold the assets and liabilities of Coaching Institute. We
recognized a loss on the sale of $574,236. At the time of the reverse
acquisition of Peregrine Control Technologies, we had no assets or liabilities,
or ongoing operations.

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

Peregrine Control Technologies was originally incorporated as a Colorado company
in 1992, and originally operated as a family-owned business specializing in
paging repair. Through knowledge gained in the operation of the business, we
began developing a specialized circuit board which could receive paging signals
and switch electrical power. In its simplest form, the technology gave the user
the ability to turn devices "on" or "off" from or to remote sites. Through
limited marketing, we were able to solve specific control problems for both
large and small companies through customization of the original circuit board.
In September 2001, Peregrine Control Technologies acquired certain assets and
liabilities of Vacation Communications, Inc., including a retail paging customer
base.

In July 2003, we sold back the remaining assets and liabilities we had acquired
from Vacation Communication to the original owners of Vacation Communication.
The assets disposed of in the sale consisted primarily of a retail paging
customer base which was declining in size and producing negative cash flows.
Retail paging is not core to our business and diverted our limited resources
from building up our remote control products business. We recognized a gain on
the disposal of this segment of our business.

OUR BUSINESS

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

Our products have been uniquely designed and programmed to be simple and ready
to use upon purchase by anyone, almost anywhere, at affordable prices. It is our
goal to have our products become commonplace, accepted and used by businesses
and consumers alike in their daily routines.

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

THE MARKETPLACE

The controls industry is characterized by companies that sell remote asset
management and tracking systems and related products. On a consumer basis, most
people think of remote control in a recreational sense. However, many companies
both large and small are seeking ways to save money and lower the risk of
liability by replacing processes that require human intervention with processes
that can be controlled remotely without on-site human intervention. Today, the
remote control of physical assets and processes is performed primarily through
the use of telephone line based systems. However, telephone lines are expensive,
requiring monthly fees, and more importantly, they restrict the remote control
to the availability of the telephone line between the person operating the
remote control and the asset to be controlled. In contrast, our products are
wireless and can therefore be operated from any location, regardless of the
availability of a telephone line. This means that the asset does not have to be
tethered to a fixed location in order to be accessed. Moreover, our products are
designed to work with a variety of wireless media including paging and satellite
based systems. Almost any device that runs off an electrical current, whether
battery, solar or line generated, can be controlled by one of our devices. We
have identified primary markets such as electric utility, IT professional and
traffic control/emergency management, as well as secondary markets such as
irrigation, outdoor advertising, oil/gas, security for our products.

Over the past two years, we have sold the majority of our units to electric
utilities, a kiosk manufacturer and operator, and to companies that use the
equipment for emergency signage or notification along roadways. Electric
utilities utilize our products to remotely turn power on or off to entire houses
or to specific appliances that consume large amounts of electricity, such as air
conditioners and hot water heaters. When attached to an electric meter, our
units can connect or disconnect power to an entire house, allowing the utility
to avoid sending a vehicle and personnel to the site to perform the task
manually by connecting or disconnecting the meter. When installed between the
meter and an appliance, our product allows the electric utility to remotely turn
on and/or off large numbers of appliances simultaneously on demand with a single
wireless transmission. By doing so, electric utilities can manage the load
across their power grid on demand during times of peak electricity in an effort
to avoid blackouts or purchases of expensive additional power on the spot
market.

We manufacturer a product that is typically used to reboot computer equipment.
During the past two years, we have sold a large number of units to a kiosk
manufacturer and operator that uses our product to reboot, from a central
location, unattended kiosks that it has installed throughout the United States
for its customers.

We have also sold many products over the past two years to companies that need
to turn on emergency signage, lights or signals along roadways. Examples include
turning on flood warnings, tornado warnings, school crossings and radio
broadcasts. Our products are useful for these purposes because they are
wireless, meaning that they can be easily moved, and they can be activated on
demand from a central or from multiple locations.

We have sold small numbers of our remote control products to companies that
provide monitoring services for the oil/gas and irrigation industries. Our
products are integrated into monitoring products so that in addition to simply
monitoring the flow of liquids, the monitor can also provide valve shut-off or
turn on services for watering systems and/or oil or gas pipelines. Similarly, in
the security market, our products have been integrated with monitoring so that
doors and gates can be opened or closed remotely. Additionally, our products
have been integrated into outdoor advertising so that lighting systems for
billboards can be activated on a remote basis.

TECHNOLOGY AND PRODUCTS

Our products have been in service for over five years, primarily to fit custom
applications. Our products are shipped ready for use and are pre-programmed
before shipment to the customer. Our electric utility products come in their own
enclosures, which fit underneath electric meters. Our computer products come as
"plug and play" devices; a user simply plugs his computer into the Nighthawk
device, which is then plugged into the electrical outlet. To our knowledge, we
are the only company currently providing a "plug and play" ready to use wireless
remote control device.

Our products typically utilize a common paging signal found virtually worldwide.
Paging is often used because it is very secure, inexpensive, and easy to use.
Customers can choose to operate their own paging accounts, or arrange for the
service directly through us. We have also developed Windows-based software
packages that enable customers to activate the remote control units from a
personal computer. Paging, when combined with our proprietary firmware and
software, allows for a "group call" feature whereby a user can access multiple
sites at the same time using a single paging number. This exponentially
increases the functionality of the product. Our products can be adapted to
function with any wireless, or wireline-based, communications medium.

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

We purchase wholesale paging services from paging carriers, including Vacation
Communication, for nationwide and international coverage. We offer paging
services to customers that buy our products but do not have their own private
paging networks. Several customers own their own private paging networks and,
hence, do not require us to arrange for their paging services.

MANUFACTURING

We assemble our finished products at our Denver, Colorado facility. We
sub-contract for assembly of various components, and utilize several vendors for
parts that do not require assembly. Parts and sub-assembly services are widely
available and we do not depend on any one supplier, although during our fiscal
year ended December 31, 2003 68% of parts cost was incurred with one supplier,
Quality Concepts Manufacturing, Inc. The same supplier accounted for 53% of our
parts cost during the six month period ended June 30, 2004. During the final
assembly process, individual units are programmed depending on their destination
or customer requirements, tested, and then shipped to the customer for
installation.

CUSTOMERS

Electric utilities who have purchased our products include but are not limited
to PECO Energy, Central Vermont Public Service, Alabama Municipal Electric
Association, El Paso Electric, Duquesne Light Company and Washington EMC.
Companies who have purchased our products for rebooting purposes include, but
are not limited to, Mercury Online Solutions, Blue Sky Wire, West Coast Wireless
and Unity Communications. The following companies comprise a sample of those
companies who have purchased our equipment for traffic control or emergency
management purposes: Highway Information Systems, Wanco, Enroute, Denver
Emergency Services, and Cimmaron Hills Fire Department.

During the year ended December 31, 2003, Mercury Online Solutions and Alabama
Municipal Electric Association generated 47% and 31% of our revenues. During the
six month period ended June 30, 2004, Mercury Online Solutions generated 44% of
our revenues.

PATENTS PENDING

We have two patent applications pending at the U.S. Patent Office: one is titled
"Paging Remote Disconnect Systems", filed on September 27, 2000, and is for the
remote wireless control for turning on and off electrical and telephonic lines.
The second is titled "Remote Disconnect for Utility Meters", filed on July 20,
2001, and is for whole house disconnect systems. The U.S. Patent Office
currently considers both of these applications abandoned, but we are petitioning
to revive them with new intellectual property counsel.

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

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

COMPETITION

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

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

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

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

SALES AND MARKETING

We believe that we have the opportunity to meet current demand for applications
of our technology within specific markets, and to create opportunities in many
other markets as well. Despite having little or no marketing resources to target
these markets, we have achieved product acceptance with both the Information
Technology professional and electrical utility markets. We intend to focus
significant direct, and supplier-based, sales efforts in these industries. We
plan to use available funds to directly market to new and existing customers
through the shipment of demo units which will be followed up by personal sales
calls, and we plan to attend trade shows within our targeted industries as well.
We will attempt to sign new distributors of our products as well. We also
anticipate increasing our Internet-based sales efforts by making improvements to
our website.

Additionally, we believe substantial opportunities exist to partner with
wireless service providers as well as hardware manufacturers and dealers, each
of which stand to gain from the use of our products. Our intelligent products
attach to existing customer hardware and act as a "brain", receiving wireless
instructions sent from a remote location, allowing the hardware to perform as
instructed. Our products literally serve as the "intelligence" between the
wireless service medium and the hardware which must perform the desired action.
We will also attempt to establish ourselves as a supplier of products to paging
and other wireless service providers, and establish dealer networks in a number
of markets, including, but not limited to, computer controls, utilities,
irrigation, traffic control, and wide area notification.

BACKLOG

As of October 27, 2004 we had a backlog of orders from six different customers
totaling approximately $72,000.

EMPLOYEES

As of November 18, 2004, we had five full time employees. We believe our
relations with all of our employees are good.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION

You should read this section together with our consolidated financial statements
and related notes thereto included elsewhere in this report and our 10-KSB.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue recognition

Revenue from product sales is recognized when all significant obligations have
been satisfied. Revenues from equipment sales are recognized either on the
completion of the manufacturing process, or upon shipment of the equipment to
the customer, depending on our contractual obligations. We occasionally contract
to manufacture items, bill for those items and then hold them for later shipment
to customer-specified locations.

Income taxes

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

Stock-based compensation

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

COMPARISON OF YEARS ENDED DECEMBER 31, 2003 TO DECEMBER 31, 2002

GENERAL

Our financial results include the accounts of Nighthawk Systems, Inc. (formerly
Peregrine, Inc.) and its subsidiary, Peregrine Control Technologies, Inc.
Effective February 1, 2002, the two companies were brought together under common
management through an acquisition in which Peregrine, Inc. acquired all of the
outstanding shares of Peregrine Control Technologies. Because Peregrine issued
more shares to acquire Peregrine Control Technologies than it had outstanding
just prior to the acquisition, the transaction was accounted for as a reverse
acquisition of Peregrine by Peregrine Control Technologies. Peregrine
subsequently changed its name to Nighthawk Systems, Inc. Because Peregrine was a
shell company with no assets, obligations or operations at the time of the
reverse merger, the operating results of Nighthawk Systems for 2001 and 2002
discussed below were generated by Peregrine Control Technologies.

Prior to the merger on February 1, 2002, Peregrine Control Technologies had been
a privately owned, family operated company since its founding in 1992. During
2001 and 2002 Peregrine Control Technologies developed products it felt could be
sold to targeted markets on a large-scale basis. Prior to 2001, our revenues
were generated primarily through sales of a circuit board that could be utilized
by various companies to perform a variety of functions. During 2001 and 2002, we
developed "off the shelf" whole house disconnect units that can disconnect
remotely the power supply to an entire house at the electric meter, as well as
load control units that can remotely connect or disconnect specific appliances
that consume relatively large amounts of electricity, such as air conditioners
and hot water heaters. Both types of units can be easily installed and used by
electrical utilities. We also developed the Nighthawk NH2, another ready to use
product which can be used to reboot remotely various electrical devices,
including computers. In an effort to strengthen our operations and results, in
September of 2001, we acquired certain assets of Vacation Communication, Inc., a
retail paging business. We felt that we could leverage off of the existing cash
flows of Vacation to fund growth of our own remote control equipment segment,
and utilize Vacation's contracts with paging carriers to provide profitable
paging services to buyers of its remote control equipment. Also, in an effort to
bring us outside funds and additional exposure, in November 2001, we entered
into discussions that culminated in the reverse acquisition of Peregrine in
February 2002. Still, during 2001 and 2002, we had minimal funds available for
sales and marketing efforts. During those years, we spent less than $5,000 per
year in advertising related to sales efforts and employed one equipment sales
person. We also spent an additional $9,000 on general advertising efforts in
2002.

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

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

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

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

REVENUE

The components of revenue, including revenues from discontinued operations, and
their associated percentages of total revenues, for the fiscal years ended
December 31, 2003 and 2002 are as follows:

YEARS ENDED DECEMBER 31,
---------------------------------------------
2003 2002

Product Revenues
-----------------
Nighthawk NH2 $508,352 47% $344,067 40%
PT1 LC 319,615 30% - 0%
PT Boards 128,914 12% 123,713 14%
Merlin-CEO 700 Sales 28,557 3% 152,638 18%
Other 45,355 4% 40,781 5%
---------- ----------

Total product revenues 1,030,793 96% 661,199 76%
----------- ----------
Discontinued operations
------------------------
Airtime sales 45,880 4% 207,513 24%
----------- ----------

Total revenues $1,076,673 100% $868,712 100%

Revenues from continuing operations are made up of product sales, while revenues
from discontinued operations consist of airtime revenues generated by our paging
operations, which were disposed of effective July 31, 2003. Product revenues
increased $369,594 or 56% between years, as we completed two large contracts
during 2003. One of the contracts was for our Nighthawk NH2 product and produced
revenues of $432,600 in 2003 and $310,000 in 2002. This contract was completed
during 2003. The other contract was for our PT1 LC product and produced revenues
of approximately $317,000 in 2003. This contract was approximately 81% complete
as of December 31, 2003. Sales of our generic PT control boards for custom use
increased only slightly between years, while sales from our CEO-700 product
declined $124,081 or 81% between years. During 2003, we re-designed our CEO-700
product to improve its performance capabilities, and we did not focus sales
efforts on this product during 2003. We expect to focus more attention on sales
of this product during 2004.

During 2002 and 2003, we spent less than $6,000 per year on product advertising
due to a lack of available funds. Some of the funds raised from the Debentures
and the Investment Agreement will be used to implement a sales and marketing
plan in late 2004 or during 2005. This plan will focus on sales to both existing
customers as well as new customers within the electric utility, computer
rebooting and traffic controls markets, and will also include marketing of our
new satellite-based products. Until this plan generates orders sufficient to
replace revenues from the two large orders processed during 2003, our revenue
production will most likely decrease until our sales and marketing plan can be
fully implemented.

Cost of goods sold increased by approximately $309,128 between years, and
increased as a percentage of product revenues from 53% in 2002 to 64% in 2003.
As a result, our gross margin decreased from 47% in 2002 to 36% in 2003. This
decrease is due primarily to the increased volume of PT1 LC's sold as a
percentage of overall product revenues between years. Gross margins from sales
of PT1 LC's are typically less than for our other products, as individual
contract sales volumes are typically higher. The PT1 LC was introduced during
2003.

Selling, general and administrative expenses, net of amounts related to deferred
compensation from 2001 and 2002, decreased $102,458 from 2002 to 2003. During
2002, we issued common stock in return for $586,500 in consulting fees. During
2003, we issued common stock for $234,750 in consulting fees. This decrease in
expenses was offset by increases in a) salaries and wages due to the addition of
accounting and financial personnel; b) insurance related to general liability
and director and officer coverage; and c) professional fees for legal, auditing
and shareholder services. During 2003, we incurred legal expenses related to
corporate governance and exchange listing matters that were not incurred during
2002.

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

Our loss from operations during 2003 was $584,553 as compared to a loss of
$1,161,727 in 2002. As indicated above, increased gross profits as a result of
increased sales between years were more than offset by expenses incurred with
consultants, which were typically paid for by the issuance of common stock.

Net interest expense for 2003 was $45,875 as opposed to $39,172 in 2002. During
2003, we added debt of $200,000 to an unrelated party during May 2003 on which
we recognized approximately $11,500 of interest, as well as short-term notes
with the same party totaling an additional $150,000 during the latter half of
2003. The short-term notes carry interest rates of .5% per month.

Airtime sales, which are included in discontinued operations, decreased 78% or
approximately $162,000 between years. The majority of the airtime revenues
produced during 2002 and 2003 were produced by retail paging customers rather
than by our equipment customers. Because our focus was not on maintaining these
retail customers, revenue production from these customers decreased between
years. As a result, we sold the customer base, as well as related assets and
obligations originally purchased from Vacation, back to the owners of Vacation
and recognized a gain of $92,443. This segment produced a net loss of
approximately $14,000 during 2003 prior to its disposal, and a net loss of
approximately $262,000 during 2002. The net loss for 2002 included an impairment
of the associated paging customer base of approximately $112,000 during 2002.

The net loss for 2003 was $552,457 or $0.03 per share as compared to a net loss
of $1,462,916 or $0.08 per share in 2002. The improvement between years was due
to increase profits from product sales and decreased expenses associated with
stock issuances to consultants. The disposal of our paging airtime operating
segment also allowed us to improve our net loss results between years.

THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003

Net sales for the three month period ended September 30, 2004 were $221,723 as
compared to $209,279 for the corresponding period of the prior year, an increase
of 6% between periods presented. During the three months ended September 30,
2003, two customers represented approximately 71% of our total sales
volumes. During the three months ended September 30, 2004, three customers
represented approximately 78% of our revenues.

Cost of goods sold increased by $18,406 or 13% to $163,786 for the three months
ended September 30, 2004 from $145,380 for the corresponding period of the prior
year, and increased as a percentage of revenues between the periods from 69% in
2003 to 74% in 2004. Approximately 72% of our revenues were produced
by sales of our electric utility products, which traditionally produce
lower margins on a per-unit basis, and only 11% were produced by sales of our
rebooting unit, which traditionally produces higher margins on a
per-unit basis. During last year's period, approximately 34% of our
revenues were produced by sales of our rebooting product. As a result of the mix
of products sold, our gross margin decreased from 31% to 26% from last
year's period to this year's period.

Selling, general and administrative expenses for the three months ended
September 30, 2004 increased by $60,129 or 21% to $348,005 from $287,876 for
the three month period ended September 30, 2003. Although amounts incurred
for salaries and related benefits declined between the periods presented, we
accrued $55,000 during the current year period for the settlement of a
claim with a former board member, and incurred approximately $100,000 in
non-cash expenses related to consultants during the current year period.

Interest expense increased by $121,531 between the three-month
periods presented. The increase was due in large part to the recording of
approximately $83,000 in expense during the current year period related to the
non-cash, beneficial conversion feature of the debenture agreement between us
and Dutchess Private Equities, L.P. ("Dutchess"). In addition, we
recognized $38,533 in interest expense during the quarter ended
September 30, 2004 associated with the fair value of warrants given to three
entities for the conversion of approximately $157,000 in notes payable and
accrued interest to common stock and warrants to purchase common stock.

The net loss from continuing operations for the three-month period ended
September 30, 2004 was $421,438 compared to $233,816 for the three-month
period ended September 30, 2003. Although revenues increased during the
period, the increase in net loss from continuing operations was due almost
entirely to the increases in selling, general and administrative expenses and
interest expense noted above. The majority of these expenses were non-cash
expenses.

After giving consideration to prior year results for our discontinued
airtime operations in 2003, for which we recognized a gain of $92,443
during July 2003, the net loss per share was $0.01 for both periods presented.

THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003

Net sales for the nine month period ended September 30, 2004 were $485,948
compared to $904,551 for the corresponding period of the prior year.
Approximately $642,231, or 71% of the product sales during the period ending
September 30, 2003 came from two customers who placed orders totaling
approximately $816,000. These orders were for our NH2 rebooting device
for a kiosk manufacturer and operator, and load control units for an electric
utility customer. The NH2 order was substantially completed during fiscal 2003,
while the load control unit order was completed during the period ending
September 30, 2004. Although we processed orders for more customers
during the 2004 period than we did during the 2003 period, the orders were
smaller in the current year period than the prior period.

Cost of goods sold decreased by $178,570 or 52% to $344,409 for the nine months
ended September 30, 2004 from $522,979 for the corresponding period of the prior
year, but increased as a percentage of revenues between the periods from 58% in
2003 to 71% in 2004. This increase was largely due to the increase in production
efficiency that we experienced in the prior year's period given the two large
orders we were producing during that period. We currently produce all our units
in-house and maintain a staff of three persons for these purposes. Salaries and
benefits for these personnel are recorded as a direct cost of sales regardless
of the number of products produced. As the number of units produced rises, the
direct labor cost associated with each unit typically decreases. In addition, we
sold a larger number of our rebooting devices during last year's period than we
did during this year's period, and we produced a relatively higher margin on a
per-unit basis on this product. As a combined result of these factors, our gross
margin decreased from 42% to 29% from last year's period to this year's period.

Selling, general and administrative expenses for the nine months ended September
30, 2004 decreased by $22,996 or 3% to $888,950 from $911,946 for the nine month
period ended September 30, 2003. Although we incurred costs of $55,000
for a legal settlement with a former director, approximately $197,000 in
consulting fees for product marketing and investor relations, and costs for the
development of our satellite-based unit during the nine-month period
ended September 30, 2004, these costs were more than offset by reductions
between the 2003 and 2004 periods presented in personnel and personnel-related
costs, as well as a decrease in professional fees from legal and auditing
services.

During the period ending September 30, 2003, we canceled 300,000
shares of common stock previously issued to a consultant during 2002. A $39,000
reduction in consulting expense was recorded during the second quarter of 2003
related to this cancellation, as the Board determined that the shares had not
been properly authorized for issuance, and that there was a lack of sufficient
evidence that any services had been performed.

Interest expense increased by $158,572 between the nine-month
periods presented, due to the value of warrants issued to creditors who
exchanged approximately $237,000 in notes and accrued interest for the warrants
and common stock, and the recognition of approximately $83,000 in beneficial
conversion expense related to the debenture agreement between us and
Dutchess.

The net loss from continuing operations for the nine-month period ended
September 30, 2004 was $940,970 compared to $526,361 for the nine-month period
ended September 30, 2003. The increase was due to the near-completion of the two
large orders discussed above that produced increased revenues during the first
nine months of 2003, coupled with increases in consulting expenses and interest
expense recorded during the 2004 period.

Liquidity and Capital Resources

Our financial statements for the three and nine months ended
September 30, 2004 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. For the nine months ended
September 30, 2004, we reported a net loss of $941,970, and have
a stockholders' deficit of approximately $950,000 and a working capital
deficiency of approximately $719,000 as of September 30, 2004.

The Report of Independent Registered Public Accounting Firm on our
financial statements as of and for the year ended December 31, 2003 included a
"going concern" explanatory paragraph which means that the auditors expressed
substantial doubt about our ability to continue as a going concern.

During the nine-month period ended September 30, 2004, we used
cash of approximately $600,000 in our normal operating activities. We
raised approximately $439,000 during the nine months from the sale
of common stock, warrants to purchase common stock, and preferred stock.
Approximately $110,000 in cash proceeds were generated from the issuance of
short term notes, and an additional $250,000 in proceeds were generated by the
issuance of the convertible debenture with Dutchess. Funds provided from these
issuances of debt and equity were used to fund our operations during
the period and to make approximately $102,000 in payments toward our
debt obligations during the quarter.

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

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

In August 2004, we signed a financing arrangement with Dutchess Private
Equities, II which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, we
received $100,000 under a convertible debenture on August 11, 2004, $25,000 on
August 26, 2004, and $125,000 under the debenture on September 27, 2004.
Interest accrues on the debenture at an annual rate of 8%. The debenture can be
converted into common shares anytime prior to its maturity on August 10, 2007 at
the lesser of (i) 73% of the lowest closing bid price on the date of conversion,
or (ii) twelve and a half cents ($0.125). Any portion of the debenture that
remains outstanding at August 10, 2007 will automatically convert into common
shares. The number of shares converted at any time is limited so as not to
exceed 4.99% of the outstanding shares of our common stock outstanding. In
addition, Dutchess was issued a warrant to purchase up to 250,000 shares of
common stock at a price of twelve and a half cents ($0.125) for a period of up
to five years. We also signed an investment agreement under which
Dutchess agreed to purchase up to $10.0 million in common stock from us,
at our discretion, over the next three years, subject to certain limitations
including our then current trading volume. Although the amount and timing
of specific cash infusions available under the entire financing arrangement
cannot be predicted with certainty, the arrangement represents a contractual
commitment by Dutchess to provide funds to us. Although no we may not
be able to do so, we expect to be able to access funds under this
arrangement to help us fund near-term and long-term sales and marketing
efforts.

A challenge we face is the ability to purchase and maintain an
inventory of parts necessary to complete orders as quickly as possible after
they are received. If we are able to complete orders more quickly, we
can generate and collect cash from our contracts more quickly. We
generate recurring orders from several of our customers; therefore, the
expeditious completion of orders could lead to the generation of additional
orders from existing customers and improved cash flows. Also,
as noted earlier, our cost of production will be higher on a per unit
basis if we do not maintain minimum levels of production in our facility.
Delays caused by the purchasing of parts during the nine-month period
ending September 30, 2004 resulted in higher production costs per product
because we have some fixed costs associated with production of units,
and therefore decreased cash inflows during the period. The delays in
purchasing also result in a delay in receiving follow-up orders from the
customers.

In an effort to assist us in completing orders for customers in a more
expeditious manner, in August 2004 our largest creditor loaned us an
additional $60,000. Proceeds from this loan were used to purchase parts
required to complete orders held at that time by us, and the creditor is
being repaid from the receipts generated by the orders, plus 10% annual
interest. Although we may not be able to do
so, we anticipate that we will also be able to utilize our investment
agreement with Dutchess to assist us in processing orders more expeditiously.
As a result of funds expected to be raised subsequent to September 30, 2004 we
believe that we will be able to initiate a sales and marketing plan designed
to utilize direct sales efforts, as well as indirect sales efforts through
dealer networks and through improvements to our own web site. We also
plan to utilize funds generated through debt and equity arrangements to
expedite the production of the orders we receive in an effort to improve our
ability to generate cash flows from operations on a
recurring basis. Additionally, in order to lessen our dependence on
securing large contracts for recurring cash flows, we are in the initial
stages of developing a consumer-based product, which we believe may eventually
produce recurring cash flows from sales.

DESCRIPTION OF PROPERTY

Our sales and operations departments are in leased facilities located at 8200
East Pacific Place, Suite 204, Denver, Colorado. The lease for our facilities
expired on March 2002, but we have maintained use of the facilities on a
month-to-month basis since that time. The leased property consists of
approximately 2400 square feet, for which we pay $1,650 per month. It consists
of office space and a manufacturing floor. Our financial and accounting offices
are located in 679 square feet of leased office space at 10715 Gulfdale, Suite
200, San Antonio, Texas. The lease expired on January 31, 2004, and, similar to
the Denver facility, we continue to lease the space on a month-to-month basis
but at a monthly rate of $808. Our Chief Executive Officer currently works out
of both the Denver and San Antonio locations.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

On December 19, 2003 we entered into a settlement and release agreement with a
former director, Herb Jacobson, and his wife. Under terms of the agreement, Mr.
& Mrs. Jacobson agreed with us to dismiss any and all claims against each other
in return for, among other things, $25,000 in cash payments which were made to
Mr. Jacobson in four equal monthly payments from January through April 2004. In
addition, Mr. and Mrs. Jacobson, along with their son Steven Jacobson, agreed to
refrain from selling, transferring, conveying or otherwise disposing of their
remaining share ownership for a period of eighteen months subsequent to selling
an aggregate of 850,000 shares. As a result of the agreement, we recorded a gain
of $23,912 due to a reduction in the amount previously recorded by us as owed to
Mr. Jacobson.

As of December 31, 2002, we owed our Vice President of Sales, Myron Anduri,
$16,100 in salary and $8,365 in commissions earned in previous periods. During
2003, we paid a total of $12,678 toward these amounts owed. During 2003, Mr.
Anduri loaned us $7,964 under short-term notes, of which $4,203 was repaid by
December 31, 2003 and an additional $655 was paid during the first six months of
2004. As of December 31, 2003 we owed Mr. Anduri $38,708 under short-term note
arrangements. During August 2004, we issued Mr. Anduri 181,416 common shares and
181,416 warrants to purchase our common shares at $0.20 per share in exchange
for $22,978 owed him under these short term arrangements.

During August 2004, we issued 400,520 common shares and 400,250 warrants to
purchase common shares at $.020 per share to Phylron Enterprises Ltd, a company
that is affiliated with our Chairman, Max Polinsky, in exchange for $60,078 in
principal and interest owed to us. Also in August 2004, we issued 157,487 common
shares and 157,250 warrants to purchase common stock for $0.20 per share to
Murray Nye, who is a business partner of our Chairman, Max Polinksy.

During 2003, Mr. Saathoff loaned us $54,100 under short term notes, of which
$45,100 was repaid by December 31, 2003. The remaining $9,000 was repaid in
January and February 2004.

On March 31, 2003, we signed a Subscription Agreement with Tomas Revesz, a
former director, for 500,000 shares of our common stock in exchange for
$100,000.

On May 13, 2003, we signed a Convertible Promissory Note with Tomas Revesz, a
former director, where he loaned us $200,000 due on August 13, 2003 in exchange
for a fee of 25,000 shares of our common stock. The Note was convertible into
shares of our common stock at a price of $.20 per share.

On August 21, 2003, we signed a Promissory Note with Tomas Revesz, a former
director, where he loaned us $50,000 due on October 31, 2003 with an interest
rate of .5% per month.

On October 3, 2003, we signed a Promissory Note with Tomas Revesz, a former
director, where he loaned us $100,000 due on October 31, 2003 with an interest
rate of .5% per month.

During 2003, we canceled 300,000 shares that were originally issued to members
of our board of directors during 2002, as it determined that the associated
services were not performed.

During 2003, the Board approved the issuance of an option to purchase 75,000
shares of our common stock to each director elected at the Annual Shareholder
Meeting held on November 13, 2003. Max Polinsky received 150,000 shares in
return for serving as Chairman of the Board through his term ending November 13,
2003. Patrick Gorman received 100,000 shares for serving as a Board member
through his term ending November 13, 2003. Both Mr. Polinsky and Mr. Gorman were
granted 75,000 options to purchase common shares at a price of $0.22 per share
in return for one year of service on the board beginning November 13, 2003.

During the six months ended June 30, 2004, we repaid $9,655 on notes payable to
Myron Anduri and Doug Saathoff, as well as $25,000 to a shareholder and former
director, Herbert Jacobson under an arrangement entered into in December 2003.
We also borrowed and repaid approximately $25,000 from a company in which our
Chairman, Max Polinsky, is a partner.

In April 2004, Tomas Revesz, a former director, assigned each of his three notes
to one of three companies controlled by him. Also in April, we reached an
agreement with Revesz, under which, in return for an additional $25,000 in
borrowings by us, and the extension of the maturity dates of the three notes to
July 31, 2004, we granted the three companies a secured position in all of our
assets. Effective with these new agreements, principal owed under the three
notes was $210,000 (under the convertible note), $110,000 and $55,000,
respectively. We also agreed to pay the three companies cash interest at an
annual rate of 8% retroactive to the signing of the notes, and monthly interest
at an annual rate of 8% on the new total of $375,000 in notes, with $750 of the
monthly interest due being paid in cash and the remainder being paid in stock at
a rate of $0.20 per share. For the period of March through September 2004, we
issued 61,875 shares to the three companies for $12,375 of interest owed under
these arrangements.

In August 2004, the three companies controlled by Tomas Revesz, a former
director, extended the maturity dates of the notes to October 31, 2004. The
company holding the $210,000 convertible note elected to convert $50,000 of the
outstanding principal balance to our common stock at a rate of $0.20 per share.

In July 2004, we signed a promissory note with a company controlled by Tomas
Revesz, a former director, under which we borrowed $60,000 under a 90-day
arrangement for the purpose of purchasing parts needed to complete certain
orders that had been placed by our customers as of that date. Under this
arrangement, the lending company will receive varying percentages of the cash
collected from those customers until its note balance, plus interest at the
annual rate of 10% is collected in full.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

From July 8, 2002 through May 23, 2003, our common stock traded on the Over the
Counter Bulletin Board, or OTCBB, under the symbol "NIHK". From May 27, 2003
until November 25, 2003 our stock was traded on the pink sheets under the same
symbol, after which our stock resumed trading on the OTCBB.

Bid and ask quotations for our common stock are routinely submitted by
registered Broker dealers who are members of the national association of
securities dealers on the NASD Over-The-Counter Bulletin Board. These quotations
reflect inter-dealer prices, Without retail mark-up, mark-down or commission and
may not represent actual transactions. The high and low bid information for our
shares for each quarter for the last two years, so far as information is
reported, through the quarter ended December 31, 2004, as reported by Bloomberg
Financial Network, are as follows:

QUARTER ENDED HIGH LOW
December 31, 2004* $0.140 $0.090
September 30, 2004 $0.250 $0.120
June 30, 2004 $0.360 $0.190
March 31, 2004 $0.360 $0.100
December 31, 2003 $0.290 $0.150
September 30, 2003 $0.320 $0.150
June 30, 2003 $0.720 $0.250
March 31, 2003 $0.730 $0.200

* Through November 29, 2004

These prices reflect the 1:100 reverse split that occurred in January 2002.

SECURITY HOLDERS

The number of record holders of our common stock on October 25, 2004, was 194.
This figure excludes an indeterminate number of shareholders whose shares are
held in "street" or "nominee" name.

DIVIDENDS

There have been no cash dividends declared or paid since the our inception, and
no cash dividends are contemplated in the foreseeable future.

EXECUTIVE COMPENSATION

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

SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------- -----------------------

AWARDS PAYOUTS
----------- ------------
NAME AND PRINCIPAL YEAR SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
POSITION ($) ($) ANNUAL STOCK UNDERLYING PAYOUT($) COMP.($)
COMPENSATION ($) AWARDS OPTIONS/SARS

Steven Jacobson, 2002 $177,000 (b) $- $4,966 (c) $- - $- $-
Chief Executive Officer (a)
2003 52,500 - $39,933 (d) - 450,000 - $-

H. Douglas Saathoff, 2003 $115,000 $- - - 500,000 - -
Chief Executive Officer

(a) Steven Jacobson was Chief Executive Officer of Peregrine Control
Technologies when we acquired Peregrine Control Technologies effective February
1, 2002. He became our Chief Executive Officer subsequent to this acquisition
until March 2003, at which time he became a salaried employee.

(b) Salary includes the issuance of 1,000,000 shares valued at $0.14 per
share issued in lieu of cash compensation, and $37,000 in cash compensation.

(d) Amount includes $34,941 in personal expenses and $4,992 uncollected
from an outstanding balance owed the Company.

(e) H. Douglas Saathoff was named the Chief Executive Officer in March
2003.

PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS GRANTED
UNDERLYING OPTIONS TO EMPLOYEES IN FISCAL EXERCISE OR BASE
NAME GRANTED YEAR 2003 PRICE ($/SH) EXPIRATION DATE
---------------------- -------------------- ----------------------- ------------------ -----------------
H. Douglas
Saathoff Chief
Executive Officer(a) 500,000 25.84% $0.22 January 1, 2013

Steven Jacobson Chief
Executive Officer(b) 450,000 23.26% $0.22 September 9, 2013

NOTES:

(a) H. Douglas Saathoff was named the Chief Executive Officer in March
2003.

(b) Steven Jacobson was Chief Executive Officer of Peregrine
Control Technologies when Peregrine Control Technologies was acquired by the
Company effective February 1, 2002. He became Chief Executive Officer of
the Company subsequent to this acquisition until March 2003, at which time he
became a salaried employee.

EMPLOYMENT CONTRACTS

We do not have employment contracts with our executive officers.

STOCK OPTION PLANS

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

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

DIRECTOR COMPENSATION

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

ADDITIONAL INFORMATION

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

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

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

FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Nighthawk Systems, Inc.
Denver, Colorado

We have audited the accompanying consolidated balance sheet of Nighthawk
Systems, Inc. and subsidiary ("the Company") as of December 31, 2003, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the two-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nighthawk Systems,
Inc. and subsidiary as of December 31, 2003, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred net losses of $552,457
and $1,462,916 during the years ended December 31, 2003 and 2002, respectively,
and has a stockholders' deficit and working capital deficiency of $1,100,981 and
$1,130,413, respectively, at December 31, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed in Note 15 to these consolidated financial statements, the Company
has restated its 2002 consolidated statements of operations, stockholders'
deficit and cash flows.

GELFOND HOCHSTADT PANGBURN, P.C.

Denver, Colorado
March 12, 2004, except for Note 14, as to which the date is March 16, 2004.

F-1

Nighthawk Systems, Inc.
Consolidated Balance Sheet
December 31, 2003

ASSETS

Current assets :
Accounts receivable, net of allowance for
doubtful accounts of $134 $ 41,917
Inventories 75,329
Other 35,355
-------------
Total current assets 152,601

Furniture, fixtures and equipment, net 20,774
Intangible assets (Note 5) 8,658
--------------
$ 182,033
--------------

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities :
Cash overdraft $ 3,902
Accounts payable 392,538
Accrued expenses 200,588
Line of credit (Note 8) 19,842
Notes payable (Note 9):
Related parties 118,834
Other 458,766
Customer deposit 63,544
Other related party payable (Note 11) 25,000
--------------
Total liabilities (all current) 1,283,014
--------------
Commitments and contingencies (Notes 6, 10 and 11)

Stockholders' deficit (Notes 10 and 12):
Preferred stock, $0.001 par value; 5,000,000
shares authorized; none issued and outstanding
Common stock; $0.001 par value; 50,000,000
shares authorized; 24,320,902 issued and
outstanding 24,321
Additional paid-in capital 2,855,289
Accumulated deficit (3,980,591)
--------------
Total stockholders' deficit (1,100,981)
--------------
$ 182,033
--------------
The accompanying notes are an integral part of these financial statements

F-2

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

2002
2003 (Restated)
------------- ------------
Revenue $ 1,030,793 $ 661,199

Cost of goods sold 658,203 349,075
------------- ------------
Gross profit 372,590 312,124

Selling, general and administrative expenses 1,290,143 1,392,601
Amortization of deferred compensation (Note 10) - 1,556,250
Reversal of 2001 deferred compensation (Note 10) - (368,750)
Reversal of 2002 deferred compensation (Note 10) (300,000) (1,106,250)
Reversal of 2002 consulting expense (Note 10) (33,000) -
------------- ------------
Loss from operations (584,553) (1,161,727)
------------- ------------
Interest expense
Related parties 15,036 17,795
Other 30,839 21,377
------------- ------------
Loss from continuing operations (630,428) (1,200,899)

Discontinued operations (Note 3)
Loss from operations of discontinued segment (14,472) (262,017)
Gain on disposal of discontinued segment 92,443 -
------------- ------------
77,971 (262,017)

Net loss $ (552,457) $(1,462,916)
------------- ------------
Loss from continuing operations per basic and
diluted common share $ (0.03) $ (0.07)
------------- ------------
Income (loss) from discontinued operations per * $ (0.01)
------------- ------------
basic and diluted common share
------------- ------------
Net loss per basic and diluted common share $ (0.03) $ (0.08)
------------- ------------
Weighted average common shares outstanding -
basic and diluted 22,021,229 18,565,172
------------- ------------
* Less than $0.01 per share

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

F-3

Nighthawk Systems, Inc.
Consolidated Statements of Stockholders' Deficit
Years ended December 31, 2003 and 2002 (Restated)

Common stock
--------------------------- Additional Accum- Deferred Stock-
paid-in ulated compen- holder
Shares Amount capital deficit sation receivable Total
------------- ------------ ------------ ------------ ------------ ------------ ------------

Balances, December
31, 2001. . . . . . . . . 14,681,200 $ 14,681 $ 3,169,840 $(1,965,218) $(1,556,250) $ (118,629) $ (455,576)

Common stock issued
for cash. . . . . . . . . 2,479,000 2,479 519,171 521,650

Common stock issued
for services. . . . . . . 2,948,324 2,948 583,552 586,500

Transfer of common
stock by stockholder
for obligations of the
Company . . . . . . . . . 21,000 21,000

Common stock retained
by Peregrine, Inc.. . . . 4,600,256 4,600 (4,600) -

Amortization of deferred
compensation cost . . . . 81,250 81,250

Cancellation of
agreements under
deferred
compensation. . . . . . . (1,900,000) (1,900) (1,473,100) 1,475,000 -

Net loss (Restated) . . . (1,462,916) (1,462,916)
------------- ------------ ----------- ---------- ----------- ------------ ------------

Balances, December
31, 2002. . . . . . . . . 22,808,780 $ 22,809 $ 2,815,863 $(3,428,134) $ - $ (118,629) $ (708,091)

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

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

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

Cancellation of
agreements under
deferred compensation . . (300,000) (300) (299,700) (300,000)

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

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

Shares received for sale
of operating segment. . . (150,000) (150) (28,350) (28,500)

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

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

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

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

F-4

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

2002
2003 (Restated)
----------- ------------
Cash flows from operating activities:
Net loss $(552,457) $(1,462,916)
----------- ------------
Adjustments to reconcile net loss to
net cash used in operating activities

Loss from operations of discontinued segment 14,472 262,017
Gain on disposition of operating segment (92,443) -
Depreciation and amortization 5,859 7,999
Provision for bad debts - 6,035
Settlement of other related party payable (23,912)
Common stock issued for services 234,750 586,500
Common stock issued for interest 11,500 -
Issuance of stock options to consultants 6,825 -
Compensation expense on settlement of receivable
from shareholder 4,992 -
Amortization of deferred compensation - 1,556,250
Reversal of 2001deferred compensation - (368,750)
Reversal of 2002 deferred compensation (300,000) (1,106,250)
Reversal of consulting agreement (33,000) -
Change in assets and liabilities, net of business acquisition:
Decrease (increase) in accounts receivable 160,232 (203,448)
Decrease (increase) in inventories (15,621) 6,873
Increase in accounts payable 53,659 53,607
Increase in accrued expenses 8,643 118,257
Increase (decrease) in deferred revenue (432,600) 432,600
Increase in customer deposit 63,544 -
Net increase in other assets and liabilities (36,075) 5,332
------------ -----------
Total adjustments (369,175) 1,357,022
------------ -----------
Net cash used in operating activities of continuing operations (921,632) (105,894)
------------ -----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (18,124) (6,231)
------------ -----------
Net cash used in investing activities (18,124) (6,231)
------------ -----------
Cash flows from financing activities:
Cash overdraft 3,902 -
Proceeds from notes payable, related parties 62,064 64,526
Payments on notes payable, related parties (49,302) (92,795)
Proceeds from (payments made) on factoring arrangement, net (82,502) 82,502
Proceeds from notes payable, other 365,000 -
Payments on notes payable, other (25,447) (18,529)
Payments on lines of credit - (158)
Payments on other related party payable - (355)
Net proceeds from issuance of common stock 263,000 521,650
----------- ------------
Net cash provided by financing activities 536,715 556,841
----------- ------------
Cash used in discontinued operations (25,636) (46,350)

Net increase (decrease) in cash (428,677) 398,366
Cash, beginning of year 428,677 30,311
----------- ------------
Cash, end of year $ - $ 428,677
----------- ------------

Supplemental disclosures of cash flow information:

Cash paid for interest $ 22,408 $ 13,345
----------- ------------
Supplemental disclosure of non-cash investing and financing activities:

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

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

Transfer of common stock by stockholder for obligations of the Company $ 21,000
------------

The accompanying notes are an integral
part of these financial statements

F-5

NIGHTHAWK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002

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

ORGANIZATION:

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

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

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

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

The Company incurred a net loss of $552,457 during the year ended December 31,
2003 and has both a stockholders' deficit and working capital deficiency of
approximately $1.1 million as of December 31, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Although no assurance can be given that such plans will be successfully
implemented, management's plans to address these concerns include:

F-6

1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common stock
3. Implementation of a sales and marketing plan.
4. Sales of products that utilize satellite-based service.

As was announced in March 2004, the Company has since decided to accept an offer
from First Associates Investments Inc. of Vancouver, British Columbia to assist
it in completing an initial public offering of its shares in Canada in
conjunction with a listing of its shares on the TSX Venture Exchange. Under the
offering, the Company anticipates raising up to CDN$1.6 million through the sale
of units consisting of one share of common stock and one common share purchase
warrant. Pricing of units will be dependent upon market conditions at the time
the offering is closed. If the offering is successful, the Company's shares will
be traded on both the OTC Bulletin Board and the TSX Venture Exchange in Canada.
Terms of the warrant may allow the Company to raise an additional CDN$1.6
million, dependent on market conditions after the offering is completed. The
offering in Canada does not preclude the Company from pursuing supplementary
financing arrangements in the United States.

The Company plans to use proceeds from the offering principally to fund a
comprehensive sales and marketing effort. The Company was able to produce record
revenues in 2002 and 2003 despite spending less than $6,000 in product
advertising during each of those years. The Company's paging based products have
been implemented successfully by clients in those years, and the Company hopes
to leverage off of those relationships to sell to both existing and new
customers. In addition, the Company has recently developed new, satellite-based
products that offer the opportunity for the Company to be 'first to market' for
many commercial applications. The Company's marketing plan also calls for the
Company to expand its sales efforts beyond the United States for international
applications within its targeted markets.

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

2. Summary of significant accounting policies

Cash and cash equivalents

Cash on hand and in banks, together with marketable securities having original
maturities of three months or less, are classified as cash and cash equivalents
by the Company.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. Receivables arising
from sales to customers are not collateralized and, as a result, management
continually monitors the financial condition of its customers to reduce the risk
of loss. At December 31, 2003, the Company had $41,917 in accounts receivable,
net of the allowance for doubtful accounts. Approximately $30,000 of this
balance was from one customer. The entire balance was collected subsequent to
December 31, 2003. This same customer represented 47% of the Company's revenue
during 2003. The Company was not dependent on any single industry segment for
its revenues.

F-7

During 2003 and 2002, the Company's largest supplier accounted for approximately
66% and 22% of purchases of pre-manufactured component materials. During 2003,
two customers accounted for approximately 47% and 31% of sales, respectively.
During 2002, two customers accounted for approximately 36% and 10% of sales,
respectively. The same customer represented the largest percentage of sales in
both 2003 and 2002.

INVENTORIES

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

Property and equipment

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

Intangible assets

Intangible assets include patent costs and are stated at cost. Amortization will
be provided by method over the estimated lives of ten years. The Company reviews
these and any other long-lived assets for impairment whenever events or changes
in circumstances indicate their carrying amounts may not be recoverable.
Recoverability of an asset to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted cash flows expected to
be generated by the asset. If the asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Based on management's
review at December 31, 2002, the Company recorded a charge of $112,394 related
to an impairment of the customer base purchased from Vacation Communication,
Inc. that is included in discontinued operations in 2002. No impairment is
recorded at December 31, 2003.

Revenue recognition

Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized either
on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations.

Provision for doubtful accounts

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

ADVERTISING:

Advertising costs are expensed as incurred. For the year ended December 31, 2003
product advertising costs were approximately $6,000. For the year ended December
31, 2002, advertising costs were approximately $14,000, which included
approximately $6,000 of product advertising and $8,000 of general corporate
advertising.

F-8

Income taxes

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

Financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and notes with floating interest rates approximate their fair values.
The fair values of notes with related parties are not practicable to estimate
based upon the related party nature of the underlying transactions.

Net loss per share

Basic net loss per share is computed by dividing the net loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the year. Diluted net loss per share reflects the potential
dilution that could occur if dilutive securities were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company, unless the effect of such inclusion would reduce
a loss or increase earnings per share. During the year ended December 31, 2001
the Company issued 2,075,000 shares under stock-based compensation arrangements,
which were to be earned in future periods. Until they were earned, or canceled,
during the year ended December 31, 2002, these shares were considered options
for purpose of computing basic and diluted earnings per share. The Company also
issued 2,310,000 options during 2003. For the years ended December 31, 2003 and
2002, the effect of the inclusion of dilutive shares would have resulted in a
decrease in loss per share. Accordingly, the weighted average shares outstanding
have not been adjusted for dilutive shares.

Use of estimates

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

Shipping and handling fees and costs

The Company records shipping and handling fees billed to customers as revenue,
and shipping and handling costs incurred with the delivery of its products as
cost of sales.

Comprehensive income

For the years ended December 31, 2003 and 2002, the Company had no components of
comprehensive income to report.

F-9

Stock-based compensation

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

In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure", an amendment of FASB Statement No. 123"("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends Accounting Principles Board ("APB")
Opinion No. 28, "Interim Financial Reporting", to require disclosure about those
effects in interim financial information. SFAS 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The Company will
continue to account for stock-based employee compensation using the intrinsic
value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees",
but has adopted the enhanced disclosure requirements of SFAS 148.

Common stock split

In January 2002, the Company effected a 1:100 reverse common stock thereby
decreasing the number of issued and outstanding shares. All references in the
accompanying financial statements to the number of common shares have been
restated to reflect the common stock split.

Recently issued accounting pronouncements

In January 2003, the FASB issued SFAS Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which changes the criteria by which one
company includes another entity in its consolidated financial statements. FIN 46
requires a variable interest entity ("VIE") to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. In December 2003, the FASB approved a partial deferral
of FIN 46 along with various other amendments. The effective date for this
interpretation has been extended until the first fiscal period ending after
December 15, 2004. However, prior to the required application of this
interpretation, a public entity that is a small business issuer shall apply this
interpretation no later than as of the end of the first reporting period after
December 15, 2003. As the Company does not currently have an interest in a VIE,
management does not expect that the adoption of FIN 46 will have a significant
immediate impact on the financial condition or results of operations of the
Company.

F-10

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

3. Discontinued operations

On September 30, 2001, the Company acquired certain assets and assumed certain
liabilities of Vacation Communication, Inc. ("VCI"), a Colorado corporation, in
exchange for $50,000 cash, 150,000 shares of the Company's common stock valued
at $150,000, and notes payable of $183,135, in a transaction accounted for as a
purchase. The Company acquired these assets and liabilities to enable it to
market and sell paging airtime to customers that purchase its equipment.
Effective July 31, 2003 the Company sold the remaining assets and liabilities
originally purchased with or originated as a result of the purchase of VCI. back
to the original owners of the operation. In return, the Company received 150,000
shares of its common stock, and the owners of VCI facilitated the return of
approximately $34,000 in cash to the Company that had been held in an account
under their control. The Company recognized a gain on this transaction of
$92,443, and has presented the financial results of this paging business segment
as discontinued operations in the accompanying financial statements. Revenues
from discontinued operations were approximately $45,900 and $207,500 for the
years ended December 31, 2003 and 2002, respectively.

4. Furniture, fixtures and equipment

Furniture, fixtures and equipment consist of the following at December 31,2003:

Equipment $ 30,306
Furniture and fixtures 3,378
Software 3,171
---------------
36,855
Less accumulated depreciation (16,081)
---------------
$ 20,774

5. Intangible assets

Intangible assets consist of the costs for two pending patent applications.
Patent costs will be amortized using the straight-line method over ten years.

6. Commitments and contingencies

LEASES

The Company leases office and warehouse space under month-to-month operating
leases in Denver, Colorado and San Antonio, Texas. Rent expense incurred for the
years ended December 31, 2003 and 2002 was approximately $26,000 and $36,000,
respectively.

F-11

Pending litigation

In May 2003, the Company was sued by a former Board member seeking recovery for
the value of 350,000 shares, or $209,500, and $120,000 due his firm under a
retainer agreement between the Company and his firm. The former Board member had
previously signed a settlement agreement with the Company in which he agreed to
cancel all potential claims against the Company and its directors in return for
150,000 unregistered shares trading at a value of $0.60 or higher. The Company
does not believe it owes the former Board member anything beyond the settlement
agreement and has actively defended its position. The case is proceeding in the
state court in Reno, Nevada. No assurance can be given, however, as to the
ultimate outcome of the case.

7. Income taxes

The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.

The Company did not incur income tax expense for the years ended December 31,
2003 and 2002. The difference between the expected tax benefit computed at the
federal statutory income tax rate of 34% and the effective tax rate for the
years ended December 31, 2003 and 2002 was due primarily to the tax effect of
the valuation allowance.

At December 31, 2003, the Company has approximately $3,600,000 of net operating
loss carryforwards, which expire from 2014 through 2023. At December 31, 2003
the components of the Company's deferred tax assets and liabilities are as
follows:

Deferred tax assets:
Net operating loss carryforwards $ 1,224,000
Valuation allowance (1,224,000)
---------------
Net deferred tax asset $ -
---------------

A valuation allowance has been provided to reduce the deferred tax assets as
realization is not assured.

8. Line of credit

The Company has $19,842 outstanding at December 31, 2003 under a $20,000
unsecured line of credit with a bank. Borrowings under the line of credit bear
interest at the Wall Street Journal's published prime rate plus 3% (7% at
December 31, 2003); interest due monthly. The line of credit is guaranteed by
three stockholders and an officer of the Company.

9. Notes payable

At December 31, 2003, notes payable consist of the following:

F-12

RELATED PARTIES:

Note payable to a stockholder/business partner;
unsecured; 8% annual interest rate; due and in
default $ 21,126

Subordinated note payable, affiliate; unsecured;
interest at 8%; due June 2002,currently in default 50,000

NOTE PAYABLE, OFFICER; UNSECURED; INTEREST
At prime rate plus 5.5% (9.49% at December 31, 2003); due on demand 10,888

NOTE PAYABLE, OFFICER; SECURED BY ACCOUNTS
receivable, interest at 18%; paid January 2004 9,000

Note payable, officer; unsecured; interest at 13%,
revolving 5,543

Note payable, officer, unsecured, interest at 17%,
due December 2002, currently in default 22,277
-----------------
$ 118,834
-----------------

OTHER:

Unsecured, convertible note payable to stockholder,
no stated interest rate, due December 1, 2003
currently in default $ 200,000

Unsecured notes payable to stockholder, interest
at 6%, due October 31, 2003,currently in default 150,000

Note payable to stockholder, interest at 5% secured
by accounts receivable, due January 2004,currently
in default 7,543

Subordinated note payable, unsecured, interest at
8%; due June 2002, currently in default 71,640

Unsecured line of credit with a bank, borrowings
under the line of credit bear interest at the
bank's prime rate plus 4.75% (13.99% at December 31,
2003); interest due monthly, due August 2005 29,583
---------------
$ 458,766
---------------

10. Stockholders' deficit

Preferred stock:

The Company has authorized 5,000,000 shares of $0.001 par value, preferred
stock. At December 31, 2003 there were no preferred shares issued and
outstanding.

F-13

Common stock:

In September 2001, PCT issued 1,225,000 shares of its common stock to
consultants for future services. At the date of commitment, the total consulting
cost was calculated to be $1,225,000 ($1.00 per share), which was to be
recognized over the one-year term of the agreement. Through December 31, 2002,
the Company had recognized consulting expense of $1,225,000. During the fourth
quarter of 2002, the Company recorded a reduction in stock compensation expense
of $1,225,250 related to the cancellation of the agreements, as management
determined that no services had been performed.

The Company issued 40,167 shares of common stock in September 2002 and 58,157
shares of common stock in December 2002 to a consultant in return for $6,000 and
$12,000 of financial and accounting services performed during the third and
fourth quarters, respectively. The number of shares issued was based on
management's estimate of the fair value of the common stock during the period in
which the services were performed. Also during 2002, the Company issued an
additional 75,000 shares to consultants for services valued at $57,750.

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

In October 2002, the Company issued 1,000,000 shares of common stock to its
chief executive officer in lieu of unpaid cash compensation aggregating
$140,000, or $0.14 per share, which was equal to the market price of the common
stock on the date of stock award, and the Company recorded stock compensation of
$140,000. On the same date, the chief executive officer transferred 150,000 and
300,000 of these shares to a creditor of the Company and a consultant,
respectively. The Company accounted for the transfer as a capital contribution
by the chief executive officer aggregating $21,000 and $42,000 for the creditor
and consultant, respectively, and the Company recorded a note reduction of
$6,360, interest expense of $14,640 and compensation expense of $42,000.

During 2002, the Company issued a total of 2,479,000 shares of its common stock
and 2,304,000 warrants, at prices ranging from $1.00 per share in January to
$0.10 per share in November, in exchange for total cash proceds of $521,650. The
warrants are exercisable within two years of the date of grants at prices
ranging from $1.50 to $0.20. During 2003, the Company issued a total of
1,575,000 shares of its common stock and 1,575,000 warrants with an exercise
price of $0.25 per share in exchange for net cash proceeds of $263,000.

Common Stock warrant transactions during 2003 and 2002 are summarized below:

WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- ----------
Outstanding at December 31, 2001 391,200 $1.50
Granted 2,304,000 0.37
Exercised - -
Forfeited - -
--------- ----------
Outstanding at December 31, 2002 2,695,200 $0.53
Granted 1,575,000 0.25
Exercised - -
Forfeited (391,200) $1.50
----------- -----------
Outstanding at December 31, 2003 3,879,000 $0.32
----------- -----------

F-14

On May 13, 2003, an investor loaned $200,000 to the Company in exchange for a
90-day note that was convertible into common shares of the Company at the
lender's option on the 91st day at a price of no more than $0.20 per share.
Should the Company sell any shares during the period the note is outstanding for
less than $0.20 per share, the conversion price would be lowered to match that
selling price. Interest on the note for the 90-day period was 25,000 shares of
the Company's common stock, valued at $0.46 per share, which was the market
value of the common stock on the date of issuance. Terms of the note stipulate
that should the lender choose not to convert the note, and should the Company
fail to repay the note when due, the Company will incur a penalty of 25,000
common shares per month. The Company also agreed to register all shares
underlying the agreement on a best-efforts basis. During August 2003, the
investor agreed to extend the maturity date of the note to December 1, 2003. As
of December 31, 2003, the note was still in default.

During the fourth quarter of 2003, the Company issued a total of 1,116,667
shares for $234,750 of consulting expenses incurred during 2003. This included a
total of 450,000 shares to five independent directors who had served on the
Company's board during 2002 and 2003.

11. Related party transactions

In October 2001, PCT issued an aggregate of 850,000 shares of its common stock
to its outside directors who were on PCT's board at that time in exchange for
services to be performed. At the date of commitment, total compensation cost was
calculated to be $850,000, which was to be recognized over the one-year term of
the agreement. With the exception of one Board member, all of the outside
directors resigned in April 2002. During the fourth quarter of 2002, the Company
canceled 200,000 of these shares that were returned to the Company, and reversed
$200,000 of consulting expenses as the associated services were never performed.
During the fourth quarter of 2003, the Company reversed an additional 300,000 of
these shares and reversed $300,000 of consulting expenses as the Company could
not determine that any of the associated services had been performed.

During 2002, the Company borrowed $41,126 from an individual who is a business
partner of a board member, and later repaid $24,150 including $4,150 in interest
during 2002. The balance of this note payable at December 31, 2003, is $21,126.

As of December 31, 2002, the Company owed an officer $16,100 in salary and
$8,365 in commissions earned in previous periods. During 2003, the Company paid
a total of $12,678 toward these amounts owed. As of December 31, 2002, the
Company owed the same officer $34,947 under short-term note arrangements. During
2003, the same officer loaned the Company an additional $7,964 under a
short-term note. During 2003, a total of $4,203 of note payments were made by
the Company. As of December 31, 2003 the Company owes the officer $38,708 under
the short-term note arrangements. During 2003, a different officer loaned the
Company $54,100 under short-term notes, of which $45,100 was repaid by December
31, 2003.

During 2003, the Company made payments of $25,504 to Arlen Felsen while he was a
director and employee to reduce amounts owed to him for the purchase of certain
assets and liabilities of Vacation Communications. These payments reduced
amounts owed to Mr. Felsen for the purchase to $95,918. This obligation was sold
back to Mr. Felsen, along with other assets and liabilities associated with the
original purchase effective July 31, 2003. The Company recognized a gain of
$92,443 on this transaction.

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

F-15

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

12. Stock options

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

YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
------------ -------------
Net loss: $ (552,457) $ (1,462,916)
As reported
Total stock-based employee compensation
expense determined under fair value
based method for all employee awards
net of related tax effects (13,685) 0
------------ --------------
Pro forma net loss $ (566,142) $ (1,462,916)

Pro forma net loss per share:
As reported:
Basic and diluted $ (0.03) $ (0.08)
Pro forma:
Basic and diluted $ (0.03) $ (0.08)

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

F-16

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

2003 2002

Dividend yield 0.0% n/a
Expected volatility 1.229 - 1.316 n/a
Risk-free interest rate 4.50% n/a
Expected life in years 1 - 3 n/a

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

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

There was no stock option activity during the year ended December 31, 2002. The
following summarizes the stock option activity for the year ended December 31,
2003:

SHARES WEIGHTED AVERAGE EXERCISE PRICE
--------- -------------------------------
Outstanding at beginning
of year 0 $ -
Options granted 2,310,000 0.22
Options exercised 0 -
Options forfeited or
expired 25,000 0.22
----------
Outstanding at end of year 2,285,000 0.22
----------
Options exercisable at
year end 325,000 0.22
-----------
Options available for
grant at end of year 2,715,000
-----------

Options outstanding at December 31, 2003 which have not yet vested will vest in
thirds on the first, second and third anniversary dates of their issuance as
follows: 486,667 on January 1, 2004, 2005 and 2006; 150,000 on September 8,
2004, 2005 and 2006; and 16,667 on November 1, 2004, 2005 and 2006.

13. Deferred revenue

In December 2002, the Company received $432,600 from a customer in return for a
commitment to build 1,400 remote control units for specific unmanned computer
kiosk sites throughout the United States. The entire amount was recognized as
revenue throughout 2003 as the units were shipped.

F-17

14. Subsequent events

During the first quarter of 2004, the Company issued 733,333 shares of common
stock and 733,333 warrants to purchase the Company's common stock for $0.25 per
share in return for cash proceeds of $110,000, an additional 150,000 shares for
services to be performed from February through April 2004, and 330,000 shares as
the result of the exercise of stock options.

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

15. Restatement

During 2003, management of the Company became aware that 1,475,000 shares of the
Company's common stock had been issued, but not accounted for by prior
management, in return for $300,000 of consulting and other services related to
the reverse acquisition of the Company by PCT in 2002. Because the services were
performed during 2002, the Company has restated its consolidated statements of
operations, stockholders' deficit and cash flows for the year ended December 31,
2002 in the accompanying financial statements to include this transaction.
Following is a summary comparison of amounts previously reported with restated
results:

YEAR ENDED
DECEMBER 31, 2002
As Previously
Restated Reported
---------- ----------------

Revenues $ 661,199 $ 661,199

Cost of goods sold $ 349,075 $ 349,075

Selling, general &
administrative expenses $ 1,392,601 $ 1,092,601

Net loss $ (1,462,916) $(1,162,916)

Net loss per basic
and diluted common share $ (0.08) $ (0.06)

Weighted average common
shares outstanding - basic
and diluted 18,565,172 18,128,254

F-18

Nighthawk Systems, Inc.
Condensed Consolidated Balance Sheet
September 30, 2004
(unaudited)

ASSETS

Current assets :
Cash $ 98,344
Accounts receivable, net of allowance for
doubtful accounts of $134 56,148
Inventories 42,489
Other 129,794
------------

Total current assets 326,775

Furniture, fixtures and equipment, net 14,993
Intangible assets, net 9,967
------------
$ 351,735
============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable $ 371,298
Accrued expenses 210,839
Line of credit 19,842
Notes payable:
Related parties 16,214
Other 391,912
Other 35,415
------------
Total current liabilities 1,045,520

Long term liabilities:
Convertible debt 231,250
Other 25,000
------------
Total liabilities 1,301,770

Commitments and contingencies

Stockholders' deficit:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; 5,000 shares issued and outstanding;
liquidation preference $12,500 5
Common stock; $0.001 par value; 50,000,000
shares authorized; 30,622,518 issued and outstanding 30,622
Additional paid-in capital 3,752,124
Special warrants 188,775
Accumulated deficit (4,921,561)
------------
Total stockholders' deficit (950,035)
------------

$ 351,735
============

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

Nighthawk Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------

Product sales, net $ 221,723 $ 209,279 $ 485,948 $ 904,551

Cost of goods sold 163,786 145,380 344,409 522,979
------------ ------------ ------------ ------------
Gross profit 57,937 63,899 141,539 381,572

Selling, general and administrative expenses 348,005 287,876 888,950 911,946
Reversal of 2002 consulting expense - - - (39,000)
------------ ------------ ------------ ------------
Loss from operations (290,068) (223,977) (747,411) (491,374)
------------ ------------ ------------ ------------

Interest expense:
Related parties 34,041 4,726 39,641 11,387
Other 97,329 5,113 153,918 23,600
------------ ------------ ------------ ------------

Loss from continuing operations (421,438) (233,816) (940,970) (526,361)
------------ ------------ ------------ ------------

Discontinued operations:
Loss from operations of
discontinued segment (5,778) (14,472)
Gain on disposal of
discontinued segment 92,443 92,443
------------ ------------

Net loss (421,438) (147,151) (940,970) (448,390)

Less: preferred stock dividends (223) - (420) -
------------ ------------ ------------ ------------

Net loss to common stockholders $ (421,661) $ (147,151) $ (941,390) $ (448,390)
============ ============ ============ ============

Loss from continuing operations per
basic and diluted common share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============ ============ ============ ============

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

Net loss to common stockholders per
basic and diluted common share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============ ============ ============ ============

Weighted average common shares outstanding,
basic and diluted 28,714,168 22,994,057 27,190,261 22,970,851
============ ============ ============ ============

* Less than $0.01 per share

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

Nighthawk Systems, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
Nine Months Ended September 30, 2004
(unaudited)

Preferred Stock Common Stock Additional
----------------- -------------- Paid-in Special Accumulated
Shares Amount Shares Amount Capital Warrants Deficit Total
------- ------- ------- ------- -------- --------- -------- ------

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

Common stock and
warrants issued and
options exercised for cash 1,488,333 1,488 235,862 $188,775 426,125

Common stock issued for services 1,340,000 1,340 195,760 197,100

Common stock issued for interest 56,667 57 11,276 11,333

Conversion of notes payable
to common stock and warrants 1,364,423 1,364 302,113 303,477

Preferred stock issued for cash 5,000 $ 5 12,495 12,500

Issuance of stock
options to consultants 26,798 26,798

Warrants issued for cash 18,750 18,750

Common stock
issed for debenture
placement fee 100,000 100 12,400 12,500

Beneficial conversion
feature of
convertible debt 83,333 83,333

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

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

Series A preferred dividends 2,193 2 (2) -

Net loss (940,970) (940,970)
---------- --------- ----------- --------- ------------ --------- ------------ ------------

Balances, September 30, 2004 5,000 $ 5 30,622,518 $30,622 $3,752,124 $188,775 $(4,921,561) (950,035)
========= ========= =========== ======== =========== ======== ============ ============

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

Nighthawk Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

Nine months ended
September 30,
-----------------------
2004 2003
---------- ----------

Cash flows from operating activities:
Net loss $(940,970) $(448,390)
---------- ----------

Adjustments to reconcile net loss to
net cash used in operating activities:

Loss from operations of discontinued segment - 14,472
Gain on disposition of operating segment - (92,443)
Depreciation and amortization 5,781 2,127
Beneficial conversion feature 83,333 -
Common stock issued for services 197,100 -
Common stock and warrants issued for interest 77,616 11,500
Common stock issued for placement fee 12,500
Issuance of stock options to consultants 26,798 -
Cancellation of consulting agreement - (39,000)
Loss from settlement of shareholder receivable - 4,992
Change in assets and liabilities:
Decrease (increase) in accounts receivable (14,231) 154,556
Decrease (increase) in inventories 32,840 (60,105)
Increase in other assets and intangible assets (95,748) (23,247)
Increase (decrease) in accounts payable (21,240) 129,811
Increase in accrued expenses 32,430 30,984
Decrease in deferred revenue - (415,829)
Increase (decrease) in customer deposits (58,129) 60,000
Increase in other liabilities 55,000 -
---------- ----------
Total adjustments 334,050 (222,182)
---------- ----------

Net cash used in operating activities of continuing operations $(606,920) $(670,572)
---------- ----------

Cash flows from investing activities:
Purchases of furniture, fixtures and equipment - (12,655)
---------- ----------
Net cash used in investing activities - (12,655)
---------- ----------

Cash flows from financing activities:
Repayment of cash overdraft (3,902) -
Proceeds from notes payable, related parties 25,809 43,733
Payments on notes payable, related parties (35,054) (40,495)
Payments made on factoring arrangement, net - (82,502)
Proceeds from issuance of convertible debt and warrants 250,000 -
Proceeds from notes payable, other 85,000 250,000
Payments on notes payable, other (30,214) (14,383)
Payments on other related party payable (25,000) -
Net proceeds from issuance of common stock and warrants 237,350 128,000
Proceeds from issuance of preferred stock 12,500 -
Net proceeds from issuance of special warrants 188,775 -
---------- ----------
Net cash provided by financing activities 705,264 284,353
---------- ----------

Cash used in discontinued operations (25,636)
----------

Net increase (decrease) in cash 98,344 (424,510)
Cash, beginning - 428,677
---------- ----------
Cash, ending $ 98,344 $ 4,167
========== ==========

Supplemental disclosure of cash flow information:

Cash paid for interest $ 21,900 $ 4,708
========== ==========

Supplemental disclosure of non-cash investing and financing activities:

Conversion of notes payable and accrued interest to common stock
Notes payable $ 215,015
Accrued interest 22,179
----------
Total balance converted $ 237,194
==========

Preferred stock dividends $ 420
==========
The accompanying notes are an integral
part of these financial statements.

NIGHTHAWK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(unaudited)

1. Basis of presentation:

The accompanying unaudited condensed consolidated financial statements, which
include the accounts of Nighthawk Systems, Inc. and its subsidiary PCT
(collectively referred to herein as "the Company"), have been prepared in
accordance with accounting principles generally accepted in the U.S. for interim
financial information. In the opinion of management, all adjustments (consisting
of only normal recurring items), which are necessary for a fair presentation
have been included. The results for interim periods are not necessarily
indicative of results that may be expected for any other interim period or for
the full year. These condensed consolidated financial statements should be read
in conjunction with a reading of the financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2003 filed with the
Securities and Exchange Commission (the "SEC").

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

The Company has incurred operating losses for several years. These losses have
caused the Company to operate with limited liquidity and have created a
stockholders' deficit of approximately $950,000 and a working capital deficiency
of approximately $719,000 as of September 30, 2004. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans to address these concerns include:

1. Raising working capital through additional borrowings.
2. Raising equity funding through sales of the Company's common stock
or preferred stock.
3. Improving working capital through increased sales of the Company's
products and services and the reduction of expenses.

As noted in Note 7 to these financial statements, in August 2004, the Company
signed a financing arrangement with Dutchess Private Equities, II, L.P.
("Dutchess") which was amended on August 26, 2004 and on September 24, 2004.
Under the terms of the amended arrangement, the Company received a total of
$250,000 under a debenture during the three-month period ended September 30,
2004. The Company also signed an investment agreement under which, subject
to the effectiveness of an SB-2 registration statement to be filed with the
Securities and Exchange Commission ("SEC") which will cover the sale of common
stock to be issued to Dutchess under the agreement, Dutchess agreed to purchase
up to $10.0 million in common stock from the Company, at the Company's
discretion, over the next three years, subject to certain limitations including
the Company's then current trading volume. On November 3, 2004, the Company
filed an SB-2 registration statement with the SEC to register the shares
underlying the debenture and the investment agreement.

2. Significant accounting policies

Revenue recognition

Revenue from product sales is recognized when all significant obligations of the
Company have been satisfied. Revenues from equipment sales are recognized
either on the completion of the manufacturing process, or upon shipment of the
equipment to the customer, depending on the Company's contractual obligations.
The Company occasionally contracts to manufacture items, bill for those items
and then hold them for later shipment to customer-specified locations.

During the nine months ended September 30, 2004, the Company's largest
customers accounted for 26%, 24% and 14% of sales respectively, and the Company
purchased 52% and 13% of its materials from two suppliers. During the three
months ended September 30, 2004, the Company's largest customers accounted for
35%, 31% and 12% of sales, respectively and the Company purchased 51% and 29% of
its materials from two suppliers. During the nine months ended September 30,
2003, the Company's two largest customers accounted for approximately 55% and
33% of sales respectively. During the three months ended September 30, 2003,
the Company's two largest customers accounted for approximately 39% and 32% of
sales.

Inventories

Inventories at September 30, 2004 consist entirely of parts and pre-manufactured
component parts. The Company monitors inventory for turnover and obsolescence,
and records reserves for excess and obsolete inventory as appropriate. The
Company did not have a reserve for excess or obsolete inventory as of September
30, 2004.

Net loss per share

Stock-based compensation

The Company has elected to continue to account for stock option grants in
accordance with APB 25 and related interpretations. Under APB 25, where the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation is recognized. No
employee options were vested during the three month and nine month periods
ending September 30, 2003. The Company issued employee options in September,
October and November 2003 that vest over three year periods. The Company has not
recognized compensation expense during the three and nine month periods ended
September 30, 2004 because the exercise price of the options equaled or exceeded
the market price of the Company's common stock on the dates the options
were granted. The weighted average fair value at date of grant for options
granted during 2003 was from $0.009 to $0.027. If compensation expense for the
Company's stock-based compensation plans had been determined consistent with
SFAS 123, the Company's net loss and net loss per share including pro
forma results would have been the amounts indicated below:

Three Months Ended September 30,
---------------------------------
2004 2003
----------- ----------
Net loss applicable to common stockholders: $ (421,661) $(147,151)

As reported
Total stock-based employee compensation expense determined
under fair value based method for all employee awards, net
of related tax effects (3,510) -
------------ ----------
Pro forma net loss applicable to common stockholders $ (425,171) $(147,151)
============ ==========

Pro forma net loss per share applicable to common stockholders:
As reported:
Basic and diluted $ (0.01) $ (0.01)
Pro forma:
Basic and diluted $ (0.01) $ (0.01)

* Less than $0.01 per share

Nine Months Ended September 30,
-------------------------------
2004 2003
------------- ----------
Net loss applicable to common stockholders: $ (941,390) $(448,390)

As reported
Total stock-based employee compensation expense determined
under fair value based method for all employee awards, net
of related tax effects (10,305) -
------------- ----------
Pro forma net loss applicable to common stockholders $ (951,695) $(448,390)
============= ==========

Pro forma net loss per share applicable to common stockholders:
As reported:
Basic and diluted $ (0.03) $ (0.02)
Pro forma:
Basic and diluted $ (0.04) $ (0.02)

During March and August of 2004, the Company issued options to purchase 330,000
and 300,000 shares of common stock of the Company, respectively, to
non-employees which vested immediately. The weighted average fair value at date
of grant for the options granted during the first nine months of 2004 was
$0.042. In accordance with SFAS 123, the Company recognized $26,798 in expense
during the nine-month period ended September 30, 2004 related to these and other
previously issued options to consultants which vested during the period.

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

2004 2003

Dividend yield 0.0% 0.0%
Expected volatility 1.094 - 1.122 1.229 - 1.316
Risk-free interest rate 4.50% 4.50%
Expected life in years 2 1 - 3

2. Related party transactions:

During the nine months ended September 30, 2004, the Company repaid $10,054 on
notes payable to two officers of the Company, as well as $25,000 to a
shareholder and former director under an arrangement entered into in December
2003. The Company also borrowed and repaid approximately $25,000 from a company
in which its Chairman is a partner.

In August 2004, in an effort to improve its working capital position, the
Company issued 739,423 common shares and warrants to purchase 739,423
common shares at $0.20 per share to two individuals and a company in
exchange for approximately $107,000 in notes payable plus accrued interest
owed them by the Company. One of the individuals is an officer of the
Company, one is a business partner of the Company's Chairman, and the company is
affiliated with the father of the Company's Chairman. Based on calculations
using Black-Scholes, the fair value of the warrants issued to the three parties
was $38,533. This amount is reflected in interest expense and additional
paid-in capital for the periods ended September 30, 2004.

3. Notes payable

In April 2004, the Company reached an agreement with its largest creditor under
which, in return for an additional $25,000 in borrowings and the extension of
the maturity dates of his three notes to July 31, 2004, the Company granted the
creditor a secured position in the assets of the Company. The Company also
agreed to pay the creditor cash interest at an annual rate of 8% retroactive to
the signing of the notes, and monthly at an annual rate of 8% on the new total
of $375,000 in notes, with $750 of the monthly interest due being paid in cash
and the remainder being paid in stock at a rate of $0.20 per share. For the
period of March through September of 2004, the Company issued 56,667 shares
to the creditor for $11,333 of interest owed under this arrangement. In August
2004, the creditor extended the maturity dates of the notes to October 31,
2004, and converted $50,000 of his $210,000 convertible note to 250,000
shares of common stock of the Company. The Company is currently in discussions
with the creditor regarding another extension of the maturity dates of the
creditor's notes.

In July 2004, the creditor also loaned the Company an additional $60,000 under a
90-day arrangement for the purpose of purchasing parts needed to complete orders
that had been placed by the Company's customers as of that date. Under this
arrangement, the creditor will receive varying percentages of the cash collected
from those customers until his note balance, plus interest at the annual rate of
10% is collected in full.

Effective June 30, 2004, a creditor of the Company converted $71,640 in
principal and $8,876 in accrued interest into 375,000 shares of the Company's
common stock and a warrant to purchase 375,000 shares of common stock at $0.25
per share. Based on a calculation using Black-Scholes, the warrant's fair value
at that date was $27,750. This amount is reflected in interest expense and
additional paid-in capital for the nine-month period ended September 30,
2004.

During the six-month period ended June 30, 2004, the Company repaid a
stockholder $7,543 owed to him under a short-term note, and made $3,725 in
payments to a financial institution.

4. Stock transactions:

During the nine months ended September 30, 2004, the Company received $127,850,
net of offering costs of $900, for the issuance of 858,333 shares of common
stock and warrants to purchase 858,333 additional shares for $0.25 per share. A
total of 1,340,000 shares of common stock were issued during the nine
month period to consultants in return for $197,100 in services, and the
Company received $109,500 in cash proceeds upon the exercise of 630,000
options issued to consultants during the period.

In order to provide the Company with working capital, a Canadian brokerage firm
sponsored a private placement of up to $300,000 in Special Warrants, which are
convertible into shares of common stock of the Company at $0.20 per share, and
also provide the purchaser with a warrant to purchase an equal number of shares
of common stock of the Company for a period of two years at $0.30 per share.
The Special Warrants will automatically convert at the earlier of i) an
effective registration statement filed with the Securities and Exchange
Commission or receipt of a qualified prospectus by a Canadian provincial
authority, whichever comes later; or ii) one year from their date of issue. As
of June 30, 2004, when the Special Offering was closed, the Company had
issued $188,775 in Special Warrants, net of issuance costs of $43,625.

In 2001, PCT issued 391,200 shares of its common stock in return for $391,200 in
cash proceeds. Based on a review of Company records during 2003, Company
management determined that associated warrants to purchase 391,200 shares of
common stock at $1.50 per share were never delivered to the purchasers
subsequent to their investment. Company management also determined this to be
the case with 255,000 shares issued by the Company between January and June 2002
in return for $255,000 in cash proceeds, for which warrants to purchase 255,000
shares at $1.50 per share should have been delivered. According to Company
records, all such warrants should have been exercisable for a period of two
years from their date of issuance; therefore, the warrants owed to investors
from 2001 expired without being delivered to the investors. In order to fulfill
the terms of their investment, in January 2004 the Company offered new warrants
to each of the investors whose funds were received in 2001 and during the first
six months of 2002 in order to permanently replace those that were never issued.
Terms of the new warrants allowed the investors to purchase one share of Series
A Preferred Stock for $2.50 per share for every $10 originally invested in the
Company. The Preferred Stock will pay a 7% annual dividend, on a quarterly
basis, in the form of Company common stock. The Preferred Stock is convertible
into common shares of the Company on a 1 for 10 basis at any date through June
30, 2005. On that date, all outstanding Preferred Stock will convert to common
stock on a 1 for 10 basis. The new warrants to purchase Preferred Stock were to
be exercised on or before April 30, 2004. A total of 5,000 shares of Series A
Preferred Stock were purchased through the exercise of the warrants. Preferred
stock dividends of $420 were accrued in the form of 2,193 shares of common
stock of the Company.

During the second quarter of 2003, the Company canceled 300,000 shares of common
stock previously issued to a consultant during 2002. A $39,000 reduction in
consulting expense was recorded during the second quarter of 2003 related to
this cancellation, as the Board of Directors determined that the shares had not
been properly authorized for issuance, and that there was a lack of sufficient
evidence that any services had been performed.

5. Discontinued operations:

Effective July 31, 2003, the Company sold the remaining assets and liabilities
of its paging airtime business segment. The financial results of this paging
business segment are presented as discontinued operations in the accompanying
financial statements.

6. Legal matters

In May 2003, the Company was sued by a former Board member seeking recovery for
the value of 350,000 shares, or $209,500, and $120,000 due his firm under a
retainer agreement between the Company and his firm. The former Board member
had previously signed a settlement agreement with the Company in which he agreed
to cancel all potential claims against the Company and its directors in return
for 150,000 unregistered shares trading at a value of $0.60 or higher. In
October 2004 we reached an agreement with the former board member to settle
the case. Under the Settlement Agreement and Release, we made a cash
payment to the former director of $10,000 during October 2004, and are scheduled
to make cash payments of $20,000 in January 2005 and $25,000 in October 2005.

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

7. Convertible debt and investment agreement

In August 2004, the Company signed a financing arrangement with Dutchess Private
Equities, II, L.P. ("Dutchess") which was amended on August 26, 2004 and on
September 24, 2004. Under the terms of the amended arrangement, the Company
received $100,000 under a convertible debenture on August 11, 2004, $25,000 on
August 26, 2004, and $125,000 under the debenture on September 27, 2004.
Interest accrues on the debenture at an annual rate of 8%. As of September 30,
2004, the debenture was convertible into common shares anytime prior to its
maturity on August 10, 2007 at the lesser of (i) 75% of the lowest closing bid
price on the date of conversion, or (ii) twelve and a half cents ($0.125).
Any portion of the debenture that remains outstanding at August 10, 2007 will
automatically convert into common shares. The number of shares converted at any
time is limited so as not to exceed 4.99% of the outstanding shares of Nighthawk
common stock outstanding. In addition, Dutchess was issued a warrant to purchase
up to 250,000 shares of common stock at a price of twelve and a half cents
($0.125) for a period of up to five years. The Company has recognized a debt
discount of $18,750 which represents the fair value of the warrant on its date
of issuance, and has recorded a beneficial conversion feature of $83,333 based
on the debenture's terms for conversion as of September 30, 2004. The Company
also issued a placement agent fee $12,500 in cash and 100,000 shares of common
stock, valued at $12,500, for the issuance of the debenture. The Company also
incurred fees of $7,500 related to the issuance of the debenture. All fees
associated with the issuance of the debenture have been capitalized and will be
amortized over the period the debenture is outstanding. On October 10, 2004,
the conversion rate of the debenture was lowered to 73% subject to a penalty
clause in the Company's agreement with Dutchess. The Company recorded an
additional beneficial conversion feature of $9,132 related to this change
subsequent to September 30, 2004.

The Company also signed an investment agreement with Dutchess on August 10,
2004 under which Dutchess agreed to purchase up to $10.0 million in
common stock from the Company, at the Company's discretion, over the next
three years, subject to certain limitations including the Company's then
current trading volume. The Company issued 2.0 million shares to the placement
agent involved in this transaction with Dutchess and incurred an additional
$7,500 in costs related to the issuance of the investment agreement. The
Company has recorded the fees and costs related to the investment agreement as
an offset to additional paid-in capital in the accompanying financial
statements. The Company also signed a consulting agreement with a company in
which an employee of Dutchess is a member of management. Under the agreement,
the company was issued 500,000 shares of Company common stock.