UNITED
                STATES
              SECURITIES
                AND EXCHANGE COMMISSION
              Washington,
                D.C. 20549
              
              FORM
                10-KSB/A
              
              (Mark
                One)x
                ANNUAL REPORT
                PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
                OF
                1934
              
              For
                the Fiscal Year Ended December 31, 2005
              
              o
                TRANSITION REPORT
                PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              
              Commission
                File Number 000-12382
              
              VERIDICOM
                INTERNATIONAL, INC.
              (Name
                of small business issuer in its charter)Delaware
              (State
                or other jurisdiction of incorporation or organization)
              Suite
                500, 21 Water Street
              Vancouver,
                British Columbia
              (Address
                of principal executive offices)
            95-2577731
              (I.R.S.
                Employer Identification Number)
              98104-4023
              (Zip
                Code)(604)
                696-0633
              (Issuer's
                telephone number)
              
              Securities
                registered under Section 12(b) of the Exchange Act:None
              Securities
                registered under Section 12(g) of the Exchange Act:Common
                Stock,$.001
                Par Value
              
              Check
                whether the issuer (1) filed all reports required to be filed by
                Section
                13 or 15(d) of the Exchange Act during the past 12 months (or for
                such
                shorter period that the registrant was required to file such reports),
                and
                (2) has been subject to such filing requirements for the past 90
                days. Yes
                oNo x
              
              Check
                if there is no disclosure of delinquent filers in response to Item
                405 of
                Regulation S-B is not contained in this form, and no disclosure will
                be
                contained, to the best of the registrant's knowledge, in definitive
                proxy
                or information statements incorporated by reference in Part III of
                this
                Form 10-KSB or any amendment to this Form 10-KSB. Yes o No x
              
              Issuer's
                revenues for its most recent fiscal year:$392,734
              
              The
                aggregate market value of 50,414,611 shares of the voting and non-voting
                common equity held by non-affiliates computed as of September 18,
                2006
                based on the average high and low price of $0.02 per share was
                $1,008,292.22.
              
              Number
                of shares outstanding of each of the issuer's classes of common stock
                atSeptember
                18, 2006:
              
              Common
                Stock:54,524,718
              
              Documents
                incorporated by reference: None
              
              Transitional
                Small Business Disclosure Format (check one) Yes oNo
x










PAGEFORM
                  10-KSB INDEXPART
                  I
              
              
              
              
              
              4ITEM
                  1
              
              
              DESCRIPTION
                  OF BUSINESS
              
              
              4ITEM
                  2
              
              
              DESCRIPTION
                  OF PROPERTIES
              
              
              14ITEM
                  3
              
              
              LEGAL
                  PROCEEDINGS
              
              
              15ITEM
                  4
              
              
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              
              16PART
                  II
              
              
              
              
              
              17ITEM
                  5
              
              
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              
              
              17ITEM
                  6
              
              
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              
              
              18ITEM
                  7
              
              
              FINANCIAL
                  STATEMENTS
              
              
              40ITEM
                  8
              
              
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURES
              
              
              40ITEM
                  8A
              
              
              CONTROLS
                  AND PROCEDURES
              
              
              40ITEM
                  8B
              
              
              OTHER
                  INFORMATION
              
              
              42PART
                  III
              
              
              
              
              
              43ITEM
                  9
              
              
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION
                  16 (A) OF THE EXCHANGE ACT
              
              
              43ITEM
                  10
              
              
              EXECUTIVE
                  COMPENSATION
              
              
              45ITEM
                  11
              
              
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              
              
              47ITEM
                  12
              
              
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              
              
              49ITEM
                  13
              
              
              EXHIBITS
              
              
              50ITEM
                  14
              
              
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              
              
              50SIGNATURES
              
              
              51POWER
                  OF ATTORNEY





-2-




Special
      Note Regarding Forward Looking Statements




This
      report contains certain forward-looking statements within the meaning of the
      Private Securities Litigation Reform Act of 1995, including the plans and
      objectives of management for the business, operations, and economic performance
      of Veridicom International, Inc. (the "Company" "we" and "us"). These
      forward-looking statements generally can be identified by the context of the
      statements or the use of words such as the Company or its management "believes,"
      "anticipates," "intends," "expects," "plans" or words of similar meaning.
      Similarly, statements that describe the Company's future operating performance,
      financial results, plans, objectives, strategies, or goals are forward-looking
      statements. Although management believes that the assumptions underlying the
      forward-looking statements are reasonable, these assumptions and the
      forward-looking statements are subject to various factors, risks and
      uncertainties, many of which are beyond the control of the Company. Accordingly,
      actual results could differ materially from those contemplated by the
      forward-looking statements.





The
      risks
      and uncertainties are detailed from time to time in reports filed by us with
      the
      Securities and Exchange Commission, including Forms 8-K, 10-QSB, and 10-KSB,
      and
      include, among others, the following: our ability to obtain additional capital
      to fund operations; our ability to respond to price fluctuations and volatility
      in the stock market in general and the market for technology stocks in
      particular; our ability improve profitability and to generate additional sources
      of revenue; compliance with recent legislation, including the Sarbanes-Oxley
      Act
      of 2002; our ability to respond to competitive pressures; international,
      national and local general economic, political and market conditions; our
      ability to respond to changes in technological developments in the biometrics
      industry; our ability to successfully market new products in the marketplace;
      our ability to protect our reputation by delivering quality products; our
      ability to manage inventory levels and to protect against manufacturing errors,
      delays or shortages; our ability to protect and secure our intellectual
      property; our ability to retain and attract key personnel; our ability to
      increase brand awareness; proper management of sales and implementation cycles;
      development of marketing distribution channels; and other factors referenced
      or
      incorporated by reference in this report and other reports.





The
      risks
      included here are not exhaustive. Other sections of this report may include
      additional factors, which could adversely impact our business and financial
      performance. Moreover, we operate in a very competitive and rapidly changing
      environment. New risk factors emerge from time to time and we cannot predict
      all
      such risk factors, nor can we assess the impact of all such risk factors on
      our
      business or the extent to which any factor, or combination of factors, may
      cause
      actual results to differ materially from those contained in any forward looking
      statements. Given these risks and uncertainties, investors should not place
      undue reliance on forward-looking statements as a prediction of actual results.
      Investors should also be aware that while we do, from time to time, communicate
      with securities analysts, we do not disclose any material non-public information
      or other confidential commercial information to them. Accordingly, individuals
      should not assume that we agree with any statement or report issued by any
      analyst, regardless of the content of the report. Thus, to the extent that
      reports issued by securities analysts contain any projections, forecasts or
      opinions, such reports are not our responsibility.




-3-




PART
      I




ITEM
      1.
      DESCRIPTION OF BUSINESS




Overview





Veridicom
      International, Inc., a Delaware corporation (hereinafter sometimes referred
      to
      as the "Company," "we," and "us"), was incorporated on September 9, 1987, under
      the name Perceptronics, Inc. From our inception through fiscal 2000, we were
      engaged in the design, development and manufacture of computer-based simulation
      systems for training and decision support. These systems included both hardware
      and software and are used to train personnel in the use of various military
      and
      commercial equipment. Much of our simulator business was in the foreign defense
      industry. The tightening of defense budgets worldwide, combined with the
      continuing consolidation and competition in the defense industry, negatively
      impacted the growth and profit opportunities for small companies such as ours.
      As a result, in July 2000, we refocused our business. In connection with the
      refocus, we sold the assets related to our computer based simulation system
      line
      of business to a developer and manufacturer of specialized defense simulation
      products. We then commenced development of commercial products in the area
      of
      Internet collaboration.





However,
      we lacked the funds necessary to exploit our developed products. As a result,
      in
      October 2002, we entered into a license agreement with our then principal
      stockholder, Global Alpha Corporation ("GAC") pursuant to which GAC was granted
      an exclusive license to our software and systems commonly referred to as the
      "IC3D Framework" (the "System"). The System encompassed substantially all of
      our
      software including software developed to support multi-user online collaborative
      interactivity in a broad variety of applications employing a variety of virtual
      media over a number of networks including the Internet and intra-nets.





In
      October 2002, in connection with the license agreement, we terminated
      substantially all of our employees. Except for our license agreement, we ceased
      all of our prior operating activities. Our principal activities became directed
      to reducing our liabilities and seeking possible acquisitions. Management's
      objective was to acquire an operating company with experienced management and
      the potential for profitable growth, in exchange for our
      securities.





On
      April
      28, 2003, we entered into an Agreement and Plan of Merger with EssTec, Inc.,
      a
      privately-held Nevada corporation ("EssTec"). In accordance with the merger,
      on
      May 8, 2003, we, through our wholly-owned subsidiary, Alpha Acquisition
      Corporation, a Nevada corporation, acquired EssTec in exchange for 4,276,162
      shares of our common stock. The transaction contemplated by the agreement was
      intended to be a "tax-free" reorganization pursuant to the provisions of Section
      351 and 368(a)(1)(A) of the Internal Revenue Code of 1986, as
      amended.





On
      May 8,
      2003, in connection with the EssTec merger, we changed our fiscal year end
      from
      March 31 to December 31.





On
      November 25, 2003, we entered into an Agreement and Plan of Merger with
      Veridicom, Inc., a privately-held California corporation ("Veridicom"). In
      accordance with the merger, on November 25, 2003, we, through our wholly-owned
      subsidiary, A/V Acquisition Corporation, a Nevada corporation, acquired
      Veridicom in exchange for 3,500,000 shares of our common stock; 3,250,000 shares
      were issued to the holders of Veridicom stock and 250,000 shares were issued
      into escrow to cover indemnification obligations, if any, of Veridicom. The
      transaction contemplated by the agreement was intended to be a "tax-free"
      reorganization pursuant to the provisions of Section 351 and 368(a)(1)(A) of
      the
      Internal Revenue Code of 1986, as amended.




-4-





On
      January 16, 2004, we entered into an Agreement and Plan of Merger with Cavio
      Corporation, a privately-held Washington corporation ("Cavio"). The merger
      became effective on February 20, 2004 following a special meeting of Cavio's
      stockholders. In accordance with the merger, on February 20, 2004, we, through
      our wholly-owned subsidiary, A/VII Acquisition Corporation, a Nevada
      corporation, acquired Cavio in exchange for 5,119,140 shares of our common
      stock. The transaction contemplated by the agreement was intended to be a
      "tax-free" reorganization pursuant to the provisions of Section 351 and
      368(a)(1)(A) of the Internal Revenue Code of 1986, as amended.




Recent
      Events





We
      officially changed our name from Alpha Virtual, Inc. to Veridicom International,
      Inc. on February 23, 2004.





Following
      the name change, shares of our common stock are traded under the symbol "VRDI"
      on the OTC Bulletin Board (the "OTCBB").





On
      February 25, 2005, we completed the first of three rounds of a private placement
      whereby we issued an aggregate of $5,100,000 worth of 10% callable secured
      notes
      convertible into shares of common stock, and warrants to purchase up to an
      aggregate of 10,200,000 shares of our common stock to certain accredited
      investors. The first two installments of $1,700,000 were received in February
      and April 2005 and the final installment of $1,700,000 was received in August
      2005.





On
      March
      8, 2005, we announced that MCP Asia Ltd, an investment and consulting firm
      from
      Hong Kong, together with Fook Vo Holding Ltd ("Fook Vo") based in Macau, are
      in
      discussions to provide the Company with marketing and sales services in the
      Hong
      Kong, Macau and China regions.





From
      March 10 to March 16, 2005, we exhibited at CeBIT 2005 at the Hannover
      Fairgrounds in Hannover, Germany. CeBIT offers a forum for business-to-business,
      “B2B”, solutions.





On
      March
      14, 2005 we announced the appointment of two new European representatives to
      expand our growing presence in the European marketplace. Mr. Theo Musallam
      is
      based in Zurich and will be representing us in Switzerland and Mr. Guenther
      Klix
      is based in Munich and will be representing us in Germany.





On
      April
      25, 2005 we announced the launch of VKI-V, an identity device for personal
      authentication and secure transactions for enterprise and
      consumers.





On
      May 2,
      2005, we announced the selection of an Atmel Corporation processor for inclusion
      in our portable biometric identity product line.





On
      May 9,
      2005, we announced the receipt of an initial sales order from Fook Vo Holdings
      Ltd. of Macau.





On
      June
      2, 2005 we announced the presenting of the Company’s roadmap for strong
      authentication, data security and identity management to a select group of
      government and business leaders at the Beijing International Convention
      Center.





On
      June
      27, 2005 we announced a strategic marketing and development agreement with
      Leviton Manufacturing Corporation, a major provider of home automation
      equipment.





On
      July
      25, 2005 we issued a performance update to our shareholders.




-5-





On
      September 21, 2005, we announce our participation and presentation of our range
      of biometric products and solutions at the Gitex-IT exhibition held at the
      Dubai
      International Convention and Exhibition Centre.





On
      October 12, 2005, we announced our participation and presentation of our
      portfolio of our identity management products and solutions at Biometrics 2005
      trade show held at the queen Elizabeth II Conference Centre in London,
      UK.





On
      October 13, 2005 we announced the latest release of VPAS, our comprehensive
      suite of authentication software, with added features.





On
      January 4, 2006 we announced a purchase order valued at approximately
      $260,000 US from Corum Marketing Inc.





On
      February 16, 2006 we announced the signing of a strategic reseller agreement
      with PC Mall Corporation.





On
      March
      28, 2006, the Company extended a special warrant offer (the “Special Warrant
      Offer”) to all holders of the Company’s Series A and Series B Warrants issued on
      February 25, 2005, April 29, 2005 and August 16, 2005 expiring five years after
      such dates (the “Original Warrants”). As part of the Special Warrant Offer, the
      exercise price of the Original Warrants was reduced from the exercise price
      $0.04 per share (the “Reduced Exercise Price”).





The
      Company and the holders consummated the Special Warrant Offer in reliance upon
      the exemption from securities registration afforded by the rules and regulations
      as promulgated by the United States Securities and Exchange Commission under
      Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”),
      and pursuant to Regulation D promulgated thereunder. Based in material part
      upon
      the representations of the holder in the Form of Election to Purchase, the
      Company has complied and will comply with all applicable federal and state
      securities laws in connection with the offer, issuance and sale of the
      securities pursuant to the Special Warrant Offer.





Neither
      the Company nor anyone acting on its behalf, directly or indirectly, has or
      will
      sell, offer to sell or solicit offers to buy any of the securities or similar
      securities to, or solicit offers with respect thereto from, or enter into any
      negotiations relating thereto with, any person, or has taken or will take any
      action so as to bring the issuance and sale of any of the securities under
      the
      registration provisions of the Securities Act and applicable state securities
      laws, and neither the Company nor any of its affiliates, nor any person acting
      on its or their behalf, has engaged in any form of general solicitation or
      general advertising (within the meaning of Regulation D under the Securities
      Act) in connection with the offer or sale of any of the securities.





The
      Special Warrant Offer commenced on 11 a.m. Eastern Time on March 30, 2006 and
      expired at 5:00 p.m. Eastern Time on April 10, 2006. Thereafter, all the
      Original Warrants that were not exercised pursuant to the Special Warrant Offer
      continue to retain all of their previous rights and remain in full force and
      effect.





A
      total
      of 8,400,000 Series A and Series B Warrants for gross proceeds of $336,000
      were
      exercised by certain holders for cash, which also resulted in reinstatement
      of
      6,046,096 shares of the Company’s common stock previously issued to such holders
      and the reinstatement of the principal amounts of $184,133 of the Callable
      Secured Convertible Notes.




-6-




Description
      of the Company Post-Merger





General





Following
      the merger with Cavio, we realigned our business strategy to leverage the core
      operations of each of our subsidiaries. We have five operational subsidiaries:
      EssTec, Esstec Pakistan, Veridicom Inc., Cavio, and Veridicom
      Canada.





Since
      March 1, 2004, we have undertaken a comprehensive review of all pre-merger
      operations. This on-going review has included all facets of operations,
      including the supply chain, product development, previous sales and marketing
      agreements, internal controls and reporting systems. Based on this review,
      we
      have decided that a thorough reorganization of all of the companies is
      warranted, including a re-evaluation of the supply chain, method of manufacture,
      product strategy and other organizational procedures. Although distracting
      in
      the short-term, we believe that this review is in the long-term best interests
      of the Company and our stockholders. As part of the reorganization, we closed
      our Sunnyvale, California offices on April 15, 2004 in favor of a more cost
      effective and efficient development environment in the Pacific
      Northwest.





Our
      core
      strategy is to build a comprehensive authentication suite of products and
      services, with market-specific applications that leverage the core identity
      management infrastructure. We believe there is a significant need for an
      auditable, scalable product solution capable of linking an individual to a
      specific electronic event or transaction -- a strong authentication solution
      that safeguards legitimate interests and adheres to emerging electronic commerce
      legislation. Our identity management solutions employ public key infrastructure
      and a "virtual token" based technology to control, audit and monitor the
      identification processes for electronic events and transactions.





We
      will
      focus on transforming the market for biometrics and growing the market beyond
      traditional security applications. In particular, the strategy will be to expand
      the traditional security offerings to include security and convenience value
      propositions for commercial or point-of-sale transactions. By developing
      customizable applications as well as authentication technology, we are
      endeavoring that our brand become synonymous with secure, authenticated
      transactions.





We
      offer
      a solution that we believe not only addresses an organization's current
      requirements for stronger and more scalable authentication and authorization,
      but also addresses a future vision for security, via a combination of
      centralized and distributed identity repositories and administration tools.
      Utilizing biometric technology, we provide organizations with an authentication
      solution that also provides users with increased convenience by reducing the
      reliance on passwords.





We
      have a
      management team with combined experience in sales and marketing, vertical market
      knowledge, technology development, and hardware integrated circuit design.
      In
      addition, we will have access to a network of advisors and consultants with
      significant expertise in technology, government, security, and financial
      services. These advisors will be invited to form a more formal advisory board
      to
      provide strategic direction for products and services, and, they may be
      leveraged to provide targeted business development contacts in key target
      markets.





There
      are
      several factors that management believes will provide new opportunities or
      present new challenges for us. We believe that regulatory, technological, and
      cultural changes will create new opportunities. International distribution
      arrangements are currently in place, while new channels are being
      developed.





Product
      and Services Overview





We
      provide a suite of identity management products, including hardware and software
      that utilize public key infrastructure (PKI), secure token-based technology,
      and
      fingerprint biometrics to authenticate and manage personal identities for a
      wide
      variety of applications and transactions. This platform provides a biometrically
      authenticated digital signature for financial, travel, and other applications.
      Veridicom’s patented authentication and transaction technology enables real-time
      authentication of individuals anytime, anywhere, via the Internet,
      point-of-sale, security kiosk, and mobile devices.




-7-





Identity
      Management Infrastructure





Our
      core
      strategy is to build a comprehensive authentication suite of products and
      services, with market-specific applications that leverage the core identity
      management infrastructure.





We
      believe that there is a significant need for an auditable and scalable product
      solution capable of linking an individual to a specific electronic event or
      transaction -- a strong authentication solution that safeguards legitimate
      business interests. Our identity management solutions employ public key
      infrastructure and a "virtual token" based technology to control, audit and
      monitor the identification processes for electronic events. We believe this
      provides organizations with several benefits:


·
            Deployments
                of biometric technology provide strong authentication and validation
                of a
                user's identity eliminating the sole reliance on the vulnerable
                password/PIN infrastructure; 
 ·
            Enterprise
                middleware systems can move authenticated events securely in real-time
                over the Internet through a "trusted
                path"; 
 ·
            Creates
                a non-reputable and legally recognized "card-present" scenario for
                events
                conducted for previously anonymous Internet credit card
                transactions; 
 ·
            Allows
                for the audit and assignment of a digital signature to any electronic
                event proving without question the time and origin of an event and
                actual
                event occurrence;




We
      believe that our product portfolio allows organizations to leverage investments
      in existing IT infrastructure.





We
      have
      an extensive portfolio of products and services that are currently available
      to
      customers, or that are available subject to customization and specific
      requirements definition. However, we realize the need to continue an aggressive
      product development strategy to meet the needs of the marketplace and advance
      the adoption of biometrics. Management believes that in general the industry
      faces continuous pressures to reduce the cost of devices and solutions in order
      to provide a greater ROI to organizations. As such, we endeavor to deliver
      additional products that provide a high degree of application flexibility to
      the
      end user. It is expected that we will build our products to meet the needs
      of
      both current and future state-of-the-art technology and will incorporate third
      party technology solutions where needed.





-8-




The
      following table outlines our current and short-term product
      portfolio:





PRODUCT
            
            DESCRIPTIONFPS200
            
            Solid
                state silicon fingerprint sensor, 256 x 300 arrayVKI
            
            Portable
                identity device with USB connectivity, on board fingerprint sensor,
                flash
                memory, and security softwareVKI
                A
            
            Provides
                access to VPAS software suite and on board flash memory. Software
                and
                drivers required to be installed on the PC.VKI
                V
            
            No
                drivers or software to install on the PC to lock/unlock the device.
                Fingerprint matching and storage of biometric performed within the
                device.
                The fingerprint sensor on the device can also be used with the VPAS
                suite
                of software to enable PC login, file encryption, and secure password
                storage with Veridicom's Ewallet application.MiddlewareCavio
                3.0 Identity Server
            
            Robust
                Enterprise level authentication server for Windows, Linux
                platformsVAS
                Hosted Service
            
            Hosted
                authentication service from our data centerSDK
            
            SDK's
                available for customer customization and OEMsApplicationsDigital
                Signature
            
            Biometric
                signature attached to transactions or events. This provides significantly
                more secure signing capabilities than current PIN-based
                certificatesVPAS
            
            Veridicom
                Personal Authentication Suite. This application is a bundled solution
                that
                allows PC ornetwork
                logon, and secure logon to web site or web applications




Intellectual
      Property





With
      a
      pedigree born out of Lucent Technologies and Bell Labs, we have several
      international patents for our technology, as well as several pending patent
      applications.





U.S.
      Patents Issued


U.S.
                  Patent No.
              
              Title5,991,408
              
              Identification
                  and Security Using Biometric Measurements6,016,355
              
              Capacitive
                  Fingerprint Acquisition Sensor6,049,620
              
              Capacitive
                  Fingerprint Sensor With Adjustable Gain6,330,345
              
              Automatic
                  Adjustment Processing For Sensor Devices6,331,452
              
              Method
                  of Fabricating Integrated Circuit Package with Opening Allowing
                  Access to Die6,546,122
              
              Method
                  For Combining Fingerprint Templates Representing Various Sensed
                  Areas of a Fingerprint to Derive One Fingerprint Template
                  Representing The Fingerprint6,538,456
              
              Capacitive
                  Fingerprint Sensor with Adjustable Gain6,535,622
              
              Method
                  for Imaging Fingerprints and Concealing Latent Fingerprints6,538,456
              
              Capacitive
                  Fingerprint Sensor with Adjustable Gain




-9-




Patent
      Applications


U.S.
                  Patent
                App.
                  Serial
              
              Title10/089,987
              
              Spoof
                  Detection for Biometric Sensing Systems10/288,554
              
              Method
                  & System for Capturing Fingerprints from Multiple
                  Swipe




Market
      Overview





Industry
      Overview





We
      believe that in the wake of the tragic events of September 11 and the heightened
      security risks posed by the prospect of random acts of terrorism, biometrics
      and
      the field of identity management are at the forefront of technological
      development. However, we believe that the tendency to-date has been for vendors
      to develop proprietary software and hardware that focuses on one segment of
      the
      identity verification and management equation. Because of their proprietary
      nature, many biometric technology products are inconsistent, impractical or
      incompatible with not only the existing `real world' needs and systems, but
      also
      other biometric products.





Fingerprint
      recognition technology continues to dominate the market for biometric
      authentication, and management believes that this will continue for the
      foreseeable future due to its combination of accuracy, ease of use, and cost
      effectiveness.





We
      believe that there are several increasingly important trends positively
      affecting the need for biometric technology:


·
            the
                need to protect increasing amounts of sensitive and private information.
                Increased digitization of travel, medical, financial and security
                information requires stronger, less fallible modes of user
                authentication; 
 ·
            the
                increased amount of information has resulted in increased access
                requirements for corporate and personal uses. Physical and logical
                access
                requirements demands a more streamlined approach to identity
                management; 
 ·
            increased
                travel security requirements demand leading edge identification technology
                to improve security while streamlining the travel process;
                and 
 ·
            information
                access requirements have increased the proliferation of passwords.
                Unfortunately, as password requirements increase, the cost of managing
                passwords becomes prohibitive.




Given
      the
      trends described above, we believe that other companies will offer a variety
      of
      services or products that incorporate biometrics and may compete with our
      technology.





-10-




Competitive
      Overview





As
      the
      opportunities for strong authentication solutions increases, so will the
      competition. With further brand recognition, patent portfolio, and technology
      solutions, we believe that we are reasonably well protected against increased
      competition. Furthermore, we believe that increased competition indirectly
      validates the business model and market potential for our solutions. The
      following companies have been identified as potential competitors due to their
      biometric focus and product mix: Identix, Bioscrypt, SAGEM, UPEK, Atrua and
      Authentec.





In
      addition to the above-mentioned entities, it is conceivable that we could face
      future indirect competition and market encroachment from companies such as
      VeriSign International and RSA, which currently offer alternative security
      and
      digital identity solutions not based on biometrics. However, these organizations
      could also present interesting partnering opportunities via bundled service
      offerings.





Market
      Influences





There
      are
      several factors that the Company believes will provide new opportunities or
      present new challenges for us. We believe that the primary market influences
      relate to regulatory, technological and cultural changes.





Regulatory
      Changes





Regulatory
      issues will continue to change the landscape for our technology. We believe
      that
      many of these legislative changes will present significant opportunities, such
      as:


·
            HIPA
                - Health Insurance Portability and Accountability Act governs the
                privacy
                of health information, and securing access to that information. We
                believe
                that biometrics is well suited to this
                task. 
 ·
            US-VISIT
                - The US Government is mandating that all visitors to the US be
                fingerprinted and have a digital photo taken. The US Government will
                soon
                require a biometric template (fingerprint) and digital photo in
                passports. 
 ·
            Department
                of Defense - The US and other defense agencies are increasing security
                requirements at facilities and increasing security surrounding information
                assets. We believe that biometrics is well suited to meeting this
                challenge. 
 ·
            National
                ID cards - Canada, UK, US, Italy, Australia, Bosnia, and other nations
                are
                evaluating national ID card programs. Many of these nations are also
                considering adding biometrics, and fingerprints in particular, as
                components of that ID card program. 
 ·
            Electronic
                Voting - Many municipal, regional, and national governments are
                contemplating and/or implementing electronic voting systems to avoid
                the
                voting debacle that plagued the 2000 US presidential election. As
                such,
                there is a strong need to authenticate voters for onsite and remote
                electronic voting.




-11-




Technological
      Changes





The
      biometrics industry is rapidly changing and we aim to remain at the leading
      edge
      of technology. In addition, we will focus on inventing, developing, and
      commercializing those technologies that we believe offer additional value to
      our
      customers.





Cultural
      Changes





Biometrics
      is still a new technology to the majority of consumers and employees around
      the
      world. However, we believe that recent mandates by the U.S. government requiring
      biometrics in passports and other security initiatives are facilitating public
      acceptance and rollout of biometrics. In addition, as information security
      becomes increasingly important to an organization's risk management policies,
      we
      believe that biometrics is getting increased attention for implementation at
      workplaces. As workplace enrolment increases, we believe that personal use
      of
      biometrics will increase accordingly. In addition, our suite of applications
      is
      targeted to drive more rapid adoption rate of biometric-based
      solutions.





Market
      Segments





Financial
      Services





The
      financial services industry has been slow to adopt biometrics as a core service
      offering. We believe that this is due to a number of factors, including cost,
      customer demand, risk vs. return of implementation, and availability of
      applications. We aim to change this scenario by offering financial services
      firms a variety of solutions aimed at increasing security; increasing
      convenience and offering a variety of authentication applications suitable
      for a
      broad organizational rollout.





We
      will
      initially target those financial institutions that have the scale and market
      influence to push biometrics to their markets, as well as those institutions
      that are known for differentiating their service offering by providing leading
      edge technology and services. The strategy will be to concurrently encourage
      use
      of biometrics by other industries, encouraging the financial institutions to
      take notice.





Travel
      & Transportation





Travel
      providers are looking for new ways to generate revenue and increase both safety
      and the convenience aspects of travel for their passengers. We plant to propose
      our solution as a business opportunity, not just a security solution. It is
      expected that travelers will be charged user and/or transaction fees by the
      travel provider in exchange for additional benefits gained by using the system.
      Target customers within this market segment include travel agents, travel
      reservations, airlines, airports, hotels, and other travel service
      providers.





We,
      currently have an agreement with Uniglobe, which is part of an international
      travel service provider, to pilot its technology for the purposes of confirming
      individual client itineraries and to approve the processing of travel service
      purchases with client customized payment instructions. Following the successful
      rollout, it is planned that this model will be expanded to include other
      industry travel partners such as airlines, hotels, etc.





Public
      Sector





We
      believe that there are many opportunities in the public sector, including
      eGovernment, health care, and education. We believe that the authentication
      product suite has far reaching implications for members of this unique but
      broad-based environment.




-12-





Specifically,
      we believe that our products are ideally suited to mimic traditional dynamic
      environments, for example, in the fields of electronic education, and industry
      accreditization. The authentication suite overcomes previously unaddressed
      variables including geographic diversity, can handle multiple users interacting
      in real-time and can control varying levels of clearance and access to allow
      for
      the appropriate flow of information.





While
      we
      recognize that government opportunities offer potential for future sales, we
      also recognize that they generally yield a longer sales cycle to close. To
      that
      end, we are focusing on establishing strategic relationships and partnerships
      with a variety of public sector organizations and allied complementary markets
      to further our efforts within this market.





Retail





We
      intend
      to actively pursue partnerships with leading retail organizations for product
      distribution purposes. It is expected that selected retailers will have the
      ability to sell components of the Authentication Service bundle and accordingly
      to share in revenues generated from the product/service sale. It is expected
      that additional transaction related fees will generally not be shared with
      partners as support and ongoing customer relationships will be managed by
      us.





The
      strategy in pursuing the retail market is twofold: First, we believe that
      customers will be attracted to the VPAS product as a means of improving security
      and convenience for PC and web logon. As their comfort with the technology
      increases, we believe that these users will gravitate towards using other
      services within the Veridicom Authentication Service (digital signatures,
      authenticated payment, etc). Second, as more scanners get deployed into the
      market, we believe that other organizations could be inclined to adopt the
      Veridicom International solution to keep up with the demands of their
      customers.





Distribution





We
      will
      approach our markets via a combination of direct sales and partnerships with
      international systems integrators and resellers. Some distributors are already
      in place as they were inherited from our previous structure, and, as such,
      we
      are currently in the process of evaluating the performance and suitability
      of
      those partners as we move forward.





Direct
      Sales





We
      have a
      number of direct sales representatives in various regions around the world.
      These representatives will be responsible for both direct sales to strategic
      customers as well as supporting the network of channel partners and OEM
      relationships in various geographic regions.





Development
      and Distribution Partners





Distribution
      partners will be evaluated based on performance, strategic value, future
      potential and/or additional value-add. Software Development Kits will be
      available to enable integration partners, development partners, and OEM's to
      develop specific applications or other devices around our product
      family.





OEM
      Integration





We
      will
      also endeavor to integrate our sensors and authentication software with OEM's
      and computer manufacturers. In addition, we believe that further opportunities
      exist by integrating sensor chips with mobile devices such as PDA's and mobile
      phones.





-13-




Promotion





A
      variety
      of strategies will be employed to promote our product and service portfolio.
      These initiatives include:


·
            Bundling
                of our services; ·
            Bundling
                with third party applications and
                software; ·
            Joint
                partnerships with leading industry
                organizations; ·
            Trade
                shows; ·
            Leverage
                personal contacts and utilize network of key industry advisors;
                and ·
            Leverage
                network of investment brokers and their clients. Transition investor
                support to market support.





Research
      and Development





Research
      and development expenditure for fiscal 2005 was
      approximately $1,274,127 .
      Research and development expenditure are in respect of salaries for personnel
      in
      product development, including hardware and software enhancements.





Employees
      and Labor Relations





On December
      31, 2005 we had
      24 full-time employees, as well as 6 contract employee s on
      monthly retainers and/or commissions. Commencing March 1, 2006, the Company
      temporarily laid off its non-management Vancouver staff. On April 15, 2006,
      the
      Company had a total of 10 full-time and contract employees.





In
      2005,
      five former employees of Veridicom, Inc. filed claims against us with the Labor
      Commissioner in the State of California. The former employees allege that we
      owe
      unpaid wages, salaries and vacation pay for various periods between July 2000
      and November 2003, prior to our acquisition, amounting to a total of $122,099 .
      The
      Company has accrued for this liability in its financial statements as at December
      31, 2005 .





Legislative
      Actions and Potential New Accounting Pronouncements





In
      order
      to comply with the newly adopted Sarbanes-Oxley Act of 2002 and proposed
      accounting changes by the Securities and Exchange Commission, we may be required
      to increase our internal controls, hire additional personnel and additional
      outside legal, accounting and advisory services, all of which could cause our
      general and administrative costs to increase. Proposed changes in the accounting
      rules, including legislative and other proposals to account for employee stock
      options as compensation expense among others, could increase the expenses that
      we report under Generally Accepted Accounting Practices and could adversely
      affect our operating results.




ITEM
      2.
      DESCRIPTION OF PROPERTIES




Our
      executive offices are located in Canada at 21 Water Street, 5 th Floor,
      Vancouver, British Columbia. We lease approximately 8,200 square feet of office
      space located at this location under a three-year lease, which expires in
      February 2007.




We
      also
      maintain an office at
      3800-999 3rd
      Avenue, Seattle, Washington. We have an agreement for use of office space at
      this location under an annual rental agreement. Under the terms of the
      agreement, we have the option to increase or decrease office space utilization
      on a monthly basis.





We
      also
      maintain short-term tenancies for office space located in London (UK) and Lahore
      (Pakistan).





All
      of
      our facilities are in good repair.




-14-





We
      believe that our existing facilities will be adequate to meet our needs for
      the
      foreseeable future. Should we need additional space, management believes it
      will
      be able to secure additional space at commercially reasonable
      rates.




ITEM
      3.
      LEGAL PROCEEDINGS




In
      October 2002 the Company had licensed its OneView software to Global Alpha
      Corporation (“GAC”). In July 2003, the Company entered into a License Agreement
      (“the license”) with GAC for an exclusive license to commercialize a certain
      computer software system (“the System”) that is specified in the License
      Agreement (“the Agreement”). GAC alleges that the Agreement provides the Company
      (a) pay an annual license fee (b) agree to keep accurate account of its business
      and operations concerning the license and (c) the Company grant GAC the right
      (“the Put Right”) to sell the System to the Company and that the Company agrees
      to buy the System from GAC, on terms specified in the Agreement for the purchase
      price of $200,000. The Company has accrued the liability for the minimum annual
      license fees for the last two years to date amounting to $50,000 in its
      financial statements as at December 31, 2005.





The
      Plaintiff has asserted a claim for breach of contract and breach of fiduciary
      duty in the Superior Court of California, Los Angeles County, Western District
      (“the Court”), which arise out of the alleged breach of the July 2003 Agreement
      discussed above. The Plaintiff is seeking damages on its breach of contract
      claim, damages for the Company’s alleged breach of the license fee provision,
      damages for breach of fiduciary duty claim, as well as attorney’s fees and
      pre-judgment interest on all damages according to proof at trial. On December
      23, 2005, the Company filed a response to the complaint denying the material
      allegations and asserting numerous affirmative defenses. This matter is in
      the
      early stages of proceeding and the Court has set a trial setting conference
      for
      April, 2006 at which time the Court is expected to set a trial date. The Company
      intends to vigorously defend the matter and investigate the possibility of
      an
      out of court settlement.





Five
      former employees of Veridicom, Inc. have filed claims against us with the Labor
      Commissioner in the State of California. The former employees allege that we
      owe
      unpaid wages, salaries and vacation pay for various periods between July 2000
      and November 2003, prior to our acquisition, amounting to a total of $122,099 .
      The
      Company has accrued for this liability in its financial statements as at December
      31, 2005.





On
      March
      21, 2005 a former employee of Veridicom Inc. signed a letter of agreement to
      convert his claim of $ 61,054 into stock based on the closing price of the
      Company’s common stock on that day of $2.40 per share, or a total of 25,439
      shares.





On
      March
      28, 2003 the Company and one of the company's stockholders filed a lawsuit
      in
      Superior Court in the State of California against a former CEO of the Company.
      The lawsuit alleges a breach of fiduciary duty, negligence, fraud and breach
      of
      contract claiming the CEO did not devote his efforts to the Company's product
      development and market strategies or maximize the profit of the business. The
      lawsuit was settled with the former CEO agreeing to pay over $200,000 to the
      Company. This amount has not been recorded in the financial statements as the
      Company has not succeeded in collection of the same.





In
      addition, the Company is a party to a number of other lawsuits arising in the
      normal course of business. In the opinion of management, the resolution of
      these
      matters will not have a material adverse effect on the Company's operations,
      cash flows or financial position.




-15-




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




There
      were no matters submitted to a vote of our security holders during the fourth
      quarter ended December
      31, 2005 .




PART
      II




ITEM
      5.
      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS




Market
      for Common Stock; Related Information





Our
      common stock is traded on the OTCBB under the symbol "VRDI". Prior to February
      23, 2004, our common stock traded under the symbol "AVRT". The following table
      sets forth the high and low bid prices for our common stock as reported by
      the
      National Daily Quotation Service and the Over-The-Counter Bulletin Board.
      Quotations reflect inter-dealer prices, without retail mark-up, markdown or
      commission and may not represent actual transactions:





High
            
            Low2004January
                1 - March 31
            
            $
            8.00
            
            $
            4.00April
                1 - June 30
            
            
            5.70
            
            
            3.45July
                1 - September 30
            
            
            5.50
            
            
            1.50October
                1 - December 31
            
            
            4.05
            
            
            2.302005January
                1 - March 31
            
            $
            2.95
            
            $
            1.31April
                1 - June 30
            
            
            2.90
            
            
            1.25July
                1 - September 30
            
            
            1.40
            
            
            0.65October
                1 - December 31
            
            
            0.67
            
            
            0.02




For
      information concerning historical dividends and our dividend policy, see "Item
      6--Management's Discussion and Analysis or Plan of Operation--Dividends and
      Distributions."





In
      connection with the EssTec, Veridicom and Cavio merger transactions described
      in
      Item 1 above, we issued a total of 12,895,302 shares
      of
      our common stock.





During
      the year ended December
      31, 2005 ,
      we
      issued an aggregate of 10,465,875 shares
      of our common stock.





The
      shares were offered and sold in reliance upon exemptions from registration
      pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
      Rule
      506 promulgated thereunder. Each of the investors qualified as an accredited
      investor (as defined by Rule 501 under the Securities Act of 1933, as
      amended).





Subsequent
      to the year end, the Company issued 9,049,417 shares
      of common stock and in accordance with the private placement completed on
      February 1, 2006 has also committed to issue 10,000,000 shares
      of common stock and a total of 22,500,000 warrants
      to purchase the Company’s common stock.





During
      the period ended March 31 2005, a total of 61,000 shares
      of common stock were issued for $100,650 in cash,
      less offering costs of $5,000 .





-16-




During
      the period ended June 30 2005, a total of 50,000 shares
      of common stock, having a fair value of $140,000 were
      issued for payment of legal services rendered.





In
      July
      2005, the Company issued 11,370 shares
      of common stock as compensation for converting $14,438 of interest owed to
      note
      holders of a private placement.





During
      November and December 2005, the Company issued 10,167,039 shares
      of common stock for converting $317,170 of the
      principal amounts of the Callable Secured Convertible Notes.





In
      December 2005, the Company issued 176,466 shares
      of common stock for repayments of certain loans and debts amounting to $380,484 owed by
      the Company and some of its subsidiaries.





In
      January 2006 the Company issued 6,549,417 shares
      of common stock for converting $239,818 of the principal amounts of the Callable
      Secured Convertible Notes.





Also,
      in
      January 2006, a total of 2,500,000 shares
      of common stock, having a fair value of $243,750 were
      issued pursuant to a compensation agreement for legal services to be performed
      on behalf of the Company.





Following
      the signing of an Omnibus Waiver and Consent by the majority of the Callable
      Secured Convertible Note Holders in January 2006, on February 1, 2006, the
      Company completed a private placement offering of 10,000,000 units to
      accredited investors for an aggregate purchase price of $400,000 .
      Each
      unit consisted of one share of the Company’s common stock, and one warrant to
      purchase one share of the Company’s common stock. The aforementioned units were
      sold in reliance upon the exemption afforded by the provisions of Regulation
      S
      under the Securities Act.




With
      respect to the foregoing private placement offering, the Company issued 12,500,000 warrants
      to purchase the Company’s common stock to a placement agent.





Pursuant
      to the terms of the Subscription Agreement in connection with the foregoing
      sale
      of units, the Company has granted the investors registration rights with respect
      to the shares of common stock and shares of common stock underlying the warrants
      purchased. Pursuant to the Subscription Agreement, the Company had undertaken
      to
      file a registration statement with the Securities and Exchange Commission within
      60 days of the closing of the sale of units.





On
      March
      3, 2006, the Company filed a Form 8-K with the Securities and Exchange
      Commission (“SEC”) that, through inadvertence and oversight, the Company had
      authorized and the Company’s transfer agent had issued, an aggregate of 11,610,178 unlegended shares of the Company’s common stock in excess of the shares of its
      common stock allocated in the Registration Statement filed by the Company on
      Form SB-2, which was declared effective by the SEC on July 18, 2005. The amount
      issued does not exceed the aggregate number of shares included in such
      Registration Statement. The Company has reviewed and revised its controls and
      procedures, with regard to the issuance of securities, to ensure full compliance
      with Federal Securities Laws in the future, and has formally requested that
      its
      transfer agent do so as well. As at December 31, 2005, there were 2,135,543 excess
      shares of common stock issued.





On
      March
      28, 2006, the Company extended a special warrant offer (the “Special Warrant
      Offer”) to all holders of the Company’s Series A and Series B Warrants issued on
      February 25, 2005, April 29, 2005 and August 16, 2005 expiring five years after
      such dates (the “Original Warrants”). As part of the Special Warrant Offer, the
      exercise price of the Original Warrants was reduced from the exercise price
      of
      $0.04 per share (the “Reduced Exercise Price”).





The
      Company and the holders consummated the Special Warrant Offer in reliance upon
      the exemption from securities registration afforded by the rules and regulations
      as promulgated by the United States Securities and Exchange Commission under
      Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”),
      and pursuant to Regulation D promulgated thereunder. Based in material part
      upon
      the representations of the holder in the Form of Election to Purchase, the
      Company has complied and will comply with all applicable federal and state
      securities laws in connection with the offer, issuance and sale of the
      securities pursuant to the Special Warrant Offer.




-17-





Neither
      the Company nor anyone acting on its behalf, directly or indirectly, has or
      will
      sell, offer to sell or solicit offers to buy any of the securities or similar
      securities to, or solicit offers with respect thereto from, or enter into any
      negotiations relating thereto with, any person, or has taken or will take any
      action so as to bring the issuance and sale of any of the securities under
      the
      registration provisions of the Securities Act and applicable state securities
      laws, and neither the Company nor any of its affiliates, nor any person acting
      on its or their behalf, has engaged in any form of general solicitation or
      general advertising (within the meaning of Regulation D under the Securities
      Act) in connection with the offer or sale of any of the securities.





The
      Special Warrant Offer commenced on 11 a.m. Eastern Time on March 30, 2006 and
      expired at 5:00 p.m. Eastern Time on April 10, 2006. Thereafter, all the
      Original Warrants that were not exercised pursuant to the Special Warrant Offer
      continue to retain all of their previous rights and remain in full force and
      effect.





A
      total
      of 8,400,000 Series A and Series B Warrants for gross proceeds of $336,000
      were
      exercised by certain holders for cash, which also resulted in reinstatement
      of
      6,046,096 shares of the Company’s common stock previously issued to such holders
      and the reinstatement of the principal amounts of $184,133 of the Callable
      Secured Convertible Notes.




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




Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations





The
      following discussion should be read in conjunction with our Consolidated
      Financial Statements, including the related notes thereto, and other financial
      information included herein. The information in this Report includes
      forward-looking statements. In addition, past operating results are not
      necessarily indicative of the results to be expected for future
      periods.




Overview




We
      were
      incorporated in Delaware on September 9, 1987 under the name Perceptronics,
      Inc.
      From our inception through fiscal 2000, we were engaged in the design,
      development and manufacture of computer-based simulation systems for training
      and decision support. The tightening of defense budgets worldwide, combined
      with
      the continuing consolidation and competition in the defense industry, negatively
      impacted the growth and profit opportunities for small companies such as ours.
      As a result, in July 2000, we refocused our business. In connection with the
      refocus, we sold the assets related to our computer based simulation system
      line
      of business to a developer and manufacturer of specialized defense simulation
      products. We then commenced development of commercial products in the area
      of
      Internet collaboration.





However,
      we lacked the funds necessary to market and sell our developed products. As
      a
      result, in October 2002, we entered into a license agreement with our then
      principal stockholder, Global Alpha Corporation ("GAC") pursuant to which GAC
      was granted an exclusive license to our software and systems commonly referred
      to as the "IC3D Framework" (the "System"). The System encompassed substantially
      all of our software including software developed to support multi-user online
      collaborative interactivity in a broad variety of applications employing a
      variety of virtual media over a number of networks including the Internet and
      intra-nets. In October 2002 we terminated substantially all of our employees,
      and except for our license agreement, ceased all of our prior operating
      activities. Our principal activities became directed to reducing our liabilities
      and seeking possible acquisitions. Management's objective was to acquire an
      operating company that has experienced management and the potential for
      profitable growth in exchange for our securities.




-18-





On
      April
      28, 2003, we entered into an Agreement and Plan of Merger with EssTec, Inc.,
      a
      privately-held Nevada corporation ("EssTec"). In accordance with the merger,
      on
      May 8, 2003, we, through our wholly-owned subsidiary, Alpha Acquisition
      Corporation, a Nevada corporation, acquired EssTec in exchange for 4,276,162
      shares of our Common Stock. The transaction contemplated by the agreement was
      intended to be a "tax-free" reorganization pursuant to the provisions of Section
      351 and 368(a)(1)(A) of the Internal Revenue Code of 1986, as
      amended.





On
      May 8,
      2003, in connection with the EssTec merger, we changed our fiscal year end
      from
      March 31 to December 31.





On
      November 25, 2003, we entered into an Agreement and Plan of Merger with
      Veridicom, Inc., a privately-held California corporation ("Veridicom"). In
      accordance with the merger, on November 25, 2003, we, through our wholly-owned
      subsidiary, A/V Acquisition Corporation, a Nevada corporation, acquired
      Veridicom in exchange for 3,500,000 shares of our Common Stock; 3,250,000 shares
      were issued to the holders of Veridicom stock and 250,000 shares were issued
      into escrow to cover indemnification obligations, if any, of Veridicom. The
      transaction contemplated by the agreement was intended to be a "tax-free"
      reorganization pursuant to the provisions of Section 351 and 368(a)(1)(A) of
      the
      Internal Revenue Code of 1986, as amended.





On
      January 16, 2004, we entered into an Agreement and Plan of Merger with Cavio
      Corporation, a privately-held Washington corporation ("Cavio"). In accordance
      with the merger, on February 20, 2004, we, through our wholly-owned subsidiary,
      A/VII Corporation, a Nevada corporation, acquired Cavio in exchange for
      5,119,140 shares of our Common Stock. The transaction contemplated by the
      agreement was intended to be a "tax-free" reorganization pursuant to the
      provisions of Section 351 and 368(a)(1)(A) of the Internal Revenue Code of
      1986,
      as amended.





Description
      of the Company Post-Merger





Following
      the merger with Cavio, we realigned our business strategy to leverage the core
      operations of each of our subsidiaries. We have five subsidiaries: Cavio,
      Veridicom Inc., Veridicom Canada, Veridicom Pakistan and EssTec.





Our
      core
      strategy is to build a comprehensive authentication suite of products and
      services, with market-specific applications that leverage the core identity
      management infrastructure. We believe there is a significant need for an
      auditable, scalable product solution capable of linking an individual to a
      specific electronic event or transaction -- a strong authentication solution
      that safeguards legitimate interests and adheres to emerging electronic commerce
      legislation. Our identity management solutions employ public key infrastructure
      and a "virtual token" based technology to control, audit and monitor the
      identification processes for electronic events and transactions.





We
      will
      focus on transforming the market for biometrics and growing the market beyond
      traditional security applications. In particular, the strategy will be to expand
      the traditional security offerings to include security and convenience value
      propositions for commercial or point-of-sale transactions. By developing
      customizable applications as well as authentication technology, we are
      endeavoring that our brand become synonymous with secure, authenticated
      transactions.




-19-





We
      offer
      a solution that we believe not only addresses an organization's current
      requirements for stronger and more scalable authentication and authorization,
      but also addresses a future vision for security, via a combination of
      centralized and distributed identity repositories and administration tools.
      Utilizing biometric technology, we provide organizations with an authentication
      solution that also provides users with increased convenience by reducing the
      reliance on passwords.





We
      have a
      management team with combined experience in sales and marketing, vertical market
      knowledge, technology development, and hardware integrated circuit design.
      In
      addition, we will have access to a network of advisors and consultants with
      significant expertise in technology, government, security, and financial
      services. These advisors will be invited to form a more formal advisory board
      to
      provide strategic direction for products and services, and, they may be
      leveraged to provide targeted business development contacts in key target
      markets.





There
      are
      several factors that management believes will provide new opportunities or
      present new challenges for us. We believe that regulatory, technological, and
      cultural changes will create new opportunities. International distribution
      arrangements are currently in place, while new channels are being
      developed.





Since
      March 1, 2004, we have undertaken a comprehensive review of all pre-merger
      operations. This on-going review has included all facets of operations,
      including the supply chain, product development, previous sales and marketing
      agreements, internal controls and reporting systems. Based on this review,
      we
      have decided that a thorough reorganization of all of the companies is
      warranted, including a re-evaluation of the supply chain, method of manufacture,
      product strategy and other organizational procedures. Although distracting
      in
      the short-term, we believe that this review is in the long-term best interests
      of the Company and our stockholders. As part of the reorganization, we closed
      our Sunnyvale, California offices on April 15, 2004 in favor of a more cost
      effective and efficient development environment in the Pacific
      Northwest.





Since
      2004, Veridicom International has prioritized the process of streamlining its
      manufacturing operations. In addition, we have re-aligned our product line
      in
      anticipation of customer requirements for stronger security solutions and secure
      devices. As such, we have worked with our suppliers to identify opportunities
      for efficiencies, reduced costs, improved quality and improved
      capacity.




We
      expect
      to begin manufacturing a new revision of our FPS200 fingerprint sensor which
      includes a number of enhancements to the previous version.





We
      have
      several patents and pending patent applications for its technology, an important
      factor in today’s competitive landscape. We expect to receive a decision to
      grant for our previously announced European Patent for the use of biometric
      technology in conjunction with encryption and the use of public and private
      keys. We believe that this is a significant patent for the company, as it covers
      a range of devices utilizing encryption technology and biometrics. The VKI-V
      is
      an example of this patent and technology used in a device.





We
      do not
      announce all sales orders received either due to confidentiality provisions
      or
      because sales are conducted indirectly through a growing base of channel
      partners.





We
      intend
      to continue the transition of our Company from research & development to the
      manufacturing and sales of our products. An initial delivery of 1000 VKIs has
      been completed to a client in Europe. We are also currently in the process
      of
      manufacturing approximately 18,000 ICs (integrated circuits) and approximately
      10,000 VKIs with varying memory sizes.




-20-





Because
      of heightened demand from other manufacturers of products in the electronic
      and
      biometric industry, and because some present and potential competitors have
      financial, marketing and manufacturing resources greater than we have, the
      lead
      times and delivery times from suppliers for some of the components required
      for
      the manufacture of our products are longer than anticipated. However, we expect
      that we will be able to complete our current manufacturing cycle for the 18,000
      ICs and 10,000 VKIs and have these available for delivery by the end of June
      2006.




Operations




Veridicom
      International, Inc., (the Company, formerly known as Alpha Virtual, Inc.
      ("Alpha") is a Delaware Corporation formerly headquartered in California that
      was formed on September 9, 1987. The name of the Company was changed to
      Veridicom International, Inc. in February 2004. The Company consolidated its
      corporate offices in Seattle, Washington, and Vancouver, British Columbia in
      April 2004.





The
      legal
      entity, Alpha Virtual, Inc. (“Alpha”), retained its name until it was changed to
      Veridicom International, Inc. in February 2004. In May 2005, the name of the
      subsidiary company in Pakistan was changed to Veridicom Pakistan (Private.)
      Limited.





The
      Company operates as one operating segment which is the development, manufacture
      and sale of capacitive fingerprint sensors, computer peripherals and software
      related to the use of its fingerprint authentication technology.





We
      have
      five subsidiaries: Esstec, Essential Tec Pakistan (Private) Limited ("Pakistan
      Ltd."), Veridicom Inc., Cavio, and Veridicom International (Canada) Inc.
      ("Canada Inc.").





Esstec
      is
      a professional services company that focuses on e-commerce initiatives,
      interactive multimedia, and mobile software applications for clients in various
      industries, including the telecommunications and entertainment industries.
      During 2004, Esstec did not have any significant revenues or incur any
      significant expenses.





Pakistan
      Ltd. was incorporated on April 19, 2000 to establish the business of software
      development for the international markets and to export software and technology.
      Esstec owns approximately 63.4% of Pakistan Ltd.





Veridicom
      Inc. designs, manufactures and delivers hardware and software products that
      enable strong authentication solutions based on fingerprint biometrics.
      Veridicom Inc. markets a complete fingerprint biometrics platform on which
      applications can be built.





Cavio
      produces technology tools designed to protect users from fraud,
      misrepresentation, security and privacy issues by allowing users to
      biometrically authenticate themselves to secure control access and confirm
      identity across a number of industries.





On
      January 21, 2004 Veridicom International (Canada) Inc. was formed to be the
      Canadian operating company to disburse expenses and payroll costs in Canada
      for
      the public company.




Principles
      of Consolidation




The
      consolidated financial statements include the accounts of us and our
      subsidiaries Esstec, Pakistan Ltd., Veridicom, Cavio, and Canada Inc. All
      significant intercompany balances and transactions have been eliminated in
      consolidation. Non-controlling interest reflects the ownership of
      non-controlling shareholders in the issued share capital of Pakistan, a
      consolidated subsidiary less than wholly-owned.




-21-





The
      historical results for fiscal 2005 include
      the Company and all its subsidiaries. The historical results for fiscal 2004 include
      Cavio from the merger date of February 20, 2004.




General




Following
      the completion of the transaction with EssTec and Veridicom Inc. in 2003 and
      with Cavio in February 2004, we have been engaged primarily in aligning the
      operations of the subsidiaries with the objective of streamlining and
      consolidating technologies and operations as necessary, reducing costs and
      seeking additional capital.





As
      part
      of the process of streamlining and consolidation of operations, we closed and
      relocated our Sunnyvale, California facility in April 2004. The direct costs
      incurred for this amounted to $31,575.





Since
      May
      2004, we have focused our resources on product development, including hardware
      and software enhancements, as well as on marketing efforts.





We
      intend
      to continue the transition of our Company from research & development to the
      manufacturing and sales of our products and to seek the financial resources
      required to do so.




Net
      Revenue




Net
      revenue for fiscal 2005 of $392,734 increased by $7,881 compared
      to fiscal 2004 .
      Net
      revenue in fiscal 2005 is mainly in respect of sales of capacitive fingerprint
      sensors, computer peripherals and software related to the use of our fingerprint
      authentication technology, whereas net revenue in fiscal 2004 was
      mainly in respect of sales of capacitive fingerprint sensors only.




Cost
      of Goods Sold




Cost
      of
      goods sold during 2005 was
      mainly for product components purchased from suppliers and the cost of finished
      products from existing inventory. These amounted to $344,764 in
      fiscal 2005 and
      increased by $132,701 compared
      to fiscal 2004 .
      This is
      due to unexpected yield losses and spoilage in manufacturing of our
      products.




Gross
      Profit




The
      gross
      profit on sales in fiscal 2005 is $47,970 compared
      to gross profit of $172,790 for
      fiscal 2004 .
      The
      decrease in the gross profit of $124,820 is due
      to yield losses and spoilage in manufacturing of our products that resulted
      in
      higher than usual cost of goods sold an uncollectibility of amounts from sales
      which lowered sales revenues.





-22-




General
      and Administrative Expenses




General
      and administrative expenses, which include non-cash compensation expense of $858,587, amounted
      to $3,526,264 in
      fiscal 2005 compared
      to $3,441,793 in
      fiscal 2004 .
      This
      increase of $84,471 in
      general and administrative expenses is mainly in respect of:


·
            Salaries
                , which increased from$1,286,000in2004to$1,393,000in2005as
                a result of the hiring of new software development, hardware development,
                and administrative staff; ·
            Marketing
                expenses, which increased from $21,000 in 2004 to $98,000 in 2005
                due to
                increased marketing efforts to introduce our core product (VKI) to
                the
                market. Substantial number of these products was distributed to potential
                marketing firms as samples; ·
            Insurance
                expense, mainly for officers and directors, increased from $49,000
                in 2004
                to $82,000 in 2005; ·
            Telephone
                and internet expenses for 2005 increased by $13,000 compared to
                2004; ·
            Office
                administration expenses, which decreased from$411,000in2004to$391,000in2005; ·
            Professional
                fees, which include legal, accounting and auditing fees, decreased
                from
                $607,000 to $583,000; ·
            Travel
                expenses decreased by $40,000; ·
            Commissions
                and fees, mainly related to new equity and debt investments decreased
                from
                $147,000 in 2004 to $84,000 in
                2005;




Research
      and Development




Research
      and development expenditure for the fiscal 2005 was $1,274,127, compared
      to $495,577 in 2004. The
      increase in this expense is mainly in respect of salaries for personnel in
      product development, including hardware and software enhancements.




Interest
      Expense




Interest
      expense for the fiscal 2005 amounting to $2,268,202 compared
      to interest expense of $94,145 for the
      same period in 2004 was
      due
      to amortization of the discount and accrued interest on the notes payable.
      The
      significant increase in interest expense in fiscal 2005 is
      mainly due to interest expense of beneficial conversion feature and amortization
      of deferred finance charges resulting from the convertible notes issued in
      2005.




Liquidity
      and Capital Resources




On
      February 25, 2005, we completed the first of three rounds of a private placement
      whereby we have issued up to an aggregate of $5,100,000 worth of 10% callable
      secured notes convertible into shares of common stock, and warrants to purchase
      up to an aggregate of 10,200,000 shares of our common stock to certain
      accredited investors. The first of three equal installments of $1,700,000 was
      received in March, 2005.





Subsequently
      in April, 2005 ,
      the
      Company completed the second round of the private placement resulting in
      aggregate proceeds amounting to $1,700,000.





On
      August
      16, 2005 the third round of the private placement was completed for aggregate
      proceeds of $1,700,000, less $80,000 for amounts not collectible.





Since
      October 1, 2005 we are in default in making repayments of principal and interest
      at the default rate of 15% per annum on the callable secured notes.





Pursuant
      to the Agreement, the Company incurs Standard Liquidated Damages consisting
      of a
      penalty of 3% per month of the outstanding principal balance of the Notes if:
      (a) the number of the Company’s authorized and reserved common shares is less
      than two times the number of shares issuable upon conversion of the Notes and
      upon exercise of the Warrants; and (b) the holders are not provided with monthly
      share information detailing the number of shares authorized and reserved within
      5 business days of the end of the month.




-23-





Since
      July 29, 2005, our first round of the private placement was in default of the
      Standard Liquidated Damages. Since November 16, 2005, our second round of the
      private placement was in default of the Standard Liquidated Damages. Since
      November 25, 2005, our third round of the private placement was in default
      of
      the Standard Liquidated Damages. As at December 31, 2005, the Company incurred
      Standard Liquidated Damages of $1,731,604.





Following
      the signing of an Omnibus Waiver and Consent by the majority of the Callable
      Secured Convertible Note Holders in January 2006, on February 1, 2006, the
      Company completed a private placement offering of 10,000,000 units to accredited
      investors for an aggregate purchase price of $400,000. Each unit consisted
      of
      one share of the Company’s common stock, and one warrant to purchase one share
      of the Company’s common stock.





On
      March
      28, 2006, the Company extended a special warrant offer (the “Special Warrant
      Offer”) to all holders of the Company’s Series A and Series B Warrants issued on
      February 25, 2005, April 29, 2005 and August 16, 2005 expiring five years after
      such dates (the “Original Warrants”). As part of the Special Warrant Offer, the
      exercise price of the Original Warrants was reduced to $0.04 per share (the
      “Reduced Exercise Price”).





A
      total
      of 8,400,000 Series A and Series B Warrants for gross proceeds of $336,000
      were
      exercised by certain holders for cash, which also resulted in reinstatement
      of
      6,046,096 shares of the Company’s common stock previously issued to such holders
      and the reinstatement of the principal amounts of $184,133 of the Callable
      Secured Convertible Notes.





We
      need
      to seek and secure additional financing to fund our current and future
      operations. If we are successful in obtaining this additional financing, we
      may
      not be able to do so on terms that are not excessively dilutive to our existing
      stockholders or less costly than existing sources of financing. Failure to
      secure additional financing in a timely manner and on favorable terms when
      needed in the future could have a material adverse effect on our financial
      performance, balance sheet and stock price and require us to implement cost
      reduction initiatives and curtail or cease operations .





If
      we are
      able to raise the required additional financing and if we are able to generate
      funds from operations by fulfillment of orders and product deliveries during
      2006, we expect to have sufficient funds to meet our operating requirements
      for
      the remainder of 2006.





In
      addition, if the holders of the private placement financing notes exercise
      their
      option to convert all of these into common stock of our company, we would not
      then be required to repay the principal and interest on these notes and would
      therefore enhance our cash flow by approximately $550,000 per quarter. However,
      the noteholders are not under any obligation to convert the notes into our
      common stock.




Off-Balance
      Sheet Arrangements




None.




Dividends
      and Distributions





We
      have
      not paid any cash dividends to date. We intend to retain our future earnings,
      if
      any, and we do not anticipate paying cash dividends on either class of our
      stock
      in the foreseeable future.




-24-




Critical
      Accounting Policies





The
      Company's critical accounting policies are particularly important to the
      portrayal of financial position and results of operations and require the
      application of significant judgments by management. As a result, the
      consolidated financial statements are subject to an inherent degree of
      uncertainty. In applying those policies, management uses its judgment to
      determine the appropriate assumptions to be used in the determination of certain
      estimates. These estimates are based on the Company's historical experience,
      terms of existing contracts, observance of trends in the industry and
      information available from outside sources, as appropriate. The Company's
      critical accounting policies are described below:




Use
      of
      Estimates in the Preparation of Financial Statements




The
      preparation of financial statements in conformity with generally accepted
      accounting principles 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
      revenues and expenses during the reporting period. Actual results could differ
      from those estimates.




Going
      Concern




Our
      financial statements have been presented on the basis that we are a going
      concern, which contemplates the realization of assets and the satisfaction
      of
      liabilities in the normal course of business. As
      of
      December 31, 2005 we have incurred a net loss of $10,338,510 and have a working
      capital deficit of $4,704,497 ,
      which
      raises substantial doubt about our ability to continue as a going concern.
      The
      Company is currently devoting its efforts to raising additional capital to
      finance on-going operations and for transitioning from research and development
      to manufacturing and sales of its products. The Company's ability to continue
      as
      a going concern is dependent upon its ability to develop additional sources
      of
      capital, and ultimately, achieve profitable operations. The accompanying
      financial statements do not include any adjustments that might result from
      the
      outcome of these uncertainties.




Long
      Lived assets




In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”, the Company tests long-lived assets or asset groups for
      recoverability when events or changes in circumstances indicate that their
      carrying amount may not be recoverable. Circumstances which could trigger a
      review include, but are not limited to: significant decreases in the market
      price of the asset; significant adverse changes in the business climate or
      legal
      factors; accumulation of costs significantly in excess of the amount originally
      expected for the acquisition or construction of the asset; current period cash
      flow or operating losses combined with a history of losses or a forecast of
      continuing losses associated with the use of the asset; and current expectation
      that the asset will more likely than not be sold or disposed significantly
      before the end of its estimated useful life.





Recoverability
      is assessed based on the carrying amount of the asset and its fair value which
      is generally determined based on the sum of the undiscounted cash flows expected
      to result from the use and the eventual disposal of the asset, as well as
      specific appraisal in certain instances. An impairment loss is recognized when
      the carrying amount is not recoverable and exceeds fair value.




-25-




P atents




The
      company has several international patents for its biometric technology, as
      well
      as several pending patent applications. The patents are being carried at a
      fair
      value of $200,000 .




Goodwill




Goodwill
      is recorded as the difference, if any, between the aggregate consideration
      paid
      for an acquisition and the fair value of the net tangible and intangible assets
      acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets
      (“SFAS 142”), the Company tests goodwill for impairment at the reporting unit
      level (operating segment or one level below an operating segment) on an annual
      basis in the fourth quarter or more frequently if the Comp P any
      believes indicators of impairment exist. The performance of the test involves
      a
      two-step process. The first step of the impairment test involves comparing
      the
      fair values of the applicable reporting units with their aggregate carrying
      values, including goodwill. The Company generally determines the fair value
      of
      its reporting units using the income approach methodology of valuation that
      includes the discounted cash flow method as well as other generally accepted
      valuation methodologies. If the carrying amount of a reporting unit exceeds
      the
      reporting unit’s fair value, the Company performs the second step of the
      goodwill impairment test to determine the amount of impairment loss. The second
      step of the goodwill impairment test involves comparing the implied  fair
      value of the affected reporting unit’s goodwill with the carrying value of that
      goodwill. If the actual results, or the plans and estimates, used for future
      impairment analysis are lower from the original estimates used to assess the
      recoverability of those assets, the Company could incur additional impairment
      charges




Revenue
      Recognition




In
      accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
      Bulletin No. 104, Revenue Recognition (“SAB 104”), the Company recognizes
      product revenue when the following fundamental criteria are met: (i) persuasive
      evidence of an arrangement exists, (ii) delivery has occurred or services have
      been rendered, (iii) the price to the customer is fixed or determinable and
      (iv)
      collection of the resulting receivable is reasonably assured. These criteria
      are
      usually met at the time of product shipment.





Revenue
      from software licenses and maintenance agreements is recognized in accordance
      with the provisions of SOP 97-2, Software Revenue Recognition, as amended by
      SOP
      98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect
      to
      Certain Transactions .





The
      Company records reductions to revenue for estimated product returns and pricing
      adjustments, such as competitive pricing programs and rebates, in the same
      period that the related revenue is recorded. The amount of these reductions
      is
      based on historical sales returns, analysis of credit memo data, specific
      criteria included in rebate agreements, and other factors known at the time.





Pakistan
      recognizes revenue at the point/time the software is delivered/exported.





Veridicom
      Inc. recognizes revenues at the point of shipment of products.





-26-




Stock
      Based Compensation




Stock
      options granted to employees and non-employees are accounted for under Statement
      of Financial Accounting Standards No. 123 “Accounting for Stock-Based
      Compensation” (SFAS 123), which establishes a fair value based method of
      accounting for stock-based awards, and recognizes compensation expense based
      on
      the fair value of the stock award or fair value of the goods and services
      received, whichever is more reliably measurable.





Unless
      otherwise disclosed, all stock based transactions entered into by the Company
      have been valued at the market value of our common stock on the date the
      transaction was entered into or have been valued using the Black-Scholes Model
      to estimate the fair market value.




Software
      Development Costs




Costs
      related to the development of software are expensed as incurred until
      technological feasibility in the form of a working model has been established
      in
      accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to
      be Sold, Leased or Otherwise Marketed”. The time period between the
      establishment of technological feasibility and completion of product development
      is expected to be short; therefore the Company has not capitalized any product
      development costs during the period.




Income
      Taxes




The
      Company recognizes deferred tax assets and liabilities for the expected future
      income tax consequences of events that have been recognized in the Company’s
      financial statements. Under this method, deferred tax assets and liabilities
      are
      determined based on temporary differences between the financial carrying amounts
      and the tax bases of assets and liabilities using enacted tax rates in effect
      in
      the periods in which the temporary differences are expected to reverse.
      Valuation allowances are established when necessary to reduce deferred tax
      assets to the amount expected to be realized. Income tax expense represents
      the
      tax payable for the current period and the change during the period in deferred
      tax assets and liabilities.




Litigation
      and settlement costs




From
      time
      to time, we are involved in disputes, litigation and other legal proceedings.
      We
      prosecute and defend these matters aggressively. However, there are many
      uncertainties associated with any litigation, and we cannot assure you that
      these actions or other third party claims against us will be resolved without
      costly litigation and/or substantial settlement charges. In addition the
      resolution of any future intellectual property litigation may require us to
      pay
      damages for past infringement or one-time license fees or running royalties,
      which could adversely impact gross profit and gross margins in future periods,
      or could prevent us from manufacturing or selling some of our products or limit
      or restrict the type of work that employees involved in such litigation may
      perform for the Company. If any of those events were to occur, our business,
      financial condition and results of operations could be materially and adversely
      affected. We record a charge equal to at least the minimum estimated liability
      for a loss contingency when both of the following conditions are met: (i)
      information available prior to issuance of the financial statements indicates
      that it is probable that an asset had been impaired or a liability had been
      incurred at the date of the financial statements and (ii) the range of loss
      can
      be reasonably estimated. However, the actual liability in any such litigation
      may be materially different from our estimates, which could result in the need
      to record additional costs.





-27-




Recent
      Accounting Pronouncements




In
      June
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standard No. 154, “ Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements
”
(“SFAS 154”). The Statement applies to all voluntary changes in accounting
      principles used, and changes the requirements for accounting for and reporting
      of a change in an accounting principle. SFAS 154 requires retrospective
      application to prior periods’ financial statements of a voluntary change in
      accounting principle unless it is impracticable. SFAS 154 requires that a change
      in method of depreciation, amortization, or depletion for long-lived,
      non-financial assets be accounted for as a change in accounting estimate that
      is
      affected by a change in accounting principle. Opinion 20 previously required
      that such a change be reported as a change in accounting principle. SFAS 154
      is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005. The Company does not believe this
      pronouncement will have a material impact in its financial results.




In
      June
      2005, the Emerging Issues Task Force (“EITF”) issued No. 05-6, “Determining the
      Amortization Period for Leasehold Improvements” (“EITF 05-6”). The pronouncement
      requires that leasehold improvements acquired in a business combination or
      purchase subsequent to the inception of the lease should be amortized over
      the
      lesser of the useful life of the asset or the lease term that includes
      reasonably assured lease renewals as determined on the date of the acquisition
      of the leasehold improvement. The Company does not have unamortized leasehold
      improvements from acquisitions or business combinations and therefore, does
      not
      believe this pronouncement will have an impact in its financial results.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
      An Amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29,
“Accounting for Non-monetary Transactions”, is based on the principle that
      exchanges of nonmonetary assets should be measured based on the fair value
      of
      the assets exchanged. The guidance in that Opinion, however, included certain
      exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate
      the exception for nonmonetary exchanges of similar productive assets and
      replaces it with a general exception for exchanges of non-monetary assets that
      do not have commercial substance. A nonmonetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. The provisions of SFAS No. 153 are
      effective for non-monetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005. Early application is permitted and companies must apply
      the
      standard prospectively. The adoption of this standard is not expected to have
      a
      material effect on the Company’s results of operations or financial
      position.





In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard (SFAS) No. 123R, “Share Based Payment”. SFAS
      123R is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation”,
      and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”
and its related implementation guidance. SFAS 123R establishes standards for
      the
      accounting for transactions in which an entity exchanges its equity instruments
      for goods or services. It also addresses transactions in which an entity incurs
      liabilities in exchange for goods or services that are based on the fair value
      of the entity’s equity instruments or that may be settled by the issuance of
      those equity instruments. SFAS 123R focuses primarily on accounting for
      transactions in which an entity obtains employee services in share-based payment
      transactions. SFAS 123R requires a public entity to measure the cost of employee
      services received in exchange for an award of equity instruments based on the
      grant-date fair value of the award (with limited exceptions). That cost will
      be
      recognized over the period during which an employee is required to provide
      service in exchange for the award - the requisite service period (usually the
      vesting period). SFAS 123R requires that the compensation cost relating to
      share-based payment transactions be recognized in financial statements. That
      cost will be measured based on the fair value of the equity or liability
      instruments issued. Public entities that file as small business issuers will
      be
      required to apply SFAS 123R in the first interim or annual reporting period
      that
      begins after December 15, 2005. The adoption of this standard is not expected
      to
      have a material effect on the Company’s results of operations or financial
      position.




-28-




In
      March
      2005, the SEC staff issued Staff Accounting Bulletin No. 107 (“SAB 107”) to give
      guidance on the implementation of SFAS 123R. The Company will consider SAB
      107
      during implementation of SFAS 123R.




R ISK
      FACTORS




In
      addition to the other information contained on this Form 10-KSB report, the
      following risk factors should be considered carefully.





The
      Company may have violated Federal Securities Laws




Section
      5
      of the Securities Act prohibits the public sale of securities absent an
      effective registration statement being filed with the SEC, unless an exemption
      from registration applies. On March 3, 2006, the Company filed a Form 8-K with
      the Securities and Exchange Commission (“SEC”) that, through inadvertence and
      oversight, the Company had authorized and the Company’s transfer agent had
      issued, an aggregate of 11,610,178 unlegended shares of the Company’s common
      stock in excess of the shares of its common stock allocated in the Registration
      Statement filed by the Company on Form SB-2, which was declared effective by
      the
      SEC on July 18, 2005. The amount issued does not exceed the aggregate number
      of
      shares included in such Registration Statement. The Company has reviewed and
      revised its controls and procedures, with regard to the issuance of securities,
      to ensure full compliance with Federal Securities Laws in the future, and has
      formally requested that its transfer agent do so as well. As at December 31,
      2005, there were 2,135,543 excess shares of common stock issued.




Until
      such time as the above issuance of excess shares of common stock is cured and
      rectified in a manner satisfactory to the regulators, this could impact the
      Company’s ability to raise additional capital in the market and hence its
      on-going and future operations.




The
      Company may face litigation from the Regulators and other interested parties
      and
      could incur significant legal and other costs, including any financial penalties
      that may be imposed. Any such action will negatively impact the Company’s
      liquidity and operations.




We
      may be
      subjected to additional litigation and claims in the future.




Particulars
      of the legal proceedings in which we are currently involved are provided under
      Item 3 “Legal Proceedings”




If
      we are
      subjected to other lawsuits or claims in the future, the costs and other effects
      of litigation and disputes, including the diversion of time and resources,
      and
      including claims, settlements, judgments, and changes in those matters, could
      have a material adverse effect on our business and financial condition.




-29-




Our
      stock price is volatile and could decline in the future.





The
      price
      of our common stock has been volatile in the past and will likely continue
      to
      fluctuate in the future. The stock market in general and the market for shares
      of technology stocks in particular has experienced extreme stock price
      fluctuations. In some cases, these fluctuations have been unrelated to the
      operating performance of the affected companies. Many companies in the
      technology and related industries, including us, have experienced dramatic
      volatility in the market prices of their common stock.





We
      have an accumulated deficit, are not currently profitable and expect to incur
      significant expenses in the future as we implement our new business model,
      which
      may reduce our profitability.





We
      have
      incurred a cumulative net loss since inception and are currently experiencing
      negative cash flow. We expect to continue to experience negative cash flow
      and
      operating losses for the foreseeable future as we continue to make significant
      expenditures for acquisitions, sales and marketing, international expansion,
      infrastructure development and general and administrative functions, in light
      of
      our new business model. As a result, we will need to generate significant
      revenues to achieve profitability. If our revenues grow more slowly than we
      anticipate, or if our operating expenses exceed expectations, we may experience
      reduced profitability.





Our
      auditors have indicated substantial doubt concerning our ability to continue
      operations as a going concern.





Our
      auditors have substantial doubt concerning our ability to continue as a going
      concern as of the year ended December 31, 2005. We cannot assure you that our
      ability to obtain additional customers or financing sources will be impaired
      as
      a result of this qualification. Additionally, we cannot assure you that our
      proposed projects and services, if fully developed, can be successfully marketed
      or that we will ever achieve significant revenues or profitable margins and
      therefore remain a going concern.





We
      will be required to raise additional capital to fund our
      operations.





We
      just
      completed the last of three rounds of a private placement to raise an aggregate
      of $5,100,000. The first of three equal installments of $1,700,000 was received
      in February, 2005, the second was received in May, 2005 and the third closing
      of
      $1,700,000 was completed on August 16, 2005. If we cannot raise additional
      needed funds on acceptable terms, we will not be able to develop or enhance
      our
      products, take advantage of future opportunities or respond to competitive
      pressures or unanticipated requirements. To the extent we raise additional
      capital by issuing equity securities; our stockholders may experience
      substantial dilution. Also, any new equity securities may have greater rights,
      preferences or privileges than our existing common stock. A material shortage
      of
      capital will require us to take drastic steps such as reducing our level of
      operations, disposing of selected assets or seeking an acquisition partner.
      If
      cash is insufficient, we will not be able to continue operations.





If
      we
      fail to maintain effective internal controls over financial reporting, the
      price
      of our Common Stock may be adversely affected.





Our
      internal controls over financial reporting may have weaknesses and conditions
      that need to be addressed, the disclosure of which may have an adverse impact
      on
      the price of our common stock. We are required to establish and maintain
      appropriate internal controls over financial reporting. Failure to establish
      those controls, or any failure of those controls once established, could
      adversely impact our public disclosures regarding our business, financial
      condition or operating results. In addition, management's assessment of our
      internal controls over financial reporting may identify weaknesses and
      conditions that need to be addressed in our internal controls over financial
      reporting or other matters that may raise concerns for investors. Any actual
      or
      perceived weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting, disclosure of management's assessment of
      our
      internal controls over financial reporting or disclosure of our public
      accounting firm's attestation to or report on management's assessment of our
      internal controls over financial reporting may have an adverse impact on the
      price of our common stock.





-30-




Risks
      related to our business




We
      face intense competition from other biometric security solution providers as
      well as identification and security systems providers.





A
      significant number of established and startup companies have developed or are
      developing hardware for fingerprint biometric security applications that
      currently compete or will compete directly with those products designed,
      developed and sold by us. Other companies have developed or are developing
      and
      marketing biometric security applications for the recognition of fingerprints
      that currently compete or will compete with those products designed, developed
      and sold by us. Some of these companies have developed or are developing and
      marketing semiconductor or optically based direct contact fingerprint image
      capture devices. Other companies have developed or are developing and marketing
      other methods of biometric identification such as retinal blood vessel or iris
      pattern, facial structure, or voice recognition.





If
      one or
      more of these technologies or approaches were widely adopted, it would
      significantly reduce the potential market for our products. Our products also
      compete with non-biometric technologies such as certificate authorities and
      traditional keys, cards, surveillance systems and passwords. Many competitors
      offering products that are competitive with our products and services have
      significantly more cash and resources than us. The biometric security market
      is
      a rapidly evolving and intensely competitive market, and we believe that
      additional competitors may enter the market and become significant long-term
      competitors.





We
      expect
      competition to increase and intensify in the near term in the biometrics
      markets. Companies competing with us may introduce products that are
      competitively priced, has increased performance or functionality or incorporate
      technological advances not yet developed or implemented by us.





Some
      present and potential competitors have financial, marketing, research, and
      manufacturing resources substantially greater than we have.





In
      order
      to compete effectively in this environment, we must continually develop and
      market new and enhanced products at competitive prices and must have the
      resources available to invest in significant research and development
      activities. The failure to do so could have a material adverse effect on its
      business operations, financial results and stock price.





We
      will need to raise additional equity or debt financing in the
      future.





We
      will
      need to raise financing in the future to fund our operations. If successful
      in
      raising additional financing, we may not be able to do so on terms that are
      not
      excessively dilutive to our existing stockholders or less costly than existing
      sources of financing. Failure to secure additional financing in a timely manner
      and on favorable terms if and when needed in the future could have a material
      adverse effect on our financial performance, balance sheet and stock price
      and
      require us to implement cost reduction initiatives and curtail
      operations.




-31-




Our
      business will not grow unless the market for our security solutions expands
      both
      domestically and internationally.





A
      large
      portion of our revenues is derived from the sale of security products and
      services. We cannot accurately predict the future growth rate, if any, or the
      ultimate size of the biometric technology market. The expansion of the market
      for our products and services depends on a number of factors,
      including:





·
            the
                cost, performance and reliability of its products and services and
                the
                products and services of our
                competitors;


·
            customers'
                perception of the benefit of biometric security
                solutions;


·
            public
                perceptions of the intrusiveness of these solutions and the manner
                in
                which firms are using the biometric information
                collected;


·
            public
                perceptions regarding the confidentiality of private
                information;


·
            customers'
                satisfaction with our products and services;
                and


·
            marketing
                efforts and publicity regarding these products and
                services.





Certain
      groups have publicly objected to the use of biometric products for some
      applications on civil liberties grounds and legislation has been proposed to
      regulate the use of biometric security products. From time to time, fingerprint
      recognition and other biometrics technologies have been the focus of
      organizations and individuals seeking to curtail or eliminate the use of these
      technologies on the grounds that these technologies may be used to diminish
      personal privacy rights. In the event that such initiatives result in
      restrictive legislation, the market for fingerprint recognition products may
      be
      adversely affected. Even if biometric markets develop as we hope, our products
      and services may not gain wide market acceptance. Even if biometric security
      solutions gain wide market acceptance, our products and services may not
      adequately address the market requirements.





The
      biometrics industry is characterized by rapid technological change and evolving
      industry standards, which could render our existing products
      obsolete.





Our
      future success will depend upon our ability to develop and introduce a variety
      of new products and services and enhancements to these new products and services
      in order to address the changing and sophisticated needs of the marketplace.
      Frequently, technical development programs in the biometrics industry require
      assessments to be made of the future directions of technology and technology
      market generally, which are inherently difficult to predict.





Delays
      in introducing new products, services and enhancements, the failure to choose
      correctly among technical alternatives or the failure to offer innovative
      products and services at competitive prices may cause customers to forego
      purchases of our products and services and purchase those of our
      competitors.





The
      development of new or enhanced products and services is a complex and uncertain
      process that requires the accurate anticipation of technological and market
      trends. We may experience development, marketing and other technological
      difficulties that may delay or limit our ability to respond to technological
      changes, evolving industry standards, competitive developments or customer
      requirements. You should also be aware that:





·
            Our
                technology may become obsolete upon the introduction of alternative
                technologies;


·
            We
                may incur substantial costs if we need to modify our products and
                services
                to respond to these alternative
                technologies;


·
            We
                may not have sufficient resources to develop or acquire new technologies
                or to introduce new products or services capable of competing with
                future
                technologies;


·
            We
                may be unable to acquire the rights to use the intellectual property
                necessary to implement new technology;
                and


·
            When
                introducing new or enhanced products or services, we may be unable
                to
                effectively manage the transition from older products and
                services.




-32-




Continued
      participation by us in the market for biometric products that are linked to
      forensic quality databases under the jurisdiction of governmental agencies
      may
      require the investment of resources in upgrading our products and technology
      in
      order for us to compete and to meet regulatory and statutory standards. We
      may
      not have adequate resources available to us or may not adequately keep pace
      with
      appropriate requirements in order to effectively compete in the
      marketplace.





Defects
      in our products and services could diminish demand for our products and
      services, which may harm our business.





Because
      our products and services are complex, they may contain errors or defects that
      are not found until after they are used by our customers. Errors or defects
      that
      subsequently arise could seriously harm our reputation and its ability to
      generate sales to new or existing customers.





Our
      products and services are used in systems with other vendors' products. These
      products and services can be adequately tested only when they are successfully
      integrated with these systems. Errors may be found in new products or releases
      after shipment and our products and services may not operate as expected. Errors
      or defects in our products and services could result in:





·
            loss
                of revenues and increased service and warranty
                costs;


·
            delay
                in market acceptance;


·
            loss
                of salaries; and


·
            injury
                to our reputation.





We
      may
      be subject to loss in market share and market acceptance as a result of
      manufacturing errors, delays or shortages.





Performance
      failure in our products or certain of our services may cause loss of market
      share, delay in or loss of market acceptance, additional warranty expense or
      product recall, or other contractual liabilities. The complexity of certain
      of
      the fingerprint recognition systems makes the manufacturing and assembly process
      of such products, especially in volume, complex. This may in turn lead to delays
      or shortages in the availability of certain products, or, in some cases, the
      unavailability of certain products. The negative effects of any delay or failure
      could be exacerbated if the delay or failure occurs in products or services
      that
      provide personal security, secure sensitive computer data, authorize significant
      financial transactions or perform other functions where a security breach could
      have significant consequences.





If
      a
      product or service launch is delayed or is the subject of an availability
      shortage because of problems with our ability to manufacture or assemble the
      product or service successfully on a timely basis, or if a product or service
      otherwise fails to meet performance criteria, we may lose revenue opportunities
      entirely and/or experience delays in revenue recognition associated with a
      product or service in addition to incurring higher operating expenses during
      the
      period required to correct the defects. We may be subject to repair,
      replacement, reimbursement and liability claims for products that fail to work
      or to meet applicable performance criteria.





There
      is
      a risk that for unforeseen reasons we may be required to repair or replace
      a
      substantial number of products in use or to reimburse customers for products
      that fail to work or meet strict performance criteria. We attempt to limit
      remedies for product or service failure to the repair or replacement of
      malfunctioning or noncompliant products or services, and also attempts to
      exclude or minimize exposure to product and related liabilities by including
      in
      our standard agreements warranty disclaimers and disclaimers for consequential
      and related damages as well as limitations on our aggregate liability. From
      time
      to time, in certain complex sale or licensing transactions, each entity may
      negotiate liability provisions that vary from such standard forms.





-33-




Our
      existing and proposed international business exposes us to additional risks
      that
      may result in future additional costs or limit the market for product
      sales.





Products
      and services provided to our international customers account for a significant
      part of our revenues. In addition, key component of our business plan is to
      expand our reach in our foreign markets. Conducting business outside of the
      United States subjects us to additional risks, including:





·
            changes
                in regulatory requirements;


·
            reduced
                protection of intellectual property
                rights;


·
            evolving
                privacy laws;


·
            tariffs
                and other trade barriers;


·
            difficulties
                in staffing and managing foreign
                operations;


·
            problems
                in collecting accounts receivable;
                and


·
            difficulties
                in authenticating customer
                information.





We
      will
      face risks inherent to new ventures in each new market that we enter, including
      a lack of acceptance of our business model. We may also incur substantial costs
      related to entering into new markets, which may not be recoverable if we are
      unsuccessful in these markets. Failure to recover these costs and expenses
      may
      materially adversely impact our cash flow and ability to meet our regular
      operating expenses, which may, in turn harm our ability to serve our customers
      and our competitive position to obtain new customers.





In
      addition, a portion of our technology base is in Pakistan. We could be adversely
      affected by any major hostilities involving Pakistan, which result in the
      interruption or curtailment of trade between Pakistan and its trading partners.
      For example, if the United States or any of its trading partners reinstitutes
      the recently lifted trade sanctions, it may adversely impact our ability to
      continue our Pakistani operations.





If
      we
      fail to attract and retain employees, our growth could be limited and our costs
      could increase, which may adversely affect our results of operations and
      financial position.





Our
      future success depends in large part upon our ability to attract, train and
      retain highly skilled executive-level management and creative and technical
      personnel. The competition in the technology industry for such personnel is
      intense, and we cannot be sure that we will be successful in attracting,
      training and retaining such personnel. Some of our employees and executive
      officers have joined our company recently, and all employees are subject to
      "at
      will" employment. High turnover resulting in additional training expense would
      decrease its profitability. We cannot guarantee that we will be able to replace
      any of our management personnel in the event their services become
      unavailable.





Our
      failure to maintain the proprietary nature of our technology, intellectual
      property and manufacturing processes could have a material adverse effect on
      our
      business, operating results and financial condition and on our ability to
      compete effectively.





We
      principally rely upon patent, trademark, copyright, trade secret and contract
      law to establish and protect our proprietary rights. There is a risk that claims
      allowed on any patents or trademarks that we hold may not be broad enough to
      protect our technology. In addition, our patents or trademarks may be
      challenged, invalidated or circumvented and management cannot be certain that
      the rights granted thereunder will provide us with competitive advantages.
      Moreover, any current or future issued or licensed patents, or trademarks,
      or
      currently existing or future developed trade secrets or know-how may not afford
      sufficient protection against competitors with similar technologies or
      processes, and the possibility exists that certain of our already issued patents
      or trademarks may infringe upon third party patents or trademarks or be designed
      around by others.




-34-




In
      addition, there is a risk that others may independently develop proprietary
      technologies and processes, which are the same as, substantially equivalent
      or
      superior to those possessed by us or become available in the market at a lower
      price.





There
      is
      a risk that we have infringed or in the future will infringe patents or
      trademarks owned by owners, that we will need to acquire licenses under patents
      or trademarks belonging to others for technology potentially useful or necessary
      to us and that licenses will not be available on acceptable terms, if at
      all.





We
      may
      have to litigate to enforce our patents or trademarks or to determine the scope
      and validity of other parties' proprietary rights. Litigation could be very
      costly and divert management's attention. An adverse outcome in any litigation
      may have a severe negative effect on our financial results and stock price.
      To
      determine the priority of inventions, we may have to participate in interference
      proceedings declared by the United States Patent and Trademark Office or
      oppositions in foreign patent and trademark offices, which could result in
      substantial cost to us and limitations on the scope or validity our patents
      or
      trademarks.





We
      also
      rely on trade secrets and proprietary know-how, which we seek to protect by
      confidentiality agreements with our employees, consultants, service providers
      and third parties. There is a risk that these agreements may be breached, and
      that the remedies available to us may not be adequate. In addition, our trade
      secrets and proprietary know-how may otherwise become known to or be
      independently discovered by others.





Failure
      to increase our brand awareness could limit our ability to compete
      effectively.





If
      the
      marketplace does not associate us with high-quality products and services,
      we
      may be unable to keep our existing customers, attract new customers or
      successfully introduce new products and services. Competitive and other
      pressures may require us to increase our marketing expenses to promote our
      brand
      name, and the benefits associated with brand creation may not outweigh the
      risks
      and costs associated with establishing our brand name. Our failure to develop
      a
      strong brand name or the incurrence of excessive costs associated with
      establishing our brand name may harm our business.





We
      have a lengthy sales and implementation cycle, which increases the cost of
      completing sales and renders completion of sales less
      predictable.





If
      we are
      unable to license our products and services to new customers on a timely basis
      or if our existing and proposed customers and their end-users suffer delays
      in
      the implementation and adoption of its services, our revenue may be limited
      and
      business and prospects may be harmed. Our customers must evaluate our technology
      and integrate our products and services into the products and services they
      provide. In addition, our customers may need to adopt a comprehensive sales,
      marketing and training program in order to effectively implement some of its
      products. For these and other reasons, the cycle associated with establishing
      licenses and implementing our products can be lengthy.





Our
      success depends on our ability to grow and develop our direct and indirect
      distribution channels and the inability to do so could adversely affect future
      operating results.





-35-




Our
      failure to grow and develop our direct sales channel or to increase the number
      of our indirect distribution channels could have a material adverse effect
      on
      its business, operating results and financial condition. We must continue to
      develop relationships with existing channel partners or they may choose to
      devote greater resources to supporting the products of competitors.





We
      may
      be adversely impacted by the events of and actions in response to September
      11,
      2001. A recurrence of terrorist attacks may have a material adverse impact
      on
      our business plan, operations and financial condition.





We
      may be
      adversely affected by the events of September 11, 2001, and the war in Iraq.
      At
      this time, the long term effects of these events, or other similar or related
      events that may occur in the future, on the biometrics industry or on worldwide
      economic conditions. We cannot assure you that our business plan will not be
      adversely impacted by future terrorist attacks or actions taken in response
      to
      those attacks.




Risks
      relating to our current financing arrangement




There
      are a large number of shares underlying our callable secured convertible notes,
      and warrants that may be available for future sale and the sale of these shares
      may depress the market price of our common stock.





As
      of April
      15,
      2006 we had 26,246,981 shares
      of common stock issued and outstanding and callable secured convertible notes
      outstanding or an obligation to issue callable secured convertible notes that
      may be converted into an estimated 8,050,513 shares of common stock at current
      market prices, and outstanding warrants or an obligation to issue warrants
      to
      purchase 10,200,000 shares of common stock. In addition, the number of shares
      of
      common stock issuable upon conversion of the outstanding callable secured
      convertible have increased due to exercise price adjustments due to default.
      All
      of the shares, including all of the shares issuable upon conversion of the
      notes
      and upon exercise of our warrants, may be sold without restriction. The sale
      of
      these shares may adversely affect the market price of our common
      stock.





As
      there is an event of default, the continuously adjustable conversion price
      feature of our callable secured convertible notes become applicable, which
      could
      have a depressive effect on the price of our common stock.





Upon
      an
      event of default the callable secured convertible notes are convertible into
      shares of our common stock at a 50% discount to the trading price of the common
      stock prior to the conversion. The significant downward pressure on the price
      of
      the common stock as the selling stockholder converts and sells material amounts
      of common stock could have an adverse effect on our stock price. In addition,
      not only the sale of shares issued upon conversion or exercise of notes,
      warrants and options, but also the mere perception that these sales could occur,
      may adversely affect the market price of the common stock.





The
      issuance of shares upon conversion of the callable secured convertible notes
      and
      exercise of outstanding warrants may cause immediate and substantial dilution
      to
      our existing stockholders.





The
      issuance of shares upon conversion of the callable secured convertible notes
      and
      exercise of warrants may result in substantial dilution to the interests of
      other stockholders since the selling stockholders may ultimately convert and
      sell the full amount issuable on conversion. Although the selling stockholders
      may not convert their callable secured convertible notes and/or exercise their
      warrants if such conversion or exercise would cause them to own more than 4.99%
      of our outstanding common stock, this restriction does not prevent the selling
      stockholders from converting and/or exercising some of their holdings and then
      converting the rest of their holdings. In this way, the selling stockholders
      could sell more than this limit while never holding more than this limit. There
      is no upper limit on the number of shares that may be issued which will have
      the
      effect of further diluting the proportionate equity interest and voting power
      of
      holders of our common stock, including investors in this offering.




-36-




If
      we
      are required for any reason to repay our outstanding callable secured
      convertible notes, we would be required to deplete our working capital, if
      available, or raise additional funds. Our failure to repay the callable secured
      convertible notes, if required, could result in legal action against us, which
      could require the sale of substantial assets.





On
      February 25, 2005, we entered into a Security Purchase Agreement involving
      the
      sale of an aggregate of $5,100,000 principal amount of callable secured
      convertible notes and stock purchase warrants to buy 10,200,000 shares of our
      common stock. The callable secured convertible notes are due and payable, with
      10% interest, three years from the date of issuance, unless sooner converted
      into shares of our common stock. We currently have $4,820,000 callable secured
      convertible notes outstanding. the investor is obligated to purchase additional
      callable secured convertible notes in the aggregate amount of $280,000. In
      addition, any event of default as our failure to repay the principal or interest
      when due, our failure to issue shares of common stock upon conversion by the
      holder, our failure to timely file a registration statement or have such
      registration statement declared effective, breach of any covenant,
      representation or warranty in the Securities Purchase Agreement or related
      convertible note, the assignment or appointment of a receiver to control a
      substantial part of our property or business, the filing of a money judgment,
      writ or similar process against us in excess of $100,000, the commencement
      of a
      bankruptcy, insolvency, reorganization or liquidation proceeding against us
      and
      the delisting of our common stock could require the early repayment of the
      callable secured convertible notes, including a default interest rate of 15%
      on
      the outstanding principal balance of the notes if the default is not cured
      within the specified grace period. We anticipate that the full amount of the
      callable secured convertible notes will be converted into shares of our common
      stock, in accordance with the terms of the callable secured convertible notes.
      If we are required to repay the callable secured convertible notes, we would
      be
      required to use our limited working capital and raise additional funds. If
      we
      were unable to repay the notes when required, the note holders could commence
      legal action against us and foreclose on all of our assets to recover the
      amounts due. Any such action would require us to curtail or cease
      operations.




Risks
      related to our common
      stock




There
      is no assurance of an established public trading market, which would adversely
      affect the ability of investors in our company to sell their securities in
      the
      public markets.





Although
      our common stock trades on the Over-the-Counter Bulleting Board (the "OTCBB"),
      a
      regular trading market for the securities may not be sustained in the future.
      The NASD has enacted recent changes that limit quotations on the OTCBB to
      securities of issuers that are current in their reports filed with the
      Securities and Exchange Commission. The effect on the OTCBB of these rule
      changes and other proposed changes cannot be determined at this time. The OTCBB
      is an inter-dealer, Over-The-Counter market that provides significantly less
      liquidity than the NASD's automated quotation system (the "NASDAQ Stock
      Market"). Quotes for stocks included on the OTCBB are not listed in the
      financial sections of newspapers as are those for The Nasdaq Stock Market.
      Therefore, prices for securities traded solely on the OTCBB may be difficult
      to
      obtain and holders of common stock may be unable to resell their securities
      at
      or near their original offering price or at any price. Market prices for our
      common stock will be influenced by a number of factors, including:





·
            the
                issuance of new equity securities;


·
            changes
                in interest rates;


·
            competitive
                developments, including announcements by competitors of new products
                or
                services or significant contracts, acquisitions, strategic partnerships,
                joint ventures or capital
                commitments;


·
            variations
                in quarterly operating results;


·
            change
                in financial estimates by securities
                analysts;


·
            the
                depth and liquidity of the market for our common
                stock;


·
            investor
                perceptions of our company and the technologies industries generally;
                and


·
            general
                economic and other national
                conditions.





-37-





The
      limited prior public market and trading market may cause volatility in the
      market price of our common stock.





Our
      common stock is currently traded on a limited basis on the OTCBB under the
      symbol "VRDI." The quotation of our common stock on the OTCBB does not assure
      that a meaningful, consistent and liquid trading market currently exists, and
      in
      recent years such market has experienced extreme price and volume fluctuations
      that have particularly affected the market prices of many smaller companies
      like
      us. Our common stock is thus subject to volatility. In the absence of an active
      trading market:





·
            investors
                may have difficulty buying and selling or obtaining market
                quotations;


·
            market
                visibility for our common stock may be limited;
                and


·
            a
                lack of visibility for our common stock may have a depressive effect
                on
                the market for our common stock.





Our
      common stock could be considered a "penny stock."





Our
      common stock could be considered to be a "penny stock" if it meets one or more
      of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g)
      of the Securities Exchange Act of 1934, as amended. These include but are not
      limited to the following: (i) the stock trades at a price less than $5.00 per
      share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it
      is
      NOT quoted on The Nasdaq Stock Market, or even if so, has a price less than
      $5.00 per share; or (iv) is issued by a company with net tangible assets less
      than $2.0 million, if in business more than a continuous three years, or with
      average revenues of less than $6.0 million for the past three years. The
      principal result or effect of being designated a "penny stock" is that
      securities broker-dealers cannot recommend the stock but must trade in it on
      an
      unsolicited basis.





Broker-dealer
      requirements may affect trading and liquidity.





Section
      15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
      promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
      to provide potential investors with a document disclosing the risks of penny
      stocks and to obtain a manually signed and dated written receipt of the document
      before effecting any transaction in a penny stock for the investor's
      account.





Potential
      investors in our common stock are urged to obtain and read such disclosure
      carefully before purchasing any shares that are deemed to be "penny stock."
      Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
      account of any investor for transactions in such stocks before selling any
      penny
      stock to that investor. This procedure requires the broker-dealer to (i) obtain
      from the investor information concerning his or her financial situation,
      investment experience and investment objectives; (ii) reasonably determine,
      based on that information, that transactions in penny stocks are suitable for
      the investor and that the investor has sufficient knowledge and experience
      as to
      be reasonably capable of evaluating the risks of penny stock transactions;
      (iii)
      provide the investor with a written statement setting forth the basis on which
      the broker-dealer made the determination in (ii) above; and (iv) receive a
      signed and dated copy of such statement from the investor, confirming that
      it
      accurately reflects the investor's financial situation, investment experience
      and investment objectives. Compliance with these requirements may make it more
      difficult for holders of our common stock to resell their shares to third
      parties or to otherwise dispose of them in the market or otherwise.





-38-




Shares
      eligible for future sale may adversely affect the market price of our common
      stock, as the future sale of a substantial amount of our restricted stock in
      the
      public marketplace could reduce the price of our common stock.





From
      time
      to time, certain of our stockholders may be eligible to sell all or some of
      their shares of common stock by means of ordinary brokerage transactions in
      the
      open market pursuant to Rule 144, promulgated under the Securities Act ("Rule
      144"), subject to certain limitations. In general, pursuant to Rule 144, a
      stockholder (or stockholders whose shares are aggregated) who has satisfied
      a
      one-year holding period may, under certain circumstances, sell within any
      three-month period a number of securities which does not exceed the greater
      of
      1% of the then outstanding shares of common stock or the average weekly trading
      volume of the class during the four calendar weeks prior to such sale. Rule
      144
      also permits, under certain circumstances, the sale of securities, without
      any
      limitations, by a non-affiliate of our company that has satisfied a two-year
      holding period. In addition, we completed the first of three rounds of a private
      placement in February 2005, whereby we granted the investors in the private
      placement certain registration rights with respect to the shares of common
      stock
      underlying their securities. Any substantial sale of common stock pursuant
      to
      Rule 144 or pursuant to any resale prospectus may have an adverse effect on
      the
      market price of our securities.





Certain
      provisions of our Certificate of Incorporation and Delaware law may make it
      more
      difficult for a third party to effect a change-in-control.





Our
      Certificate of Incorporation authorizes the Board of Directors to issue up
      to
      2,000,000 shares of preferred stock. The preferred stock may be issued in one
      or
      more series, the terms of which may be determined at the time of issuance by
      the
      Board of Directors without further action by the stockholders. These terms
      may
      include voting rights including the right to vote as a series on particular
      matters, preferences as to dividends and liquidation, conversion rights,
      redemption rights and sinking fund provisions. The issuance of any preferred
      stock could diminish the rights of holders of our common stock, and therefore
      could reduce the value of such common stock. In addition, specific rights
      granted to future holders of preferred stock could be used to restrict our
      ability to merge with, or sell assets to, a third party. The ability of the
      Board of Directors to issue preferred stock could make it more difficult, delay,
      discourage, prevent or make it more costly to acquire or effect a
      change-in-control.





In
      addition, we are also subject to Section 203 of the Delaware General Corporation
      Law that, subject to certain exceptions, prohibits a Delaware corporation from
      engaging in any business combination with any interested stockholder for a
      period of three years following the date that the stockholder became an
      interested stockholder. The preceding provisions of our Certificate of
      Incorporation, as well as Section 203 of the Delaware General Corporation Law,
      could discourage potential acquisition proposals, delay or prevent a
      change-in-control and prevent changes in our management, even if such things
      would be in the best interests of our stockholders.





-39-




ITEM
      7.
      FINANCIAL STATEMENTS




The
      information required by this Item 7 is incorporated by reference to our audited
      consolidated financial statements and Report of the Independent Registered
      Public Accounting Firm beginning at page F-1 of this Form 10-KSB.




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




NONE




ITEM
      8A.
      CONTROLS AND PROCEDURES




As
      of the
      end of the fiscal year ended December 31, 2005, the Company carried out an
      evaluation, under the supervision and with the participation of members of
      our
      management, including our Chief Executive Officer and Chief Financial Officer,
      of the effectiveness of the design and operation of our company's disclosure
      controls and procedures pursuant to Rule 13a-15(b) of the U.S. Securities
      Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, our Chief
      Executive Officer and Chief Financial Officer concluded that, as of December
      31,
      2005, our disclosure controls and procedures, related to internal control over
      financial reporting and the recording of certain equity transactions, were
      not
      effective in light of the material weaknesses described below.





We
      were
      advised by Manning Elliott LLP, our independent auditors that during their
      performance of audit procedures related to our financial statements for the
      fiscal period ended December 31, 2005, they identified "material weaknesses"
      in
      our internal controls as defined in Statement on Auditing Standards No. 60,
      "Communication of Internal Control Related Matters Noted in an Audit" ("SAS
      60"). The material weaknesses are described below:





INADEQUATE
      FINANCIAL STATEMENT PREPARATION AND REVIEW PROCEDURES. We do not have adequate
      procedures and controls to ensure that accurate financial statements can be
      prepared and reviewed on a timely basis, including insufficient a) review and
      supervision within the accounting and finance departments; b) underlying
      accurate data to ensure that balances are properly summarized and posted to
      the
      general ledger; and c) technical accounting resources. If we were not, or are
      not in future periods, successful in identifying these adjustments, our
      quarterly or annual financial statements could be materially misstated, which
      could require a restatement.





·
            We
                have begun to identify a list of key policies and procedures needed
                to
                improve our financial statement preparation and review
                process


·
            Significant
                transactions are reviewed and approved by a supervisor before recording
                in
                the accounting records and financial statements


·
            We
                have implemented a uniform chart of accounts for all subsidiaries
                so that
                consolidation and review of accounting records are easier and more
                accurate


·
            Some
                administrative duties completed by our internal accountant have been
                transferred to other departments allowing the accounting department
                to
                focus on record keeping


·
            We
                have enhanced our internal procedures for journal entry recording
                and
                approvals on a timely basis and for efficient and accurate consolidations
                and reporting


·
            We
                have added to our review procedures on, and documentation of, our
                accounts, including the preparation of memoranda to support our
                significant judgments and estimates each
                quarter




-40-




INADEQUATE
      CONTROLS OVER EQUITY TRANSACTIONS. We do not have adequate review and
      supervision controls or sufficient supporting documentation of certain
      equity-related transactions to ensure that equity transactions are properly
      valued and recorded on a timely basis. As a result, adjustments in the equity
      accounts and financial statements could occur. If we were not, or are not in
      future periods, successful in identifying these adjustments, our quarterly
      or
      annual financial statements could be materially misstated, which could require
      a
      restatement.




·
            We
                disclosed on Form 8K filed in March 2006 that we inadvertently issued
                shares. This was an isolated situation related to Convertible Notes.
                The
                required procedures and controls to be followed by the Company and
                by the
                transfer agent have now been revised and corrected to prevent the
                same
                error from occurring.


·
            Significant
                transactions are reviewed and approved by senior management before
                recording in the accounting records and financial statements





INADEQUATE
      ENTITY LEVEL CONTROLS. We do not have effective entity level controls. These
      weaknesses include




(i)
            weaknesses
                in the risk assessment controls, including the lack of adequate mechanisms
                for anticipating and identifying financial reporting risks; and for
                reacting to changes in the operating environment that could have
                a
                potential effect on financial
                reporting;




(ii)
            weaknesses
                in monitoring controls, including the lack of adequate staffing and
                procedures to ensure periodic evaluations of internal controls to
                ensure
                that appropriate personnel regularly obtain evidence that controls
                are
                functioning effectively and that identified control deficiencies
                are
                timely remedied.




If
      we
      were not, or are not in future periods, successful in identifying these control
      weaknesses, our quarterly or annual financial statements could be materially
      misstated, which could require a restatement.





·
            To
                address the lack of adequate accounting and finance resources and
                lack of
                effective segregation of duties, we have implemented an increased
                level of
                internal reviews and approvals. These procedures include review and
                approval by the CEO of significant transactions with financial reporting
                risk.





INADEQUATE
      SEGREGATION OF DUTIES. We do not have adequate procedures and controls in place
      to ensure proper segregation of duties within the contract approval processes.
      As a result, adjustments in the financial statements could occur and not be
      prevented or detected by our controls in a timely manner.





·
            We
                will ensure that adequate procedures are in place so that all material
                agreements and contracts entered into by the Company are approved
                by the
                Board of Directors.


·
            Refer
                to the response in the above section on inadequate entity level controls
                for planned response.





INADEQUATE
      CONTROLS OVER TIMELY PREPARATION OF BANK RECONCILIATIONS. We do not have
      adequate controls to ensure timely preparation of bank reconciliations. This
      could prevent us from recording cash receipts/payments accurately and timely.
      As
      a result, misappropriation of assets and material misstatements in our financial
      statements could occur and not be prevented or detected by our controls in
      a
      timely manner. If we were not, or are not in future periods, successful in
      recording cash transactions supported by timely cash reconciliations, our
      quarterly or annual financial statements could be materially misstated, which
      could require a restatement.





·
            We
                enhanced our internal procedures for the timely preparation of bank
                reconciliations.




-41-




INADEQUATE
      CONTROLS OVER INVENTORY AND COST OF REVENUES. We do not have adequate procedures
      and controls to ensure that cost of revenues transactions are accurately
      recorded in the correct period, and that any resulting adjusting entries are
      accurately and timely recorded in our general ledger. We do not have adequate
      control over physical inventory quantities. As a result, material post-closing
      adjustments have been posted to our general ledger.





·
            We
                will implement internal control procedures to ensure our inventory
                quantities are updated on a timely basis and reflect the actual quantities
                on hand during our quarterly and annual reporting periods.




Our
      disclosure controls and procedures are designed to ensure that the information
      required to be disclosed in our reports filed under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the U.S. Securities and Exchange Commission's (the "SEC") rules and forms,
      and to reasonably assure that such information is accumulated and communicated
      to our management, including our Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure. A control system, no matter how well conceived and operated, can
      provide only reasonable, not absolute, assurance that the objectives of the
      control system are met under all potential conditions, regardless of how remote,
      and may not prevent or detect all error and all fraud. Because of the inherent
      limitations in all control systems, no evaluation of controls can provide
      absolute assurance that all control issues and instances of fraud, if any,
      within our company have been prevented or detected.





We
      continue to improve and refine our internal controls as an ongoing process.
      Other than as summarized above, there have been no changes in our internal
      controls over financial reporting or other factors that have materially
      affected, or are reasonably likely to materially affect, our internal controls.





The
      certifications of our principal executive officer and principal financial
      officer required in accordance with Section 302 of the Sarbanes-Oxley Act of
      2002 are attached as exhibits to this Annual Report on Form 10-KSB. The
      disclosures set forth in this Item 8A contain information concerning (i) the
      evaluation of our disclosure controls and procedures, and changes in internal
      control over financial reporting, referred to in paragraph 4 of the
      certifications, and (ii) material weaknesses in the design or operation of
      our
      internal control over financial reporting, referred to in paragraph 5 of the
      certifications. Those certifications should be read in conjunction with this
      Item 8A for a more complete understanding of the matters covered by the
      certification




ITEM
      8B.
      OTHER INFORMATION




None





-42-





PART
      III




ITEM
      9.
      DIRECTORS, EXECUTIVE OFFICERS ,
      PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
      ACT




Information
      Concerning Our Directors and Executive Officers





Our
      executive officers and directors and their respective ages and


positions
      as of April 26, 2006 are as follows:





Name
            Age
            PositionPaul
                Mann
            47
            Chief
                Executive Officer and DirectorBill
                Cheung
            34
            DirectorJeremy
                Coles
            51
            DirectorShannon
                McCallum
            41
            DirectorDan
                Stryker*
            50
            PresidentBashir
                Jaffer**
            60
            Chief
                Financial Officer and SecretaryHamid
                Baradaran
            44
            Vice
                President, Hardware Development and
                Manufacturing




*
      Mr.
      Stryker was terminated as President on August 8, 2006.




**
      Mr.
      Jaffer resigned as the Chief Financial Officer and Secretary on May 3, 2006
      and
      Mr. Mann has been serving as the interim Chief Financial Officer.





Paul
      Mann, Chief Executive Officer and Director. Mr. Mann has held a variety of
      international posts throughout Europe including: Sales and Marketing Manager,
      Erith PLC, England; National Sales and Marketing Director, Eurodata Limited,
      UK;
      and Sales and Marketing Director ASB Grunland, Ludwigsburgh, Germany. In Canada,
      Mr. Mann has served as President of an international business referral service
      linking global trade opportunities, and has worked to spearhead the
      international sales and marketing initiatives of The Business Development
      Corporation. Mr. Mann's background in international trade and international
      business development led to the creation of Cavio and since its inception in
      1998, he has been its Chief Executive Officer.





Bill
      Cheung, Director. Mr. Cheung was appointed to our Board of Directors in May
      2003. Mr. Cheung has been a partner of Manhattan Capital Partners, Inc., an
      investment advisory company, since 2002. Prior to that, Mr. Cheung spent ten
      years in the industrial manufacturing industry as a partner of National Plastics
      (China) and Sino Energy (Hong Kong).





Jeremy
      Coles, Director. Mr. Coles was appointed to our Board of Directors in June
      2004.
      Mr. Coles has been a managing director at Beaufort International Associates
      Limited since September 1998. Prior to that, Mr. Coles was a self-employed
      research and marketing consultant.





Shannon
      McCallum, Director. Mr. McCallum was appointed to our Board of Directors in
      June
      2004. Mr. McCallum has been employed with the U.S. Department of Defense for
      the
      past five years, where he has provided security risk management services for
      homeland defense matters. Mr. McCallum was previously president of The McCallum
      Risk Company, a private consulting company specializing in eCommerce risk,
      fraud
      detection and IT security infrastructure evaluations for homeland security.
      Mr.
      McCallum was also Manager, Internet Fraud Investigations & Security for
      Travelocity.com, a leading provider of online travel services.





Dan
      Stryker, President. Mr. Stryker has over 20 years of successful technology
      sales
      and business development experience, focusing in the areas of enterprise
      solutions integration, internet security, e-business strategies, business
      intelligence and telecommunications. From August 2001 to date, Mr. Stryker
      has
      served as the Founder and CEO of Global Access Integrated Network Services
      LLC,("GAINS LLC") based in Verona, NJ. GAINS LLC is a Biometric Systems
      Integrator that specializes in fingerprint biometric enrollment services,
      project management, and providing complete biometric identification integration
      solutions and services. From February 2000 to August 2001, Mr. Stryker was
      the
      Vice President, Business Development and Worldwide Sales at Y-Point Inc.,
      located in Hazlet, NJ. Y-Point Inc. was a back-end web development company
      and
      systems integrator specializing in financial services and project management.
      Prior to February 2000, Mr. Stryker was based in Madison, NJ and served as
      the
      Director, Strategic Sales with Veridicom Inc., of Santa Clara, CA.




-43-




Bashir
      Jaffer, Chief Financial Officer and Secretary. Mr. Jaffer was appointed as
      our
      Chief Financial Officer on March 1, 2004. Mr. Jaffer has been a member of the
      Canadian Institute of Chartered Accountants since 1976. He is also a Fellow
      of
      the Institute of Chartered Accountants of England and Wales. From 1998 to 2003,
      Mr. Jaffer was the owner and President of a travel management company. From
      1983
      to 1998, Mr. Jaffer was a partner at a firm of chartered accountants located
      in
      Vancouver, British Columbia. Prior to that, Mr. Jaffer worked for a public
      company and an international firm of chartered accountants located in London,
      England. Mr. Jaffer also worked at KPMG (formerly Thorne Riddell) and
      PricewaterhouseCoopers (formerly Coopers & Lybrand) both located in
      Vancouver, British Columbia.




Hamid
      Baradaran, VP, Hardware Development and Manufacturing. Mr. Baradaran joined
      our
      company as our Vice President, Hardware Development and Manufacturing in July,
      2004. Mr. Baradaran has over twenty-one years of diverse research and
      development experience with leading telecommunication/ data communication
      corporations. Mr. Baradaran also has over 15 years direct experience in hardware
      design and manufacturing, including IC and systems level design, having served
      as the director of hardware development in Califonia with Gluos Networks from
      2002 to 2004, with Othios from 2000 to 2002 and with Alcatel USA from 1996.
      Mr.
      Baradaran has previously developed new products and has particular strengths
      in
      high-speed digital design, printed circuit board design, high-speed signal
      integrity, high-speed PCB layout, system electromechanical design &
mechanical design. Mr. Baradaran has a Bachelor of Science in Electrical
      Engineering, received in 1982 from California State University, Fullerton,
      California. He has also been the recipient of several patents and
      awards.





There
      are
      no family relationships between any of our directors or executive
      officers.





Executive
      Officers





We
      have
      an employment agreement with Paul Mann. The remaining officers serve at the
      discretion of our board of directors and hold office until their successor
      is
      elected and qualified or until their earlier resignation or
      removal.





Board
      Committees





Our
      Board
      does not maintain a separate audit, nominating or compensation committee.
      Functions customarily performed by such committees are performed by our Board
      as
      a whole. We are not required to maintain such committees under the applicable
      rules of the Over-the-Counter Bulletin Board. None of our independent directors
      qualify as an "audit committee financial expert."





The
      Board
      of Directors has not adopted a specific process with respect to security holder
      communications, but security holders wishing to communicate with the Board
      of
      Directors may do so by mailing such communications to the Board of Directors
      at
      our offices.





-44-




Code
      of
      Ethics





We
      have
      not yet adopted a "code of ethics", as defined by the SEC that applies to our
      Chief Executive Officer, Chief Financial Officer, principal accounting officer
      or controller and persons performing similar functions. We are in the process
      of
      drafting and adopting a Code of Ethics.





Director
      Compensation





Directors
      are reimbursed for reasonable out-of-pocket expenses incurred in connection
      with
      attendance at Board meetings. Directors are also eligible to receive annual
      stock option grants approved by the Board.





Section
      16(a) Beneficial Ownership Compliance





Section
      16(a) of the Securities Exchange Act of 1934 requires our directors and certain
      executive officers and persons who own more than ten percent (10%) of a
      registered class of our equity securities (collectively, the "Reporting
      Persons"), to file reports of ownership and changes in ownership with the
      Securities and Exchange Commission. The Reporting Persons are required by
      Securities and Exchange Commission regulation to furnish us with copies of
      all
      Section 16(a) forms they file.





To
      our
      knowledge, based solely on our review of the copies of such forms received
      by
      us, or written representations from the Reporting Persons, all of our insiders
      complied with all filing requirements during 2005 .




ITEM
      10.
      EXECUTIVE COMPENSATION




The
      following table sets forth the annual and long-term compensation paid to our
      Chief Executive Officer and the other executive officers who earned more than
      $100,000 per year at the end of the last completed fiscal year. We refer to
      all
      of these officers collectively as our "named executive officers."





Summary
      Compensation Table


(a)
              
              
              
              (b)
              
              (c)
              
              
              
              (d)
              
              (e)
              
              
              
              (f)Name
                  and principal Position
              
              
              
              Year
              
              Salary($)
              
              
              
              Bonus($)
              
              Other
                Annual
                Compensation
              
              
              
              Restricted
                Stock
                  Award$Charles
                  Lesser, Former President
              
              
              (1)
              
              
              2003
              
              
              69,631
              
              
              
              
              
              
              
              
              14,369
              
              
              (2)Paul
                  Mann, CEO
              
              
              
              
              
              2004
              
              
              175,000
              
              
              
              
              
              —Bashir
                  Jaffer, CFO
              
              
              
              
              
              2004
              
              
              100,000
              
              
              
              
              
              —Hamid
                  Baradanan, VP Hardware Development
              
              
              
              
              
              2004
              
              
              100,000
              
              
              
              
              
              —Terry
                  Laferte, VP Software Development
              
              
              
              
              
              2004
              
              
              100,000
              
              
              
              
              
              —Cameron
                  Adams, VP Strategic Devt & Sales
              
              
              
              
              
              2004
              
              
              100,000
              
              
              
              
              
              —Current
                  year, 2005Paul
                  Mann, CEO
              
              
              
              
              
              2005
              
              
              175,000
              
              
              
              
              
              —Bashir
                  Jaffer, CFO
              
              
              
              
              
              2005
              
              
              100,000
              
              
              (4)
              
              
              —Hamid
                  Baradanan, VP Hardware Development
              
              
              
              
              
              2005
              
              
              100,000
              
              
              
              
              
              —





-45-




Summary
      Compensation Table (cont.)





Long
                Term CompensationAnnual
                Compensation
            
            Awards
            
            
            
            
            
            Payouts(g)
            
            
            
            (h)
            
            (i)Securities
              Underlying
              Options
                / SARs (#)
            
            
            
            LTIP
              Payouts
                ($)
            
            All
                Other
              Compensations($)Charles
                Lesser, Former President
            
            
            60,000
            
            
            (1)(3)Jeremy
                Coles, Director
            
            
            50,000Shannon
                McCallum, Director
            
            
            100,000Bill
                Cheung, Director
            
            
            0Paul
                Mann, CEO
            
            
            200,000
            
            
            (5)Bashir
                Jaffer, CFO
            
            
            100,000Hamid
                Baradaran, VP Hardware Development
            
            
            100,000




(1)
            Retained
                in April 2003.





(2)
            Represents
                premiums paid on an insurance
                policy.





(3)
            Options
                were originally granted on April 1, 2003 vesting 2,500 shares per
month
                over a period of 24 months. Mr. Lesser resigned in February 2004
                andat
                that time 24,000 options were vested. These options have now
                lapsed.





(4)
            Remuneration
                for certain officers is paid in Canadian currency at $130,000per
                annum. These have been stated above as US $100,000 per
                annum





(5)
            Stock
                options to the CEO & President consist of 150,000 options under theterms
                of his employment agreement and 50,000 options under the 2004 StockOption
                Plan





-46-




Option/SAR
      Information





The
      following table sets forth stock options granted by us to the named executive officers
      in the most recent fiscal year.


Options/SAR
      Grants in Last Fiscal Year


Individual
      Grants




Director
                / Officer
            
            No.
                of Securities Underlying Options/SARs Granted(#)
            
            Percent
                of Total Options/SARs Granted to Employees in Fiscal Year (1)
                (2)
            
            Exercise
                or Base Price($/Sh)
            
            Expiration
                DatePaul
                Mann, CEO
            
            
            200,000
            
            
            27.59
            %
            $
            1.79
            
            
            See
                Note 3Bashir
                Jaffer, CFO
            
            
            100,000
            
            
            13.79
            %Hamid
                Baradaran, VP Hardware
            
            
            100,000
            
            
            13.79
            %




(1)
            1,155,000
                stock options were granted in February and April 2005.Of
                these, 430,000 lapsed during the year and currently, the outstanding
                numberof
                options are 725,000





(2)
            Options
                vest monthly over 24 months from the date of Grant for Directorsand
                employees who were with the Company from March 1, 2004 to June 30,2004.
                Options vest monthly over 24 months from the date of Grant forDirectors
                and employees who were with the Company from March 1, 2004 toJune
                30, 2004. For directors and employees who joined on or after July
                1,2004
                the options vest monthly over 36 months from the grant
                date.





(3)
            The
                shares will be free trading at the time of exercise of vested options.Options
                can only be exercised one year following the date of grant of theoptions.
                Options expire 5 years after the grant date or 90 days aftercessation
                of employment or directorship





Employment
      Agreements with Executive Officers





We
      entered into an employment agreement with our current Chief Executive Officer,
      Paul Mann. The term of the agreement is one year and is automatically renewable.
      Under the terms of the agreement, Mr. Mann receives a base salary of $175,000
      and is eligible for an additional bonus based on our revenue performance. Under
      the terms of this employment agreement, Mr. Mann is also entitled to a ten-year
      stock option for 150,000 shares of our common stock at an exercise price of
      $3.50 per share.





We
      have
      not entered into employment agreements with our other executive
      officers.




ITEM
      11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




The
      following table sets forth information regarding the beneficial ownership
      of our common stock as of April 26, 2006 by:




·
              each
                  person known by us to be the beneficial owner of more than 5%of
                  our Common Stock;





·
              each
                  of our directors;





·
              each
                  of our executive officers;
                  and




-47-




·
              our
                  executive officers and directors as a
                  group.





Beneficial
      ownership is determined in accordance with the rules of the SEC and includes
      voting and investment power. Under SEC rules, a person is deemed to be the
      beneficial owner of securities which may be acquired by such person upon the
      exercise of options and warrants or the conversion of convertible securities
      within 60 days from the date on which beneficial ownership is to be determined.
      Each beneficial owner's percentage ownership is determined by dividing the
      number of shares beneficially owned by that person by the base number of
      outstanding shares, increased to reflect the beneficially-owned shares
      underlying options, warrants or other convertible securities included in that
      person's holdings, but not those underlying shares held by any other
      person.





Unless
      indicated otherwise, the address for each person named is c/o Veridicom
      International, Inc., 21 Water Street., 5 th Floor,
      Vancouver, British Columbia V6B 1A1, Canada





Named
                Executive Officers and Directors:
            
            Amount
                and Nature of Beneficial Ownership
            
            
            
            Percentage
                of ClassPaul
                Mann, Director, Chief Executive Officer
            
            
            3,113,267
            
            
            (1)
            
            
            11.9
            %Dan
                Stryker, President
            
            
            0
            
            
            
            
            
            0
            %Bashir
                Jaffer, Chief Financial Officer and Secretary
            
            
            100,000
            
            
            
            
            
            0.4
            %Hamid
                Baradaran, VP, Hardware Development & Manufacturing
            
            
            100,000
            
            
            
            
            
            0.4
            %Bill
                Cheung, Director
            
            
            713,512
            
            
            (2)
            
            
            2.7
            %Shannon
                McCallum, Director
            
            
            100,000
            
            
            
            
            
            0.4
            %Jeremy
                Coles, Director
            
            
            83,268
            
            
            (3)
            
            
            0.3
            %All
                current directors and named officers as a group (7 in all)
            
            
            7,100,294
            
            
            
            
            
            27.1
            %5%
                Stockholders:Dara
                Bashir Khan
              F12
                Off Hatim Alvi Road
              Block
                4 Old Clifton
              Karachi
                Pakistan
            
            
            3,750,000
            
            
            
            
            
            14.3
            %Palmira
                Advisors S C
              Avenida
                Palmira 142
              Cuernavaca
                Morelos
              62490
                Mexico
            
            
            2,500,000
            
            
            
            
            
            9.5
            %




(1)
            Includes
                options to purchase 200,000 shares of Common
                Stock.





(2)
            Includes
                (i) options to purchase 285,714 shares of Common Stock, owned byManhattan
                Capital Partners, LLC of which Mr. Cheung is a partner, (ii)options
                to purchase 150,000 shares of Common Stock and(iii)
                277,858shares
                in the name of Manhattan Capital
                Partners.





(3)
            Includes
                options and warrants to purchase an aggregate of 652,348 sharesof
                Common Stock.





(4)
            Includes
                979,376 shares held in the name of Biocom Co., Ltd. Mr. Kwun isthe
                president of Biocom Co., Ltd.




-48-




ITEM
      12.
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




We
      have
      entered into indemnification agreements with certain of our directors and
      executive officers pursuant to which we have agreed to indemnify any officer
      or
      director against all costs associated with the defense of any action brought
      against him or her in his/her capacity as our officer or director.





We
      have
      entered into agreements with Manhattan Capital Partners ("Manhattan") and its
      affiliates to provide consulting and stock placement services. We paid Manhattan
      a total of $115,714 during the year ended December 31, 2005 and $316,028 during
      the year ended December 31, 2004. At December 31, 2003 Manhattan had advanced
      to
      us $110,005 in a non-interest bearing short-term loan, which was repaid in
      2004.
      Manhattan is related due to one of the principals who is one of our
      directors.





We
      have
      an unsecured, non-interest bearing short-term advance from Paul Mann,
      our
      CEO, in the amount of $83,719 as of December 31, 2005 (2004: $218,899). These
      advances are without any specified repayment terms.





We
      had an
      unsecured short term loan from Tall Enterprises Ltd. (a company controlled
      by
      Terry Laferte, a former officer of the Company) amounting to $64,000 as at
      December 31, 2004; bearing interest at 7% per annum and due on or before June 30,
      2005.
      Thos loan was paid in full in March 2005.





We
      have
      an unsecured loan from Global Ventures Advisors, a company controlled by a
      former director of our subsidiary in Pakistan, Veridicom Pakistan (Private)
      Ltd., as at December 31, 2005 amounting to $366,214; bearing interest at 12%
      per
      annum and due on or before June 30, 2007, with an option to convert to common
      stock in the event of default in repayment by the Company.





In
      January 2005, the Company entered into a Consulting Agreement for a term of
      24
      months at $10,000 per month with Taktical Advisory Group of United Arab Emirates
      (UAE), a company affiliated with a former related party, for consulting services
      to develop strategic alliances, business development, securing distribution
      channels, and to provide representation in the UAE.





On
      November 3, 2003, Veridicom Inc. our subsidiary, entered into a five year
      Marketing and Distribution Agreement with Biocom Co. Ltd., ("Biocom") a Korean
      corporation and Gyung Min Kim, our former director. Under the terms of this
      Agreement Biocom was appointed as our exclusive distributor for all the sale
      and
      servicing of the Company's products in Korea.





We
      believe that the terms of all of the above transactions are commercially
      reasonable and no less favorable to us than we could have obtained from an
      unaffiliated third party on an arm's length basis. Our policy requires that
      all
      related parties exclude themselves from negotiating and voting on behalf of our company in connection
      with related party transactions.





-49-




ITEM
      13.
      EXHIBITS




(a)
      Exhibits.


Exhibit
                Number14.1
              
              Code
                  of Ethics (incorporated by reference to incorporated by reference
                  to
                  Exhibit 14.1 to the Registrant’s Annual Report on Form 10-KSB for the year
                  ended December 31, 2003).24.1
              
              Power
                  of Attorney (included on the signature page).31.1
              
              Certification
                  of Chief Executive Officer pursuant to Item601(b)(31) of Regulation S-B, as adopted pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Item601(b)(31) of Regulation S-B, as adopted pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
                  adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.1
              
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
                  adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.




ITEM
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES




In
      July
      2005, A J Robbins,PC were dismissed as the Company’s auditors and Manning
      Elliott LLP, Chartered Accountants were appointed as our auditors by the Board
      of Directors.





Aggregate
      fees billed by our independent public accountants for the years ended 2005
      and
      2004 are as follows:





2005
            
            2004Audit
                fees
            
            $
            47,500
            (1)
            $
            223,568Audit
                related fees
            
            $
            —
            
            $
            —Tax
                fees
            
            $
            —
            
            $
            1,193All
                other fees
            
            $
            —
            
            $
            —





(1)  Fees
      billed during fiscal 2005 by Manning Elliott LLP were $20,000 of this amount.





The
      Board
      has considered the provision of non-audit services provided by our independent
      public accountants to be compatible with maintaining their independence. The
      Board will continue to approve all audit and permissible non-audit services
      provided by our independent public accountants. These services may include
      audit
      services and related services, tax services, and other services.





-50-




SIGNATURES





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.




VERIDICOM
              INTERNATIONAL, INC.By:
            /s/
              Paul
              MannName:
              Paul MannTitle:  
                President
              (Principal
                Executive Officer)





In
      accordance with the Securities Exchange Act of 1934, this report has been signed
      below by the following persons on behalf of the registrant and in the capacities
      and on the dates indicated.





Signature
            
            Title
            
            Date/s/
                Paul Mann
            
            President,
                Chief Executive Officer, Chief Financial
            
            September
                22, 2006Paul
                Mann
            
            Officer
              and Director
              (Principal Executive Officer and Principal Financial Officer)/s/
                Bill Cheung
            
            Director,
            
            September
                22, 2006Bill
                  Cheungs/
                Jeremy Coles
            
            Director
            
            September
                22,2006Jeremy
                  ColesDirectorShannon
                McCallum





-51-





VERIDICOM
      INTERNATIONAL, INC. AND SUBSIDIARIES


(FORMERLY
      KNOWN AS ALPHA VIRTUAL, INC.)


INDEX
      TO
      FINANCIAL STATEMENTS





PAGEReport
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets
            F-2Consolidated
                Statements of Operations and Other ComprehensiveIncome (Loss)
            F-3Consolidated
                Statement of Changes in Stockholders' Equity (Deficit)
            F-4Consolidated
                Statements of Cash Flows
            F-5Notes
                to Consolidated Financial Statements
            F-6





-52-









Report
      of
      Independent Registered Public Accounting Firm





To
      the
      Directors and Stockholders


Veridicom
      International, Inc.





We
      have
      audited the accompanying consolidated balance sheet of Veridicom International,
      Inc. as of December 31, 2005 and the related consolidated statements of
      operations, stockholders" deficit, and cash flows for the year then ended.
      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 audit. The accompanying consolidated balance
      sheet of Veridicom International, Inc. as of December 31, 2004 and the related
      consolidated statements of operations, stockholders' equity, and cash flows
      for
      the year then ended, were audited by other auditors in their report dated
      February 11, 2005. Those auditors expressed an unqualified opinion on those
      consolidated financial statements and included an explanatory paragraph
      describing the substantial doubt about the Company's ability to continue as
      a
      going concern.





We
      conducted our audit 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 management, as well as evaluating the overall
      financial statement presentation. We believe that our audit 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 Veridicom International,
      Inc. as of December 31, 2005, and the results of its operations and its cash
      flows for the year then ended, in conformity with accounting principles
      generally accepted in the United States.





The
      accompanying financial statements have been prepared assuming the Company will
      continue as a going concern. As discussed in Note 1 to the financial statements,
      the Company has a working capital deficiency and has incurred significant
      operating losses from operations. The Company will need additional equity/debt
      financing to sustain operations. These factors raise substantial doubt about
      the
      Company's ability to continue as a going concern. Management's plans in regard
      to these matters are also discussed in Note 1. The financial statements do
      not
      include any adjustments that might result from the outcome of this
      uncertainty.





As
      discussed in Note 19 to the accompanying financial statements, the Company
      has
      restated the consolidated financial statements for the year ended December
      31,
      2005.





MANNING
      ELLIOTT LLP





CHARTERED
      ACCOUNTANTS


Vancouver,
      Canada


April
      14,
      2006, except as to Note 19 which is as of September 18, 2006




F-1




VERIDICOM
                INTERNATIONAL, INC. AND SUBSIDIARIES
              CONSOLIDATED
                BALANCE SHEETSASSETS2005(Restated
                - Note 19)
            
            2004Current
                assetsCash
            
            $
            —
            
            $
            53,866Accounts
                receivable, net
            
            
            47,358
            
            
            15,791Accounts
                receivable, related party
            
            
            119,378
            
            
            32,794Subscriptions
                receivable
            
            
            —
            
            
            420,000Inventory
            
            
            469,609
            
            
            72,793Other
                current assets
            
            
            18,457
            
            
            26,603Total
                current assets
            
            
            654,802
            
            
            621,847Property
                & equipment, net
            
            
            107,897
            
            
            206,697Patents
            
            
            200,000
            
            
            200,000Goodwill
            
            
            2,570,806
            
            
            4,728,546Deferred
                finance costs, net
            
            
            807,969
            
            
            —Other
                assets
            
            
            —
            
            
            3,302$
            4,341,474
            
            $
            5,760,392LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)Current
                liabilitiesBank
                indebtedness
            
            $
            769
            
            
            —Accounts
                payable
            
            
            1,456,722
            
            $
            1,808,828Accrued
                expenses
            
            
            2,711,612
            
            
            785,889Due
                to related party
            
            
            117,237
            
            
            610,003Notes
                payable, current portion
            
            
            80,050
            
            
            254,549Notes
                payable — related parties, current portion
            
            
            53,000
            
            
            582,681Convertible
                notes payable
            
            
            887,603
            
            
            —Other
                current liabilities
            
            
            52,306
            
            
            37,799Total
                current liabilities
            
            
            5,359,299
            
            
            4,079,749Notes
                payable, related parties, less current portion
            
            
            36,812
            
            
            —Notes
                payable, less current portion
            
            
            366,214Other
                liabilities
            
            
            89,044
            
            
            —Noncontrolling
                interest
            
            
            28,980
            
            
            18,698Stockholders'
                equity (deficit)Preferred
                stock, $.001 par value 2,000,000authorized;
                NIL issued and outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value, 60,000,000authorized;
                26,246,981 and 15,781,107 issued and outstanding,respectively
            
            
            26,246
            
            
            15,781Additional
                paid in capital
            
            
            20,804,835
            
            
            13,591,671Accumulated
                other comprehensive loss
            
            
            (230,634
            )
            
            (144,695
            )Deficit
            
            
            (22,139,322
            )
            
            (11,800,812
            )Stockholders'
                equity (deficit)
            
            
            (1,538,875
            )
            
            1,661,945$
            4,341,474
            
            $
            5,760,392SEE
                ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL
                STATEMENTS





F-2




VERIDICOM
                INTERNATIONAL, INC. AND SUBSIDIARIES
              CONSOLIDATED
                STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
              FOR
                THE YEARS ENDED DECEMBER 31, 2005 AND 20042005(Restated
                - Note 19)
            
            2004RevenuesRevenue
            
            $
            392,734
            
            $
            384,853Cost
                of goods sold
            
            
            344,764
            
            
            212,063Gross
                profit
            
            
            47,970
            
            
            172,790ExpensesGeneral
                and administrative
            
            
            3,526,264
            
            
            3,441,793Research
                and development
            
            
            1,274,127
            
            
            495,577Depreciation
            
            
            158,172
            
            
            47,188Impairment
                of goodwill
            
            
            2,157,740
            
            
            —Loss
                from operations
            
            
            (7,068,333
            )
            
            (3,811,768
            )Other
                income (expense):Gain
                on forgiveness of debt
            
            
            194,620
            
            
            —Interest
                expense
            
            
            (2,268,202
            )
            
            (94,145
            )Other
                income
            
            
            545,291
            
            
            179,344Liquidated
                damages (Note 15)
            
            
            (1,731,604
            )
            
            —Loss
                before noncontrolling interest
            
            
            (10,328,228
            )
            
            (3,726,569
            )Noncontrolling
                interest
            
            
            (10,282
            )
            
            6,308Net
                loss
            
            
            (10,338,510
            )
            
            (3,720,261
            )Other
                comprehensive loss:Foreign
                currency translation
            
            
            (85,939
            )
            
            (141,002
            )Total
                comprehensive loss
            
            $
            (10,424,449
            )
            $
            (3,861,263
            )Loss
                per share (basic and diluted)
            
            $
            (0.69
            )
            $
            (0.27
            )Weighted
                average common shares(basic
                and fully diluted)
            
            
            15,060,000
            
            
            14,416,000SEE
                ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL
                STATEMENTS








F-3


VERIDICOM
                  INTERNATIONAL, INC. AND SUBSIDIARIES
                CONSOLIDATED
                  STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY (DEFICIT)
                FOR
                  THE YEARS ENDEDDECEMBER 31,2005 AND 2004Common
                  Stock $.001 par valueShares
              
              Amount
              
              CommonStock
                Committed
              
              AdditionalPaid
                  In
                Capital
              
              AccumulatedComprehensive
                  Loss
              
              (Deficit)
              
              Total
                  StockholdersEquity
                  (Deficit)**Balances,
                  December 31, 2003**
              
              
              **9,450,689**
              
              **$**
              **9,450**
              
              **$**
              **10,000**
              
              **$**
              **7,280,603**
              
              **$**
              **(3,693**
              **)**
              **$**
              **(8,080,551**
              **)**
              **$**
              **(784,191**
              **)**Sales
                  of common stock net of offering costs of $673,978
              
              
              1,020,578
              
              
              1,021
              
              
              —
              
              
              2,040,063
              
              
              —
              
              
              —
              
              
              2,041,084Stocks
                  issued for conversion of debt
              
              
              157,143
              
              
              157
              
              
              
              
              
              164,843
              
              
              —
              
              
              —
              
              
              165,000Stocks
                  issued as loan fee (Beaufort)
              
              
              25,000
              
              
              25
              
              
              —
              
              
              106,225
              
              
              —
              
              
              —
              
              
              106,250Stock
                  issued in Cavio merger
              
              
              5,119,140
              
              
              5,119
              
              
              —
              
              
              424,401
              
              
              —
              
              
              —
              
              
              429,520Stock
                  options granted for CEO
              
              
              —
              
              
              —
              
              
              —
              
              
              359,100
              
              
              —
              
              
              —
              
              
              359,100Exercise
                  of Stock options
              
              
              8,560
              
              
              9
              
              
              —
              
              
              13,817
              
              
              —
              
              
              —
              
              
              13,826Cavio's
                  subscription received
              
              
              —
              
              
              —
              
              
              —
              
              
              3,192,619
              
              
              —
              
              
              —
              
              
              3,192,619Common
                  stock comitted reclassified
              
              
              —
              
              
              —
              
              
              (10,000
              )
              
              10,000
              
              
              —
              
              
              —
              
              
              —Foreign
                  currency translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (141,002
              )
              
              —
              
              
              (141,002
              )Net
                  (loss)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,720,261
              )
              
              (3,720,261
              )**Balances,
                  December 31, 2004**
              
              
              **15,781,110**
              
              **$**
              **15,781**
              
              **$**
              **—**
              
              **$**
              **13,591,671**
              
              **$**
              **(144,695**
              **)**
              **$**
              **(11,800,812**
              **)**
              **$**
              **1,661,945**Sales
                  of common stock net of offering costs of $5,000
              
              
              61,000
              
              
              61
              
              
              —
              
              
              95,589
              
              
              —
              
              
              —
              
              
              95,650Stocks
                  issued for conversion of debt
              
              
              10,343,502
              
              
              10,343
              
              
              —
              
              
              699,470
              
              
              —
              
              
              —
              
              
              709,813Stocks
                  issued for services
              
              
              50,000
              
              
              50
              
              
              —
              
              
              139,950
              
              
              —
              
              
              —
              
              
              140,000Beneficial
                  conversion rights
              
              
              —
              
              
              —
              
              
              —
              
              
              5,559,579
              
              
              —
              
              
              —
              
              
              5,559,579Stock
                  options granted for CEO and employees
              
              
              —
              
              
              —
              
              
              —
              
              
              704,149
              
              
              —
              
              
              —
              
              
              704,149Stocks
                  issued as interest expense
              
              
              11,369
              
              
              11
              
              
              —
              
              
              14,427
              
              
              —
              
              
              —
              
              
              14,438Foreign
                  currency translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (85,939
              )
              
              —
              
              
              (85,939
              )Net
                  (loss)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (10,338,510
              )
              
              (10,338,510
              )**Balances,
                  December 31, 2005 (Restated - Note 19**
              
              
              **26,246,981**
              
              **$**
              **26,246**
              
              **$**
              **—**
              
              **$**
              **20,804,835**
              
              **$**
              **(230,634**
              **)**
              **$**
              **(22,139,322**
              **)**
              **$**
              **1,538,875**




F-4





VERIDICOM
                INTERNATIONAL, INC. AND SUBSIDIARIES
              CONSOLIDATED
                STATEMENTS OF CASH FLOWS2005(Restated -
                Note 19)
            
            2004Cashflow
                from operating activities:Net
                loss from operations
            
            $
            (10,338,510
            )
            $
            (3,720,261
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                of property and equipment
            
            
            158,172
            
            
            47,188Amortization
                of deferred financing costs
            
            
            225,317
            
            
            —Stock
                based compensation
            
            
            858,587
            
            
            465,350Common
                stock issued for debt conversion
            
            
            709,813
            
            
            (165,000
            )Gain
                on forgiveness of debt
            
            
            (194,620
            )
            
            —Accretion
                of interest expense on convertible debt
            
            
            1,513,864
            
            
            —Impairment
                of goodwill
            
            
            2,157,740
            
            
            —Non-controlling
                interest
            
            
            10,282
            
            
            (6,308
            )Change
                in operating assets and liabilities:Accounts
                receivable
            
            
            (31,564
            )
            
            11,749Related
                party receivables
            
            
            (86,584
            )
            
            45,166Subscriptions
                receivables
            
            
            —
            
            
            (420,000
            )Inventory
            
            
            (396,816
            )
            
            17,010Other
                assets
            
            
            12,131
            
            
            (11,474
            )Accounts
                payable
            
            
            (143,635
            )
            
            605,443Accrued
                expenses
            
            
            1,925,831
            
            
            (98,880
            )Due
                to related parties
            
            
            (469,079
            )
            
            234,304Other
                current liabilities
            
            
            103,549
            
            
            37,799Convertible
                notes payable
            
            
            (317,171
            )
            
            —Bank
                indebtedness
            
            
            769
            
            
            —Net
                cash used in operating activities
            
            
            (4,301,924
            )
            
            (2,957,914
            )Cash
                flows from investing activitiesCash
                acquired through merger and acquisition
            
            
            —
            
            
            164,791Purchase
                of property and equipment
            
            
            (66,888
            )
            
            (70,609
            )Net
                cash provided by (used in) investing activities
            
            
            (66,888
            )
            
            94,182Cash
                flows from financing activitiesProceeds
                from notes payable
            
            
            5,020,000
            
            
            582,681Payment
                on notes payable
            
            
            (633,932
            )
            
            (130,000
            )Deferred
                finance costs
            
            
            (493,707
            )
            
            —Collection
                of subscriptions receivable
            
            
            420,000
            
            
            129,821Payment
                of offering costs
            
            
            (5,000
            )
            
            (673,968
            )Proceeds
                from sale of common stock and warrants
            
            
            100,650
            
            
            3,023,699Net
                cash provided by financing activities
            
            
            4,408,011
            
            
            2,932,233Effect
                of exchange rate changes on cash
            
            
            (93,065
            )
            
            (141,002
            )Decrease
                in cash
            
            
            (53,866
            )
            
            (72,501
            )Cash,
                beginning of period
            
            
            53,866
            
            
            126,367Cash,
                end of period
            
            $
            —
            
            $
            53,866Supplemental
                disclosures of cash flow informationInterest
                paid
            
            
            136,683
            
            
            22,676Income
                taxes paid
            
            
            —
            
            
            —SEE
                ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL
                STATEMENTS





F-5




VERIDICOM
      INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
      TO
      AUDITED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
      1 —
NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS




Veridicom
      International, Inc., (the "Company", formerly known as Alpha Virtual, Inc.
      ("Alpha") is a Delaware Corporation formerly headquartered in California that
      was formed on September 9, 1987. The name of the Company was changed to
      Veridicom International, Inc. in February 2004. The Company consolidated its
      corporate offices in April 2004 and is now headquartered in Vancouver, British
      Columbia.





The
      legal
      entity, Alpha, retained its name until it was changed to Veridicom
      International, Inc. in February 2004. In May 2005, the name of the subsidiary
      company in Pakistan was changed to Veridicom Pakistan (Private)
      Limited.





The
      Company operates as one operating segment which is the development, manufacture
      and sale of capacitive fingerprint sensors, computer peripherals and software
      related to the use of its fingerprint authentication technology.





On
      January 21, 2004 Veridicom International (Canada) Inc. was formed to be the
      Canadian operating company to disburse expenses and payroll costs in Canada
      for
      the Company.





The
      Company has five subsidiaries: Esstec Inc.("Esstec"), Veridicom Pakistan
      (Private) Limited ("Pakistan"), Veridicom Inc., Cavio Corporation ("Cavio"),
      and
      Veridicom International (Canada) Inc. ("Canada Inc").





Esstec
      is
      a professional services company that focuses on e-commerce initiatives,
      interactive multimedia, and mobile software applications for clients in various
      industries, including the telecommunications and entertainment industries.
      Since
      2004, Esstec has not had any significant revenues or incurred any significant
      expenses.





Pakistan
      was incorporated on April 19, 2000 to establish the business of software
      development for the international markets and to export software and technology.
      Esstec owns approximately 63.4% of Pakistan.





Veridicom
      Inc. designs, manufactures and delivers hardware and software products that
      enable strong authentication solutions based on fingerprint biometrics.
      Veridicom Inc. markets a complete fingerprint biometrics platform on which
      applications can be built.





Cavio
      produces technology tools designed to protect users from fraud,
      misrepresentation, security and privacy issues by allowing users to
      biometrically authenticate themselves to secure control access and confirm
      identity across a number of industries.





The
      Company's financial statements have been presented on the basis that it is
      a
      going concern, which contemplates the realization of assets and the satisfaction
      of liabilities in the normal course of business. The
      Company has incurred a net loss of $10,338,510 and has a working capital deficit
      of $4,704,497 ,
      which
      raises substantial doubt about its ability to continue as a going concern.
      The
      Company is currently devoting its efforts to raising additional capital to
      finance on-going operations and for transitioning from research and development
      to manufacturing and sales of its products. The Company's ability to continue
      as
      a going concern is dependent upon its ability to develop additional sources
      of
      capital, and ultimately, achieve profitable operations. The accompanying
      financial statements do not include any adjustments that might result from
      the
      outcome of these uncertainties.





F-6




The
      Company completed subsequent financing as disclosed in Note 18.




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Basis
      of Presentation




These
      consolidated financial statements reflect all adjustments that, in the opinion
      of management, are considered necessary for a fair presentation of the financial
      position, results of operations, and cash flows for the periods presented.
      The
      results of operations for such periods are not necessarily indicative of the
      results expected for the full fiscal year or for any future period.





The
      historical results for fiscal 2005 and
      2004 include
      the Company and all its subsidiaries. The historical results include Cavio
      from
      the merger date of February 20, 2004.




Principles
      of Consolidation




These
      consolidated financial statements include the accounts of the Company and its
      subsidiaries Esstec, Pakistan, Veridicom Inc., Cavio, and Canada Inc. All
      significant intercompany balances and transactions have been eliminated upon
      consolidation. Non-controlling interest reflects the ownership of
      non-controlling shareholders in the issued share capital of Pakistan, a
      consolidated subsidiary less than wholly-owned.





On
      January 16, 2004, the Company entered into an Agreement and Plan of Merger
      with
      Cavio Corporation, a privately held Washington corporation ("Cavio"). The merger
      became effective on February 20, 2004 following a special meeting of Cavio's
      stockholders. In accordance with the merger, on February 20, 2004, through
      its
      wholly owned subsidiary, A/VII Acquisition Corporation, a Nevada corporation,
      acquired Cavio in exchange for 5,119,140 shares of our common stock.





Cash
            
            $
            164,791Receivables
            
            
            14,043Stock
                subscription receivable
            
            
            129,821Prepaid
                expenses
            
            
            4,874Fixed
                assets, net
            
            
            109,473423,002Less
                liabilities assumedAccounts
                payable and accrued expenses
            
            
            (694,009
            )Loans
                payable
            
            
            (28,693
            )(722,702
            )Net
                liabilities
            
            $
            (299,700
            )Net
                liabilities assumed
            
            $
            299,700Stock
                issued for acquisition
            
            
            299,700Common
                stock issued into escrow
            
            
            3,192,619Goodwill
            
            $
            3,792,019





There
      was
      no significant effect on net revenues, net loss, or loss per share if the above
      transaction occurred at the beginning of 2004. As a result, pro-forma data
      is
      not presented.





F-7




Cash
      and Cash Equivalents




For
      purposes of reporting cash flows, the Company considers all funds with original
      maturities of three
      months or less
      to be cash equivalents.




Use
      of
      Estimates in the Preparation of Financial Statements




The
      preparation of financial statements in conformity with generally accepted
      accounting principles used 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 revenues and expenses during the reporting period.
      Actual results could differ from those estimates.




Inventory




Inventory
      consists primarily of various sensors, including VKIs, combos and parallel
      port
      units. Inventory is valued at lower of cost (first-in, first-out) or
      market.





Inventory
      also includes work in process, at cost, which consists of actual costs incurred
      by the Company to December 31, 2005, in respect of manufacturing and production
      costs for fingerprint sensors and VKIs which were in production and unfinished
      as at December 31, 2005.




Furniture
      and Equipment




Furniture
      and equipment are recorded at cost. Depreciation and amortization expense is
      provided on a straight-line basis using estimated useful lives of 3-7 years.
      Maintenance and repairs are charged to expense as incurred and expenditures
      for
      major improvements are capitalized.




Fair
      Value of Financial Instruments




The
      carrying amounts of cash, accounts receivable, notes payable, accounts payable,
      and accrued expenses approximate fair value because of the short maturity of
      these items.




Concentrations
      of Credit Risk




Financial
      instruments, which potentially expose the Company to concentrations of credit
      risk, consist primarily of trade accounts receivable. Aggregate
      potential credit losses have so far not exceeded management's
      expectations.




Advertising
      Expenses




Advertising
      costs are charged to operations as incurred. During fiscal 2005 and 2004 ,
      the
      Company incurred $97,965 and $20,830 for
      marketing and advertising costs, respectively.




Long
      Lived Assets




In
      accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
      Long-Lived Assets", the Company tests long-lived assets or asset groups for
      recoverability when events or changes in circumstances indicate that their
      carrying amount may not be recoverable. Circumstances which could trigger a
      review include, but are not limited to: significant decreases in the market
      price of the asset; significant adverse changes in the business climate or
      legal
      factors; accumulation of costs significantly in excess of the amount originally
      expected for the acquisition or construction of the asset; current period cash
      flow or operating losses combined with a history of losses or a forecast of
      continuing losses associated with the use of the asset; and current expectation
      that the asset will more likely than not be sold or disposed significantly
      before the end of its estimated useful life.





F-8




Recoverability
      is assessed based on the carrying amount of the asset and its fair value which
      is generally determined based on the sum of the undiscounted cash flows expected
      to result from the use and the eventual disposal of the asset, as well as
      specific appraisal in certain instances. An impairment loss is recognized when
      the carrying amount is not recoverable and exceeds fair value.




Foreign
      Currency Transactions/Balances




The
      Company translates the financial statements of foreign subsidiaries in
      accordance with SFAS No. 52, "Foreign Currency Translation". Assets and
      liabilities of foreign subsidiaries denominated in foreign currencies are
      translated into US dollars at rates of exchange in effect at the balance sheet
      date. Average rates for the year are used to translate revenues and expenses.
      Resulting translation gains and losses are accumulated in a separate component
      of stockholders' equity as accumulated other comprehensive income or
      loss.





Pakistan
      considers the Pakistan Rupee to be the functional currency of its operations.
      Cavio and Canada Inc. consider the Canadian Dollar to be the functional currency
      of their operations. The reporting currency of the Company is the U.S. dollar;
      accordingly, all amounts included in the financial statements have been
      translated into U.S. dollars.





Exchange
                Rates
              (indirect
                quotation)
            
            
            For
                the year
              Ending
              December
                31, 2005
            
            
            For
                the year
              Ending
              December
                31, 2004Rupee
                Average
            
            
            .01671
            
            
            .01715Rupee
                Period end
            
            
            .01673
            
            
            .01682Canadian
                Dollar Average
            
            
            .86135
            
            
            .76847Canadian
                Dollar Period end
            
            
            .85771
            
            
            .83084




Patents




The
      Company has several international patents for its biometric technology, as
      well
      as several pending patent applications. The patents are being carried at a
      fair
      value of $200,000 .




Impairment
      of Goodwill




Goodwill
      is recorded as the difference, if any, between the aggregate consideration
      paid
      for an acquisition and the fair value of the net tangible and intangible assets
      acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets
      ("SFAS 142"), the Company tests goodwill for impairment at the reporting unit
      level  (operating
      segment or one level below an operating segment) on an annual basis in the
      fourth quarter or more frequently if the Company believes indicators of
      impairment exist. The performance of the test involves a two-step process.
      The
      first step of the impairment test involves comparing the fair values of the
      applicable reporting units with their aggregate carrying values, including
      goodwill. The Company generally determines the fair value of its reporting
      units
      using the income approach methodology of valuation that includes the discounted
      cash flow method as well as other generally accepted valuation methodologies.
      If
      the carrying amount of a reporting unit exceeds the reporting unit's fair value,
      the Company performs the second step of the goodwill impairment test to
      determine the amount of impairment loss. The second step of the goodwill
      impairment test involves comparing the implied fair value of the affected
      reporting unit's goodwill with the carrying value of that goodwill. If the
      actual results, or the plans and estimates, used for future impairment analysis
      are lower from the original estimates used to assess the recoverability of
      those
      assets, the Company could incur additional impairment charges.





F-9




Revenue
      Recognition




In
      accordance with Securities and Exchange Commission ("SEC") Staff Accounting
      Bulletin No. 104, Revenue Recognition ("SAB 104"), the Company recognizes
      product revenue when the following fundamental criteria are met: (i) persuasive
      evidence of an arrangement exists, (ii) delivery has occurred or services have
      been rendered, (iii) the price to the customer is fixed or determinable and
      (iv)
      collection of the resulting receivable is reasonably assured. These criteria
      are
      usually met at the time of product shipment.





Revenue
      from software licenses and maintenance agreements is recognized in accordance
      with the provisions of SOP 97-2, Software Revenue Recognition, as amended by
      SOP
      98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect
      to
      Certain Transactions.





The
      Company records reductions to revenue for estimated product returns and pricing
      adjustments, such as competitive pricing programs and rebates, in the same
      period that the related revenue is recorded. The amount of these reductions
      is
      based on historical sales returns, analysis of credit memo data, specific
      criteria included in rebate agreements, and other factors known at the time.





The
      Company and Veridicom Inc. recognize revenues at the point of shipment of
      products.




Allowance
      for doubtful accounts





The
      Company continually monitors timely payments and assesses any collection issues.
      The allowance for its bad debts is based on the Company's detailed assessment
      of
      the collectibility of specific customer accounts. Any significant customer
      accounts that are not expected to be collected are excluded from
      revenues.




Stock
      Based Compensation




Stock
      options granted to employees and non-employees are accounted for under Statement
      of Financial Accounting Standards No. 123 "Accounting for Stock-Based
      Compensation" (SFAS 123), which establishes a fair value based method of
      accounting for stock-based awards, and recognizes compensation expense based
      on
      the fair value of the stock award or fair value of the goods and services
      received, whichever is more reliably measurable.





Unless
      otherwise disclosed, all stock based transactions entered into by the Company
      have been valued at the market value of our common stock on the date the
      transaction was entered into or have been valued using the Black-Scholes Model
      to estimate the fair market value.





F-10




Income
      Taxes




The
      Company recognizes deferred tax assets and liabilities for the expected future
      income tax consequences of events that have been recognized in the Company's
      financial statements. Under this method, deferred tax assets and liabilities
      are
      determined based on temporary differences between the financial carrying amounts
      and the tax bases of assets and liabilities using enacted tax rates in effect
      in
      the periods in which the temporary differences are expected to reverse.
      Valuation allowances are established when necessary to reduce deferred tax
      assets to the amount expected to be realized. Income tax expense represents
      the
      tax payable for the current period and the change during the period in deferred
      tax assets and liabilities.




Comprehensive
      Loss




The
      Company utilizes Statement of Financial Accounting Standards ("SFAS") No. 130
      "Reporting Comprehensive Income." This statement establishes standards for
      reporting comprehensive loss and its components in the consolidated financial
      statements. Accumulated other comprehensive loss presented in these consolidated
      financial statements resulted from foreign currency translation adjustments.




Software
      Development Costs




Costs
      related to the development of products and software are expensed as incurred
      until technological feasibility in the form of a working model has been
      established in accordance with SFAS No. 86, "Accounting for the Costs of
      Computer Software to be Sold, Leased or Otherwise Marketed". The time period
      between the establishment of technological feasibility and completion of product
      development is expected to be short; therefore the Company has not capitalized
      any product development costs during the presented periods.




Earnings
      Per Common Share




The
      Company computes earnings (loss) per common share in accordance with Statement
      of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128).
      This statement simplifies the standards for computing earnings per share (EPS)
      previously found in Accounting Principles Board Opinion No. 15, Earnings Per
      Share, and makes them more comparable to international EPS standards. SFAS
      No.
      128 replaces the presentation of primary EPS with a presentation of basic EPS.
      In addition, the Statement requires dual presentation of basic and diluted
      EPS
      on the face of the income statement for all entities with complex capital
      structures and requires a reconciliation of the numerator and denominator of
      the
      basic EPS computation to the numerator and denominator of the diluted EPS
      computation.





Warranty





The
      Company's products carry a limited warranty from manufacturing defects for
      a
      period of one year from the date of purchase. The Company's liability is limited
      to the repair or replacement of the defective product. To date there have been
      no significant costs incurred by the Company for warranty claims.





In
      future
      years the Company intends to establish reserves for estimated product warranty
      costs at the time revenue is recognized based upon its historical warranty
      experience, and additionally for any known product warranty issues.





Shipping
      and Handling Costs





The
      Company's shipping and handling costs are normally included in cost of
      sales.





F-11




Recent
      Accounting Pronouncements




In
      June
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standard No. 154, “ Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements
”
(“SFAS 154”). The Statement applies to all voluntary changes in accounting
      principles used, and changes the requirements for accounting for and reporting
      of a change in an accounting principle. SFAS 154 requires retrospective
      application to prior periods’ financial statements of a voluntary change in
      accounting principle unless it is impracticable. SFAS 154 requires that a change
      in method of depreciation, amortization, or depletion for long-lived,
      non-financial assets be accounted for as a change in accounting estimate that
      is
      affected by a change in accounting principle. Opinion 20 previously required
      that such a change be reported as a change in accounting principle. SFAS 154
      is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005. The Company does not believe this
      pronouncement will have a material impact in its financial results.




In
      June
      2005, the Emerging Issues Task Force (“EITF”) issued No. 05-6, “Determining the
      Amortization Period for Leasehold Improvements” (“EITF 05-6”). The pronouncement
      requires that leasehold improvements acquired in a business combination or
      purchase subsequent to the inception of the lease should be amortized over
      the
      lesser of the useful life of the asset or the lease term that includes
      reasonably assured lease renewals as determined on the date of the acquisition
      of the leasehold improvement. The Company does not have unamortized leasehold
      improvements from acquisitions or business combinations and therefore, does
      not
      believe this pronouncement will have an impact in its financial
      results.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
      An Amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29,
“Accounting for Nonmonetary Transactions”, is based on the principle that
      exchanges of nonmonetary assets should be measured based on the fair value
      of
      the assets exchanged. The guidance in that Opinion, however, included certain
      exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate
      the exception for nonmonetary exchanges of similar productive assets and
      replaces it with a general exception for exchanges of nonmonetary assets that
      do
      not have commercial substance. A nonmonetary exchange has commercial substance
      if the future cash flows of the entity are expected to change significantly
      as a
      result of the exchange. The provisions of SFAS No. 153 are effective for
      nonmonetary asset exchanges occurring in fiscal periods beginning after June
      15,
      2005. Early application is permitted and companies must apply the standard
      prospectively. The adoption of this standard is not expected to have a material
      effect on the Company’s results of operations or financial
      position.





In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard (SFAS) No. 123R, “Share Based Payment”. SFAS
      123R is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation”,
      and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”
and its related implementation guidance. SFAS 123R establishes standards for
      the
      accounting for transactions in which an entity exchanges its equity instruments
      for goods or  services.
      It also addresses transactions in which an entity incurs liabilities in exchange
      for goods or services that are based on the fair value of the entity’s equity
      instruments or that may be settled by the issuance of those equity instruments.
      SFAS 123R focuses primarily on accounting for transactions in which an entity
      obtains employee services in share-based payment transactions. SFAS 123R
      requires a public entity to measure the cost of employee services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award (with limited exceptions). That cost will be recognized over the
      period during which an employee is required to provide service in exchange
      for
      the award - the requisite service period (usually the vesting period). SFAS
      123R
      requires that the compensation cost relating to share-based payment transactions
      be recognized in financial statements. That cost will be measured based on
      the
      fair value of the equity or liability instruments issued. Public entities that
      file as small business issuers will be required to apply SFAS 123R in the first
      interim or annual reporting period that begins after December 15, 2005. The
      adoption of this standard is not expected to have a material effect on the
      Company’s results of operations or financial position.


F-12


In
      March
      2005, the SEC staff issued Staff Accounting Bulletin No. 107 (“SAB 107”) to give
      guidance on the implementation of SFAS 123R. The Company will consider SAB
      107
      during implementation of SFAS 123R.




Reclassifications




Certain
      reclassifications have been made to prior period financial statements to conform
      to the current period presentation.





NOTE
      3
      - BUSINESS ACQUISITIONS AND GOODWILL IMPAIRMENT





The
      Company completed the following business acquisition during 2004, in order
      to
      secure and consolidate the required technologies needed for the development
      of
      the Company’s comprehensive identity management solutions.





In
      February 2004, Cavio Corporation, a privately held Washington corporation was
      acquired in exchange for 5,119,140 shares of the Company’s common stock. As at
      December 31, 2004, the goodwill arising from this acquisition was
      $3,792,019.





As
      at
      December 31, 2005 in accordance with the requirements of the Statement of
      Accounting Standards No.142, “Goodwill and Other Intangible Assets,” the annual
      assessment of all of the Company’s goodwill was undertaken and conducted by an
      independent third party. Based on this independent assessment, the implied
      fair
      value of the Company’s goodwill was determined to be $2,570,806 as at December
      31, 2005, resulting in an impairment charge of $2,157,740 being recognized
      by
      the Company in its audited financial statements for 2005.




NOTE
      4 -
      ACCOUNTS RECEIVABLE, RELATED PARTY




The
      Company inadvertently repaid a note of $82,501 that was previously converted
      to
      equity. This amount is fully collectible as of December 31, 2005.




NOTE
      5 -
      ACCOUNTS RECEIVABLE




In
      December 1999 the Company sold its PGTS training simulator to an unrelated
      entity. As part of the agreement, the Company is entitled to royalty payments
      on
      future PGTS Training System sales by Eidetics for a four-year period from the
      date of sale. As
      of
      December 31, 2005 the Company was owed approximately $105,117 in past due
      royalties .
      The
      Company continues to pursue collection of these royalties but is uncertain
      of
      collectibility. The Company has recorded an allowance for the full amount
      owing.




NOTE
      6 -
      FURNITURE AND EQUIPMENT




Furniture
      and equipment consists of the following:





December
                31
              2005
            
            December
                31
              2004Tooling
                equipment
            
            $
            203,651
            
            $
            161,595Furniture
                and fixtures
            
            
            33,932
            
            
            33,932Office
                equipment
            
            
            31,891
            
            
            30,954Computer
                hardware
            
            
            289,853
            
            
            278,185Computer
                software
            
            
            163,162
            
            
            158,539Vehicles
            
            
            27,422
            
            
            19,818749,911
            
            
            683,023Less
                accumulated depreciation and amortization
            
            
            642,014
            
            
            476,326Net
                carrying value
            
            
            107,897
            
            $
            206,697





F-13


NOTE
      7 -
      NOTES PAYABLE - RELATED PARTIES




During
      the year ended December
      31, 2005 ,
      the
      Company reached a full settlement with a lender in respect of a short-term
      loan
      of $100,000 and the interest due thereon. A director of the Company is an
      associate of the lender's parent company. Under the settlement terms, the total
      interest payable was limited to a maximum of $20,000. The Company paid, in
      full,
      the principal of $100,000 and all the accrued interest owed to the lender of
      $10,000. The Company also issued 25,000 shares of the Company’s common stock to
      this lender as a loan fee valued at $106,250.





In
      March
      2005, the Company repaid $50,000 of its unsecured loan of $416,214 from Global
      Ventures Advisors, a company controlled by a former director of the Company's
      subsidiary in Pakistan. The loan bears interest at 12% per annum and is due
      on
      or before June 30, 2007, with an option to convert to common stock in the event
      of default in repayment by the Company. The outstanding loan balance of $366,214
      is shown as notes payable net of current portion.





In
      December 2005, the Company issued 176,466 shares of common stock to related
      parties for repayments of certain loans and debts amounting to $380,484 owed
      by
      the Company and some of its subsidiaries.





Also
      included in notes payable to related party are $25,000 due to an affiliate
      of
      one of the subsidiaries of the Company and $28,000 due to ten former officers
      of
      the Company.





The
      Company has notes payable totaling $446,263(2004: $582,681) bearing interest
      at
      rates from 10%-12% per annum, maturing between January and June, 2007.





Unsecured,
      non-interest bearing short term advances from Paul Mann, CEO and President
      of
      the Company, amounted to $83,719 as at
      December 31, 2005 ( 2004:  $218,899 ).
      These
      advances are without any specified repayment terms.





Unsecured
      short term loan from Tall Enterprises Ltd. (a company controlled by Terry
      Laferte, a former officer of the Company) amounting to $64,000 as at December
      31, 2004; bearing interest at 7% per annum and due on or before June 30, 2005.
      This loan was paid in full in March, 2005.




NOTE
      8 -
      STOCK-BASED COMPENSATION




In
      April
      2004 the Company adopted the 2004 Stock Option, Deferred Stock, and Restricted
      Stock Plan (“the Plan”) effective June 25, 2004, which provides for the granting
      of options to officers, directors, consultants, employees, and advisors.
      2,000,000 shares of common stock are reserved under the Plan for the granting
      of
      options. The Plan is in effect until June 25, 2014. The options are exercisable
      to purchase stock for a period of up to ten years from the date of grant. The
      stock options vest monthly over a thirty-six-month period.


F-14





Activity
      under the Company’s stock option plan is as follows:





On
      February 7, 2005, the Board of Directors of the Company approved the granting
      of
      1,025,000 options to officers, directors and employees of the Company under
      the
      Plan.





On
      April
      22, 2005, the Board of Directors of the Company approved the granting of an
      additional 130,000 options to employees of the Company under the Plan.





The
      fair
      value of the vested options of $273,229 for the
      year ended December 31, 2005 was estimated using the Black-Scholes option
      pricing model with an expected life of five years, a risk-free interest rate
      of
      2.43% and an expected volatility of 209%. The fair value of vested options
      during the year has been expensed as stock based compensation.





The
      Company recognized $858,587 as stock
      based compensation to employees and directors of the Company for the year ended December
      31, 2005.





December
                31, 2005
            
            December
                31, 2004Number
            
            Weighted
                Average Exercise
              Price
            
            Number
            
            Weighted
                Average Exercise
              PriceBalance,
                beginning of year
            
            
            2,681,549
            
            
            1.99
            
            
            2,690,109
            
            
            1.99Granted
            
            
            1,155,000
            
            
            1.79
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            (8,560
            )
            
            1.61Forfeited/Expired
            
            
            (662,255
            )
            
            1.47
            
            
            —
            
            
            —Balance,
                end of year
            
            
            3,174,294
            
            
            2.02
            
            
            2,681,549
            
            
            1.99





F-15


Additional
      information regarding options outstanding as at December 31, 2005 is as
      follows:




Outstanding
            
            Vested
                and ExercisableRange
                of
              Exercise
                prices
              $
            
            Number
                of
              shares
            
            Weighted
              average
              remaining
              contractual
              life
                (years)
            
            Weighted
              average
              exercise
                price
              $
            
            Number
                of
              shares
            
            Weighted
              average
              exercise
                price
              $0.00
                - 1.00
            
            
            294,426
            
            
            2.76
            
            
            0.70
            
            
            294,426
            
            
            0.701.01
                - 2.00
            
            
            2,022,368
            
            
            3.03
            
            
            1.47
            
            
            1,297,368
            
            
            1.302.01
                - 3.00
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —3.01
                - 4.00
            
            
            712,500
            
            
            2.02
            
            
            3.50
            
            
            712,500
            
            
            3.504.01
                - 5.00
            
            
            145,000
            
            
            2.00
            
            
            5.00
            
            
            145,000
            
            
            5.003,174,294
            
            
            
            
            
            
            
            
            2,449,294





The
      following table summarizes the continuity of the Company’s warrants to acquire
      additional shares:





Number
                of
              Warrants
            
            Weighted
                average
              exercise
                price
              $Balance,
                December 31, 2004
            
            
            1,046,634
            
            $
            2.39Issued
            
            
            10,736,511
            
            $
            3.88Exercised
            
            
            —
            
            
            —Lapsed
            
            
            —
            
            
            —Outstanding,
                December 31, 2005
            
            
            11,783,145
            
            $
            3.75





As
      at
      December 31, 2005, the outstanding warrants have a weighted average life of
      3.75
      years




NOTE
      9 -
      RELATED PARTY TRANSACTIONS




The
      Company has entered into agreements with Manhattan Capital Partners
      ("Manhattan") and its affiliates to provide consulting and stock placement
      services. The Company paid Manhattan a total of $150,714 during
      the year ended December
      31, 2005 ($316,028 for 2004) .





On
      July
      15, 2003 the Company entered into an advisory agreement with the principals
      of
      the consulting company in the above agreement to join the Company's Advisory
      Board to assist the Company's Board of Directors in structuring and advising
      as
      to strategic alliances and growth. The agreement is for one year and the
      principals were each granted options to acquire 10,000 shares of the Company's
      common stock at $3.50 per share; options vest monthly over one year. The options
      were valued at $54,520, the fair value using the Black-Scholes European Pricing
      Model. The average risk rate used was 3.3%, volatility was estimated at 100%
      and
      the expected life was one year.




NOTE
      10 -
      COMMON STOCK




The
      Company has authorized 60,000,000 shares
      of $.001 par value common stock and 2,000,000 shares
      of $.001 par value preferred stock


F-16





Common
      stock issued during the year ended December 31, 2005 and 2004





During
      the year ending December 31, 2004 the Company sold 1,020,578 shares of common
      stock for $2,715,062 less offering costs of $673,978.





During
      the year ending December 31, 2004 the Company also issued 8,560 shares of common
      stock for $13,826 for the exercise of stock options.





During
      the year ended December 31, 2005, the Company issued a total of 10,465,874
      shares of common stock.





During
      the period ended March 31 2005, a total of 61,000 shares of common stock were
      issued for $100,650 in cash, less offering costs of $5,000.





During
      the period ended June 30 2005, a total of 50,000 shares of common stock, having
      a fair value of $ 140,000 were issued for payment of legal services
      rendered.





In
      July
      2005, the Company issued 11,370 shares of common stock as compensation for
      converting $14,438 of interest owed to note holders of a private
      placement.





During
      November and December 2005, the Company issued 10,167,039 shares of common
      stock
      for converting $317,171 of the principal amounts of the Callable Secured
      Convertible Notes.





In
      December 2005, the Company issued 176,466 shares of common stock for repayments
      of certain loans and debts amounting to $380,425 owed by the Company and some
      of
      its subsidiaries.




NOTE
      11 -
      COMMITMENTS AND CONTINGENCIES




Employment
      Agreement




The
      Company entered into an employment agreement with its President and Chief
      Executive Officer effective February 20, 2004 for one year providing for an
      annual salary of $175,000, a ten-year stock option to purchase 150,000 shares
      of
      the Company's common stock at $3.50 per share, and an annual bonus of $20,000
      for every $1.5 million in gross consolidated revenue of the Company for said
      year. The agreement is automatically renewable, and no revisions have been
      made
      to the original agreement.





The
      stock
      options vest monthly over a twenty-four month period. The fair value of the
      current year vested options of $430,920 was
      estimated using the Black-Scholes option pricing model with an expected life
      of
      five years, a risk-free interest rate of 2.79% and an expected volatility of
      293%. The fair value of vested options during the year has been charged to
      operations as stock based compensation.




Litigation




In
      October 2002 the Company had licensed its OneView software to Global Alpha
      Corporation (“GAC”). In July 2003, the Company entered into a License Agreement
      (“the license”) with GAC for an exclusive license to commercialize a certain
      computer software system (“the System”) that is specified in the License
      Agreement (“the Agreement”). GAC alleges that the Agreement provides the Company
      (a) pay an annual license fee (b) agree to keep accurate account of its business
      and operations concerning the license and (c) the Company grant GAC the right
      (“the Put Right”) to sell the System to the Company and that the Company agrees
      to buy the System from GAC, on terms specified in the Agreement for the purchase
      price of $200,000. The Company has accrued the liability for the minimum annual
      license fees for the last two years to date amounting to $50,000 in its
      financial statements as at December 31, 2005.


F-17




The
      Plaintiff has asserted a claim for breach of contract and breach of fiduciary
      duty in the Superior Court of California, Los Angeles County, Western District
      (“the Court”), which arise out of the alleged breach of the July 2003 Agreement
      discussed above. The Plaintiff is seeking damages on its breach of contract
      claim, damages for the Company’s alleged breach of the license fee provision,
      damages for breach of fiduciary duty claim, as well as attorney’s fees and
      pre-judgment interest on all damages according to proof at trial. On December
      23, 2005, the Company filed a response to the complaint denying the material
      allegations and asserting numerous affirmative defenses. This matter is in
      the
      early stages of proceeding and the Court has set a trial setting conference
      for
      April, 2006 at which time the Court is expected to set a trial date. The Company
      intends to vigorously defend the matter and investigate the possibility of
      an
      out of court settlement.





Five
      former employees of Veridicom, Inc. have filed claims against the Company with
      the Labor Commissioner in the State of California. The former employees allege
      that the Company owes unpaid wages, salaries and vacation pay for various
      periods between July 2000 and November 2003 amounting to a total of $122,099.
      The Company has accrued for this liability in its financial statements as at December
      31, 2005 .





On
      March
      21, 2005 one of the claimants signed a letter of agreement to convert his claim
      of $ 61,054 into stock based on the closing price of the Company’s common stock
      on that day of $2.40 per share, or a total of 25,439 shares for his entire
      claim. However, this settlement is subject to obtaining certain waivers and
      documents from the holders of the Company’s Callable Secured Convertible
      Notes.





On
      March
      28, 2003 the Company and one of the company's stockholders filed a lawsuit
      in
      Superior Court in the State of California against a former CEO of the Company.
      The lawsuit alleges a breach of fiduciary duty, negligence, fraud and breach
      of
      contract claiming the CEO did not devote his efforts to the Company's product
      development and market strategies or maximize the profit of the business. The
      lawsuit was settled with the former CEO agreeing to pay over $200,000 to the
      Company. This amount has not been recorded in the financial statements as the
      Company has not succeeded in collection of the same.




In
      addition, the Company is a party to a number of other lawsuits arising in the
      normal course of business. In the opinion of management, the resolution of
      these
      matters will not have a material adverse effect on the Company's operations,
      cash flows or financial position.




Agreements




On
      November 3, 2003, Veridicom Inc. a subsidiary of the Company, entered into
      a
      five year Marketing and Distribution Agreement with Biocom Co. Ltd., (“Biocom”)
      a Korean corporation and Gyung Min Kim, a director of the Company. Under the
      terms of this Agreement Biocom was appointed as the Company’s exclusive
      distributor for all the sale and servicing of the Company’s products in
      Korea





The
      Company entered into a Non-Excusive Agreement with KirwanGier for assisting
      in
      equity placements on August 5, 2004 for a term of six months. The agreement
      was
      terminated on October 6, 2004. Under the terms of the agreement, the Company
      was
      to issue warrants to purchase 100,000 shares of the Company's common stock
      at
      $3.50 per share. The Company will not issue these warrants due to
      non-performance on the part of KirwanGier.





The
      Company entered into an agreement with Carpe DM on August 23, 2004 for investor
      relations services for a term of one year. The terms of the agreement are
      pending approval of the Board of Directors of the Company and include monthly
      fees of $2,500 to $5,000 and the issuance of warrants to purchase 150,000 shares
      of the Company's common stock at $3.50 per share. Additional warrants for a
      further 150,000 shares may be issued at similar terms dependent upon attainment
      of specific performance targets. The Agreement was terminated in September
      2005.


F-18




In
      January 2005, the Company entered into a Consulting Agreement for a term of
      24
      months at $10,000 per month with Taktical Advisory Group of United Arab Emirates
      (UAE), a company affiliated with a former related party, for consulting services
      to develop strategic alliances, business development, securing distribution
      channels, and to provide representation in the UAE.




Leases




In
      February 2004 the Company entered into a three year operating lease for its
      corporate office space in Vancouver, Canada. The Company is required to pay
      basic rent and estimated operating expenses monthly of $16,451.The lease expires
      at the end of February, 2007. The Company also maintains short-term month to
      month tenancies for office spaces located in Seattle (Washington), London (UK)
      and Lahore (Pakistan).




Rent
      expense was $169,488 and
      $139,077 for the years ended December
      31, 2005 and 2004 respectively .




NOTE
      12 -
      PROCEEDS FROM CAPITAL STOCK SUBSCRIPTIONS




On
      January 16, 2004, the Company entered into an Agreement and Plan of Merger
      (“the
      Merger”) with Cavio Corporation, a privately held Washington corporation
      ("Cavio"). The Merger became effective on February 20, 2004 following a special
      meeting of Cavio's stockholders. In accordance with the terms of the Merger
      Agreement, the Company acquired all outstanding shares of Cavio common stock
      in
      exchange for 5,119,140 shares of the Company’s common stock. As of February 20,
      2004 Cavio had received proceeds from capital stock subscriptions amounting
      to
      $3,192,619, which represented amounts advanced to Cavio that were intended
      to be
      converted into capital stock. To complete the Merger with the Company, Cavio
      issued 1,754,000 shares which were then exchanged for 486,654 shares of the
      Company (at the exchange ratio of 1: 0.277454 as per the terms of the Merger
      Agreement). The 486,654 shares have been held in trust since consummation of
      the
      Merger, pending confirmation of eligible subscribers and the proceeds of
      $3,192,619 were recorded as a liability in Cavio’s financial statements.





In
      March,
      2005, Cavio and the Company confirmed the subscribers eligible to be issued
      the
      486,654 shares of the Company’s common stock. The Board of Directors of the
      Company then ratified, approved and accepted the issuance of the aforementioned
      486,654 shares of the Company’s common stock to the subscribers. Accordingly,
      the proceeds from capital stock subscriptions were recorded as additional paid
      in capital (APIC) in the year ended December 31, 2004.




F-19




NOTE
      13 -
      EARNINGS PER SHARE





For
                the Year EndedDecember
                31, 2005Income
              (Numerator)
            
            Shares
              (Denominator)
            
            Per
                Share
              AmountBasic
                EPS(Loss)
                available to common stockholders
            
            $
            (10,338,510
            )
            
            15,060,000
            
            $
            (0.69
            )Effect
                of Dilutive Securities
            
            
            —
            
            
            —
            
            
            —Diluted
                EPS(Loss)
                available to common stockholders
            
            $
            (10,338,510
            )
            
            15,060,000
            
            $
            (0.69
            )





For
                the Year EndedDecember
                31, 2004Income
              (Numerator)
            
            Shares
              (Denominator)
            
            Per
                Share
              AmountBasic
                EPS(Loss)
                available to common stockholders
            
            $
            (3,861,263
            )
            
            14,415,829
            
            $
            (0.27
            )Effect
                of Dilutive Securities
            
            
            —
            
            
            —
            
            
            —Diluted
                EPS(Loss)
                available to common stockholders
            
            $
            (3,861,263
            )
            
            14,415,829
            
            $
            (0.27
            )




NOTE
      14
      GAIN ON CANCELLATION/FORGIVENESS OF DEBT




During
      fiscal 2005, the Company recorded $194,620 for gain
      on forgiveness of debt after reaching settlement agreements with certain
      vendors, to cancel old accounts payable for reduced cash payment, and
      cancellations of certain pre-merger accounts payable for which no collection
      efforts were made by vendors over the last four years.




NOTE
      15 -
      LONG-TERM DEBT





On
      August
      16, 2005, the Company completed the third of three equal rounds of a private
      placement having previously completed the first and second rounds in previous
      quarters, whereby the Company issued an aggregate of $5,100,000 worth of 10%
      callable secured notes convertible into shares of common stock of the Company
      and warrants to purchase up to an aggregate of 10,200,000 shares of common
      stock
      of the Company to certain accredited investors. In the third round, $80,000
      was
      deemed uncollectible and has been written off. The warrants are exercisable
      at
      any time for a period of five years from the date of issuance. The Series A
      Warrants have an exercise price of $3.00 per share and the Series B Warrants
      have an exercise price of $5.00 per share. As consideration for the placement
      agent services in connection with the private placement, the Company is
      obligated to issue warrants to purchase up to 107,087 shares of its common
      stock
      at an exercise price of $1.27 per share and cash commissions in the amount
      of
      $136,000 for each round of the private placement. Also, the Company was
      obligated, and has issued, one time warrants to purchase up to 100,000 shares
      of
      its common stock at an exercise price of $3.50 per share.


F-20




The
      Notes
      are convertible into the Company’s common stock at a conversion price equal to
      $1.27, which is seventy percent (70%) of the initial market price of $1.81
      as
      defined in the agreement using the Volume weighted Average Price (“VWAP”);
      provided however, that if an event of default shall have occurred and be
      continuing, the conversion price shall be equal to the lesser of (i) fifty
      percent (50%) of the initial market price or (ii) the variable conversion price,
      defined as the applicable percentage multiplied by the average of the average
      daily prices for the common stock for the five (5) days prior to the date the
      conversion notice is sent by the holder of the notes to the Company. The Notes
      have a term of 36 months and bear interest at 10% per annum, which is payable
      monthly; provided, however, that the interest rate shall reset at 0% for any
      monthly period in which the Company's stock price is greater than 125% of the
      "Initial Market Price," which is defined as 100% of the volume weighted average
      of the Company's common stock for the five days immediately prior to closing,
      as
      reported on the Over-the-Counter Bulletin Board. Since October 1, 2005 the
      Company is in default in making repayments of principal and interest due on
      these Notes, and as at December 31, 2005, $317,170 of the Notes have been
      converted.





As
      an
      inducement to participate in the Private Placement, the Company granted the
      Note
      Holders a security interest in all of its intellectual property.





The
      fair
      value of the beneficial conversion feature for these convertible notes and
      warrants issued was estimated using the Black-Scholes option pricing model
      with
      an expected life of five years, a risk-free interest rate of 2.43% and an
      expected volatility of 187%, 185% and 187% for the first, second and third
      rounds of the private placement, respectively. The fair value of the beneficial
      conversion feature of $3,788,166 has been
      capitalized as a discount on notes and is being amortized over the three-year
      term of the Notes. The monthly amortization of $105,227 is being
      recorded as interest expense over the three-year term of the notes.





The
      Company also recorded interest expense of $186,752, $65,415 and $68,355 related
      to the beneficial conversion features for the first, second and third rounds,
      respectively .





The
      Company incurred a total of $493,707 in legal
      expenses and commissions to complete all three rounds of the private placement.
      These costs are being capitalized and amortized over the three-year term of
      the
      Notes.





The
      Company also recorded, as deferred finance costs, the fair value of 321,261 warrants
      issued as consideration for the three completed rounds of the private placement.
      The fair value of these warrants was estimated at $539,579 using
      the Black-Scholes option pricing model with an expected life of five years,
      a
      risk-free interest rate of 2.43% and an expected volatility of 187%, 185% and
      187% for the first, second and third rounds of the private placement,
      respectively.





The
      fair
      value of the deferred finance costs have been capitalized and are being
      amortized over the three-year term of the Notes.





Pursuant
      to the Agreement, the Company incurs a penalty of 3% per month of the
      outstanding principal balance of the Notes if: (a) the number of the Company’s
      authorized and reserved common shares is less than two times the number of
      shares issuable upon conversion of the Notes and upon exercise of the Warrants;
      and (b) the holders are not provided with monthly share information detailing
      the number of shares authorized and reserved within 5 business days of the
      end
      of the month. During the year ended December 31, 2005, the Company incurred
      both
      penalties on the entire principal balance of convertible notes. Accordingly,
      as
      at December 31, 2005, the Company has recognized an accrued liability of
      $1,731,604 relating to these penalties.


F-21




NOTE
      16 - INCOME
      TAX




At
      December 31, 2005 and 2004, the Company had net operating losses to carry
      forward totalling approximately $9,200,000 and $3,800,000, respectively. Because
      of the current uncertainty of realizing the benefit of these losses carried
      forward, a valuation allowance equal to the tax benefit for deferred taxes
      has
      been established. The full realization of the tax benefit associated with the
      losses carried forward depends upon the Company’s ability to generate taxable
      income during the carry forward period th rough
      to
      2020.





The
      reconciliation of the Company’s effective income tax rate to the United States
      statutory rate is as follows for the years ended December 31, 2005 and
      2004.





2005
            
            2004Federal
                income tax rate
            
            
            (35
            %)
            
            (35
            %)Effect
                of valuation allowance
            
            
            35
            %
            
            35
            %Effective
                income tax rate
            
            
            0
            %
            
            0
            %





Deferred
      tax assets and liabilities reflect the net tax effect of temporary differences
      between the carrying amount of assets and liabilities for financial reporting
      purposes and amounts used for income tax purposes. The
      approximate tax effect of each type of temporary difference and carry forward
      that gave rise to the Company’s deferred tax assets and liabilities at December
      31, 2005 and 2004 are as follows:





2005
              $
            
            2004
              $Net
                operating losses carried forward
            
            
            3,220,000
            
            
            1,330,000Less:
                valuation allowance
            
            
            (3,220,000
            )
            
            (1,330,000
            )Net
                deferred tax asset
            
            
            —
            
            
            —




NOTE
      17 -
      SEGMENT DISCLOSURES




The
      Company operates as one operating segment which is the development, manufacture
      and sale of capacitive fingerprint sensors, computer peripherals and software
      related to the use of its fingerprint authentication technology. The Chief
      Executive Officer is the Company’s Chief Operating Decision Maker (CODM) as
      defined by SFAS 131, “Disclosure about Segments of an Enterprise and Related
      Information.” The CODM allocates resources and assesses the performance of the
      Company based on the results of operations.




F-22




NOTE
      18 -
      SUBSEQUENT EVENTS





In
      January 2006 the Company issued 6,549,417 shares of common stock for converting
      $239,818 of the principal amounts of the Callable Secured Convertible
      Notes.





Also,
      in
      January 2006, a total of 2,500,000 shares of common stock, having a fair value
      of $ 243,750 were issued pursuant to a compensation agreement for legal services
      to be performed on behalf of the Company.





Following
      the signing of an Omnibus Waiver and Consent by the majority of the Callable
      Secured Convertible Note Holders in January 2006, on February 1, 2006, the
      Company completed a private placement offering of 10,000,000 units to accredited
      investors for an aggregate purchase price of $400,000. Each unit consisted
      of
      one share of the Company’s common stock, and one warrant to purchase one share
      of the Company’s common stock. The aforementioned units were sold in reliance
      upon the exemption afforded by the provisions of Regulation S under the
      Securities Act. With respect to the foregoing private placement offering, the
      Company issued 12,500,000 warrants to purchase the Company’s common stock to a
      placement agent. Pursuant to the terms of the Subscription Agreement in
      connection with the foregoing sale of units, the Company has granted the
      investors registration rights with respect to the shares of common stock and
      shares of common stock underlying the warrants purchased. Pursuant to the
      Subscription Agreement, the Company had undertaken to file a registration
      statement with the Securities and Exchange Commission within 60 days of the
      closing of the sale of units.





On
      March
      3, 2006, the Company filed a Form 8-K with the Securities and Exchange
      Commission (“SEC”) that, through inadvertence and oversight, the Company had
      authorized and the Company’s transfer agent had issued, an aggregate of
      11,610,178 unlegended shares of the Company’s common stock in excess of the
      shares of its common stock allocated in the Registration Statement filed by
      the
      Company on Form SB-2, which was declared effective by the SEC on July 18, 2005.
      The amount issued does not exceed the aggregate number of shares included in
      such Registration Statement. The Company has reviewed and revised its controls
      and procedures, with regard to the issuance of securities, to ensure full
      compliance with Federal Securities Laws in the future, and has formally
      requested that its transfer agent do so as well. As at December 31, 2005, there
      were 2,135,543 excess shares of common stock issued.





On
      March
      28, 2006, the Company extended a special warrant offer (the “Special Warrant
      Offer”) to all holders of the Company’s Series A and Series B Warrants issued on
      February 25, 2005, April 29, 2005 and August 16, 2005 expiring five years after
      such dates (the “Original Warrants”). As part of the Special Warrant Offer, the
      exercise price of the Original Warrants was reduced to $0.04 per share (the
      “Reduced Exercise Price”).





The
      Special Warrant Offer commenced on 11 a.m. Eastern Time on March 30, 2006 and
      expired at 5:00 p.m. Eastern Time on April 10, 2006. Thereafter, all the
      Original Warrants that were not exercised pursuant to the Special Warrant Offer
      continue to retain all of their previous rights and remain in full force and
      effect. A total of 8,400,000 Series A and Series B Warrants for gross proceeds
      of $336,000 were exercised by certain holders for cash, which also resulted
      in
      reinstatement of 6,046,096 shares of the Company’s common stock previously
      issued to such holders and the reinstatement of the principal amounts of
      $184,133 of the Callable Secured Convertible Notes.




F-23




NOTE
      19 -
      RESTATEMENT




The
      Company has restated its financial statements as at December 31, 2005 and for
      the year then ended to account for liquidated damages owing to the holders
      of
      the Company’s convertible debt and revised its accounting for the amortization
      of the discount on the convertible notes. The Company also reclassified all
      of
      the convertible notes as current liabilities, as the Company was in default
      of
      the terms as at December 31, 2005. The effect of the restatements are to
      increase accrued expenses by $1,731,604 and notes payable by $267,953. The
      restatement also increases net loss by $1,999,557 and net loss per share by
      $0.14 for the year ended December 31, 2005.





Consolidated
      Balance Sheet





As
                At December 31, 2005As
                Reported
              $
            
            Adjustment
              $
            
            As
                Restated
              $Current
                LiabilitiesAccrued
                expenses
            
            
            980,008
            
            
            1,731,604
            
            
            2,711,612Convertible
                notes payable
            
            
            393,529
            
            
            494,074
            
            
            887,603Total
                current liabilities
            
            
            3,133,621
            
            
            2,225,678
            
            
            5,359,299Convertible
                notes payable, less current portion
            
            
            226,121
            
            
            (226,121
            )
            
            —




Consolidated
      Statements of Operations





Year
                Ended December 31, 2005As
                Reported
              $
            
            Adjustment
              $
            
            As
                Restated
              $Other
                ExpensesInterest
                expense
            
            
            (2,000,249
            )
            
            (267,953
            )
            
            (2,268,202
            )Liquidated
                damages
            
            
            —
            
            
            (1,731,604
            )
            
            (1,731,604
            )Loss
                before noncontrolling interest
            
            
            (8,328,671
            )
            
            (1,999,557
            )
            
            (10,328,228
            )Net
                loss
            
            
            (8,338,953
            )
            
            (1,999,557
            )
            
            (10,338,510
            )Comprehensive
                loss
            
            
            (8,424,892
            )
            
            (1,999,557
            )
            
            (10,424,449
            )Net
                Loss Per Share - Basic and Diluted
            
            
            (0.55
            )
            
            (0.14
            )
            
            (0.69
            )




Consolidated
      Statement of Cash Flows





Year
                Ended December 31, 2005As
                Reported
              $
            
            Adjustment
              $
            
            As
                Restated
              $Operating
                ActivitiesNet
                loss for the period
            
            
            (8,338,953
            )
            
            (1,999,557
            )
            
            (10,338,510
            )Accretion
                of interest expense on convertible debt
            
            
            1,245,911
            
            
            267,953
            
            
            1,513,864Accrued
                expenses
            
            
            194,227
            
            
            1,731,604
            
            
            1,925,831





F-24