embedded derivatives be determined by an independent study, which was

commissioned by the Company and provided to the prior auditors at various stages

of completion with the final completion on September 11, 2006. On September 12,

2006, the Company`s prior auditors informed the Company that a different

methodology than that applied in the independent study should be used to value

the embedded derivatives.

At each stage, the prior auditors had the opportunity to comment on the methodolgy, as did the current auditors.

Material or not?

The Company has also determined

that the adjustments required as a result of our reassessments are material to

certain of our previously issued financial statements and, therefore, will

require us to restate our financial statements for the year ended May 31, 2005,

and restate our quarterly reports for the quarters ended August 31, 2005,

November 30, 2005 and February 28, 2006.

vs

The decision by the Company to account for its interest in Phoenix Digital

Solutions, LLC in accordance with the equity method of accounting for

investments and its decision to bifurcate the embedded derivatives in its

previously outstanding convertible debentures will not have a material effect on

the Company`s financial condition.

Be well