UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                                   (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

|_|     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                                   95-2577731
  (State or other jurisdiction of        (I.R.S. Employer Identification Number)
  incorporation or organization)

    Suite 500, 21 Water Street                           98104-4023
    Vancouver, British Columbia
(Address of principal executive offices)                 (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 |_| No
|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 |_| No |X|

      Issuer's revenues for its most recent fiscal year: $392,734

Number of shares  outstanding of each of the issuer's classes of common stock at
April 28, 2006:

                            Common Stock: 47,650,302

Documents incorporated by reference: None

      Transitional Small Business Disclosure Format (check one) Yes |_| No |X|

<PAGE>

                                FORM 10-KSB INDEX
                                                                            PAGE
PART I
  ITEM 1    DESCRIPTION OF BUSINESS                                            4
  ITEM 2    DESCRIPTION OF PROPERTIES                                         14
  ITEM 3    LEGAL PROCEEDINGS                                                 15
  ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               16

PART II
  ITEM 5    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS          16
  ITEM 6    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION         18
  ITEM 7    FINANCIAL STATEMENTS                                              40
  ITEM 8    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURES                                             40
  ITEM 8A   CONTROLS AND PROCEDURES                                           40
  ITEM 8B   OTHER INFORMATION                                                 42

PART III
  ITEM 9    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT                43
  ITEM 10   EXECUTIVE COMPENSATION                                            45
  ITEM 11   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            AND RELATED STOCKHOLDER MATTERS                                   47
  ITEM 12   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                    49
  ITEM 13   EXHIBITS                                                          50
  ITEM 14   PRINCIPAL ACCOUNTANT FEES AND SERVICES                            50
            SIGNATURES                                                        51
            POWER OF ATTORNEY                                                 51

                                      -2-
<PAGE>

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-
<PAGE>

                                     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-
<PAGE>

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-
<PAGE>

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 to 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.

Description of the Company Post-Merger
--------------------------------------

General
-------


                                      -6-
<PAGE>

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-
<PAGE>

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:

      o     Deployments of biometric  technology  provide strong  authentication
            and validation of a user's identity eliminating the sole reliance on
            the vulnerable password/PIN infrastructure;

      o     Enterprise middleware systems can move authenticated events securely
            in real-time over the Internet through a "trusted path";

      o     Creates  a  non-reputable  and  legally  recognized   "card-present"
            scenario for events  conducted  for  previously  anonymous  Internet
            credit card transactions;

      o     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-
<PAGE>

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

PRODUCT                     DESCRIPTION
--------------------------------------------------------------------------------
FPS200                      Solid state silicon fingerprint sensor, 256 x 300
                            array
--------------------------------------------------------------------------------
VKI                         Portable identity device with USB connectivity,  on
                            board fingerprint sensor, flash memory, and security
                            software
--------------------------------------------------------------------------------
VKI 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.
--------------------------------------------------------------------------------
Middleware
--------------------------------------------------------------------------------
Cavio 3.0 Identity Server   Robust Enterprise level authentication server for
                            Windows, Linux platforms
--------------------------------------------------------------------------------
VAS Hosted Service          Hosted authentication service from our data center
--------------------------------------------------------------------------------
SDK                         SDK's available for customer customization and OEMs
--------------------------------------------------------------------------------
Applications
--------------------------------------------------------------------------------
Digital Signature           Biometric  signature  attached  to  transactions or
                            events.  This  provides significantly  more  secure
                            signing   capabilities  than  current  PIN-based
                            certificates
--------------------------------------------------------------------------------
VPAS                        Veridicom  Personal  Authentication  Suite.  This
                            application  is a  bundled solution that allows PC
                            or network 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.                          Title
---------------                          ------

5,991,408        Identification and Security Using Biometric Measurements

6,016,355        Capacitive Fingerprint Acquisition Sensor

6,049,620        Capacitive Fingerprint Sensor With Adjustable Gain

6,330,345        Automatic Adjustment Processing For Sensor Devices

6,331,452        Method of Fabricating Integrated Circuit Package with Opening
                 Allowing Access to Die

6,546,122        Method For Combining Fingerprint Templates Representing Various
                 Sensed Areas of a Fingerprint to Derive One Fingerprint
                 Template Representing The Fingerprint

6,538,456        Capacitive Fingerprint Sensor with Adjustable Gain

6,535,622        Method for Imaging Fingerprints and Concealing Latent
                 Fingerprints

6,538,456        Capacitive Fingerprint Sensor with Adjustable Gain


                                      -9-
<PAGE>

Patent Applications

    U.S. Patent
    App. Serial                        Title
    -----------                        -----
    10/089,987   Spoof Detection for Biometric Sensing Systems

    10/288,554   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:

      o     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;

      o     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;

      o     increased   travel   security   requirements   demand  leading  edge
            identification technology to improve security while streamlining the
            travel process; and

      o     information access  requirements have increased the proliferation of
            passwords.  Unfortunately,  as password requirements  increase,  the
            cost of managing passwords becomes prohibitive.


                                      -10-
<PAGE>

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.

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:

      o     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.

      o     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.

      o     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.

      o     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.

      o     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-
<PAGE>

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-
<PAGE>

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-
<PAGE>

Promotion
---------

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

      o     Bundling of our services;
      o     Bundling with third party applications and software;
      o     Joint partnerships with leading industry organizations;
      o     Trade shows;
      o     Leverage  personal  contacts  and  utilize  network of key  industry
            advisors; and
      o     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
employees 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 2003, 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,  5th 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).


                                      -14-
<PAGE>

All of our facilities are in good repair.

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-
<PAGE>

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            Low
                                               --------        --------
            2004

            January 1 - March 31               $   8.00        $   4.00
            April 1 - June 30                      5.70            3.45
            July 1 - September 30                  5.50            1.50
            October 1 - December 31                4.05            2.30

            2005

            January 1 - March 31               $   2.95        $   1.31
            April 1 - June 30                      2.90            1.25
            July 1 - September 30                  1.40            0.65
            October 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.


                                      -16-
<PAGE>

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  $317,170 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 to the exercise
price of $0.04 per share (the "Reduced Exercise Price").


                                      -17-
<PAGE>

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.


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.


                                      -18-
<PAGE>

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.

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.


                                      -19-
<PAGE>

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.

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.


                                      -20-
<PAGE>

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.

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.


                                      -21-
<PAGE>

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.

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-
<PAGE>

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:

      o     Salaries , which  increased from $1,286,000 in 2004 to $1,393,000 in
            2005 as a result of the hiring of new software development, hardware
            development, and administrative staff;
      o     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;
      o     Insurance expense, mainly for officers and directors, increased from
            $49,000 in 2004 to $82,000 in 2005;
      o     Telephone  and  internet  expenses  for 2005  increased  by  $13,000
            compared to 2004.
      o     Office  administration  expenses,  which  decreased from $411,000 in
            2004 to $391,000 in 2005;
      o     Professional  fees,  which include  legal,  accounting  and auditing
            fees, decreased from $607,000 to $583,000;
      o     Travel expenses decreased by $40,000;
      o     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  $2,000,249  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.


                                      -23-
<PAGE>

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.

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-
<PAGE>

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  $9,230,263  and  have a  working  capital  deficit  of
$2,781,476,  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-
<PAGE>

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.

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

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.


                                      -26-
<PAGE>

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-
<PAGE>

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-
<PAGE>

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.


RISK 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-
<PAGE>

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-
<PAGE>

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-
<PAGE>

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:

      o     the cost,  performance  and reliability of its products and services
            and the products and services of our competitors;
      o     customers'   perception   of  the  benefit  of  biometric   security
            solutions;
      o     public  perceptions of the  intrusiveness of these solutions and the
            manner in which firms are using the biometric information collected;
      o     public   perceptions   regarding  the   confidentiality  of  private
            information;
      o     customers' satisfaction with our products and services; and
      o     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:

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

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


                                      -32-
<PAGE>

      o     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;

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

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

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:

      o     loss of revenues and increased service and warranty costs;
      o     delay in market acceptance;
      o     loss of salaries; and
      o     injury to our reputation.
      o     We may be subject to loss in market share and market acceptance as a
            result of manufacturing errors, delays or shortages.

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.


                                      -33-
<PAGE>

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.

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:

      o     changes in regulatory requirements;
      o     reduced protection of intellectual property rights;
      o     evolving privacy laws;
      o     tariffs and other trade barriers;
      o     difficulties in staffing and managing foreign operations;
      o     problems in collecting accounts receivable; and
      o     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.


                                      -34-
<PAGE>

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.

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.


                                      -35-
<PAGE>

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.

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  28,  2006 we had  47,650,302  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.


                                      -36-
<PAGE>

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.

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.
--------------------------------------------------------------------------------


                                      -37-
<PAGE>

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:

      o     the issuance of new equity securities;
      o     changes in interest rates;
      o     competitive developments,  including announcements by competitors of
            new  products or services or  significant  contracts,  acquisitions,
            strategic partnerships, joint ventures or capital commitments;
      o     variations in quarterly operating results;
      o     change in financial estimates by securities analysts;
      o     the depth and liquidity of the market for our common stock;
      o     investor perceptions of our company and the technologies  industries
            generally; and general economic and other national conditions.


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:

      o     investors may have difficulty buying and selling or obtaining market
            quotations;
      o     market visibility for our common stock may be limited; and
      o     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.


                                      -38-
<PAGE>

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.

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.


                                      -39-
<PAGE>

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.


ITEM 7. FINANCIAL STATEMENTS

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

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

On July 14, 2005, the Company  dismissed AJ.  Robbins,  PC ("AJ Robbins") as its
independent public  accountants.  Further, on July 14, 2005, the Company engaged
Manning Elliott LLP ("Auditor") as its principal  independent  accountant.  This
decision to engage Auditor was taken upon the unanimous approval of the Board of
Directors of the Company.

During the last two fiscal  years ended  December 31, 2004 and December 31, 2003
and through July 14, 2005, (i) there were no  disagreements  between the Company
and AJ Robbins on any matter of accounting  principles  or practices,  financial
statement  disclosure or auditing scope or procedure  which,  if not resolved to
the satisfaction of AJ Robbins would have caused AJ Robbins to make reference to
the matter in its reports on the  Company's  financial  statements,  and (ii) AJ
Robbins'  reports on these financial  statements were modified as to uncertainty
that the Company will continue as a going concern;  other than this, AJ Robbins'
reports on the  Company's  financial  statements  did not  contain  any  adverse
opinion,  disclaimer of opinion,  or modification or  qualification  of opinion.
During  the last two most  recent  fiscal  years  ended  December  31,  2004 and
December 31, 2003 and through July 14, 2005, there were no reportable  events as
the term described in Item 304(a)(1)(iv) of Regulation S-B.

During the two most recent  fiscal  years and through  July 14, 2005 the Company
has not consulted with Auditor regarding either:

      1.    the   application   of   accounting   principles  to  any  specified
            transaction,  either  completed  or  proposed,  or the type of audit
            opinion   that  might  be  rendered  on  the   Company's   financial
            statements, and neither a written report was provided to the Company
            nor oral advice was provided that Auditor concluded was an important
            factor  considered  by the  Company in reaching a decision as to the
            accounting, auditing or financial reporting issue; or

      2.    any matter  that was either  subject of  disagreement  or event,  as
            defined in Item  304(a)(1)(iv)(A)  of Regulation S-B and the related
            instruction to Item 304 of Regulation S-B, or a reportable event, as
            that term is explained in Item 304(a)(1)(iv)(A) of Regulation S-B.

The Company had requested that AJ Robbins furnish it with a letter  addressed to
the Securities and Exchange  Commission stating whether it agrees with the above
statements.  A copy of this letter was attached as Exhibit 16.1 with the Form 8K
that was filed by the Company on July 18, 2005

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.

      o     We have begun to  identify  a list of key  policies  and  procedures
            needed to improve our  financial  statement  preparation  and review
            process
      o     Significant  transactions  are reviewed and approved by a supervisor
            before recording in the accounting records and financial statements


                                      -40-
<PAGE>

      o     We have implemented a uniform chart of accounts for all subsidiaries
            so that  consolidation  and review of accounting  records are easier
            and more accurate
      o     Some administrative duties completed by our internal accountant have
            been  transferred  to  other  departments  allowing  the  accounting
            department to focus on record keeping
      o     We have enhanced our internal procedures for journal entry recording
            and  approvals  on a timely  basis and for  efficient  and  accurate
            consolidations and reporting
      o     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

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.

      o     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.
      o     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.

      o     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.

      o     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.

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


                                      -41-
<PAGE>

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.

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

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.

      o     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-
<PAGE>

                                    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   Position
----                ---   ------------------------------------------------------
Paul Mann           47    Chief Executive Officer and Director
Bill Cheung         34    Director
Jeremy Coles        51    Director
Shannon McCallum    41    Director
Dan Stryker         50    President
Bashir Jaffer       60    Chief Financial Officer and Secretary
Hamid Baradaran     44    Vice President, Hardware Development and Manufacturing


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-
<PAGE>

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-
<PAGE>

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
                           --------------------------
<TABLE>
<CAPTION>
(a)                                              (b)       (c)         (d)           (e)              (f)

                                                                                    Other          Restricted
                                                         Salary       Bonus        Annual          Stock Award
Name and principal Position                     Year       ($)         ($)      Compensation           ($)
---------------------------                     ----     -------      ------    ------------       -----------
<S>                                         <C> <C>        <C>          <C>           <C>
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, 2005
------------------
Paul Mann, CEO                                  2005      175,000        -
Bashir Jaffer, CFO                              2005      100,000 (4)    -
Hamid Baradanan, VP Hardware Development        2005      100,000        -
</TABLE>


                                      -45-
<PAGE>

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

(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 and
      at that time 24,000 options were vested.

(4)   Remuneration for certain officers is paid in Canadian currency at $130,000
      per 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 the
      terms of his employment  agreement and 50,000 options under the 2004 Stock
      Option Plan

Option/SAR Information

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


                                      -46-
<PAGE>



                     Options/SAR Grants in Last Fiscal Year
                                Individual Grants
                               -------------------

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


(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  number of
      options are 725,000

(2)   Options vest  monthly over 24 months from the date of Grant for  Directors
      and  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 for
      Directors  and  employees  who were with the Company from March 1, 2004 to
      June 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 the
      options.  Options  expire 5 years  after the grant  date or 90 days  after
      cessation 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:


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


                                      -47-
<PAGE>

      o     each of our executive officers; and
      o     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., 5th Floor,  Vancouver,  British Columbia
V6B 1A1, Canada

<TABLE>
<CAPTION>
                                                                     Amount and
                                                                     Nature of
                                                                     Beneficial            Percentage
Named Executive Officers and Directors:                              Ownership              of Class
----------------------------------------                             ----------             -------
<S>                                                                  <C>        <C>          <C>
Paul Mann, Director, Chief Executive Officer                         3,113,267  (1)           6.5%
Dan Stryker, President                                                       0                  0%
Bashir Jaffer, Chief Financial Officer and Secretary                   100,000                0.2%
Hamid Baradaran, VP, Hardware Development & Manufacturing              100,000                0.2%
Bill Cheung, Director                                                  713,512  (2)           1.5%
Shannon McCallum, Director                                             100,000                0.2%
Jeremy Coles, Director                                                  66,634                0.1%

All current directors and named officers as a group (7 in all)       4,193,473                8.8%

5% Stockholders:
----------------
Dara Bashir Khan                                                     3,750,000                7.9%
F12 Off Hatim Alvi Road
Block 4 Old Clifton
Karachi Pakistan

Palmira Advisors S C                                                 2,500,000                5.2%
Avenida Palmira 142
Cuernavaca Morelos
62490 Mexico
</TABLE>


                                      -48-
<PAGE>


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

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

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.

Equity Compensation Plan Information
------------------------------------

The following table summarizes our equity compensation plan information as of
December 31, 2004.

In February and April 2005, the Board of Directors of the Company approved the
granting of 1,115,000 stock options to officers, directors and employees of the
Company under the 2004 Stock Option Plan. Of these, 430,000 have lapsed as at
December 31, 2005.

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                                        Number of Shares
                                                                           Remaining
                                                                           Available
                                      Number of                            for Future
                                      Shares to        Weighted-            Issuance
                                   Be Issued upon       Average           Under Equity
                                     Exercise of     Exercise Price       Compensation
                                     Outstanding     of Outstanding     Plans (Excluding
                                       Options,         Options,             Shares
                                       Warrants       Warrants and        Reflected in
                                      and Rights         Rights            Column (a))
        Plan Category(1)                 (a)               (b)                (c)
-----------------------------        -------------    ------------      --------------
<S>                                  <C>               <C>              <C>
Equity Compensation plans
approved by stockholders

2004 Stock Option Plan                     725,000        $1.79              845,000

2000 EssTec Plan                         1,391,212        $2.61              548,292

1999 Alpha Virtual Plan                  1,058,082        $1.40            4,441,918

Equity Compensation plans
not approved by stockholders                    --           --                   --
-----------------------------        -------------    ------------      --------------
Total                                    3,174,294        $2.02            5,835,210
=============================        =============    ============      ==============
</TABLE>


                                      -49-
<PAGE>

ITEM 13. EXHIBITS

(a) Exhibits.

   Exhibit
   Number
------------


      14.1  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 Item 601(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 Item 601(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          2004
                                                     ---------     ---------
Audit fees........................................   $ 47,500(1)    $ 223,568
Audit related fees................................   $     --       $      --
Tax fees..........................................   $     --       $   1,193
All 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-
<PAGE>

                                   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 Mann
                                            ------------------------------------
                                            Name:  Paul Mann
                                            Title: 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,
------------------------     Director (Principal Executive
Paul Mann                    Officer)                               May 2, 2006


/s/ Bashir Jaffer            Chief Financial Officer (Principal
------------------------     Financial Officer), Secretary          May 2, 2006
Bashir Jaffer


/s/ Bill Cheung
------------------------
Bill Cheung                  Director,                              May 2, 2006


/s/ Jeremy Coles
------------------------
Jeremy Coles                  Director                              May 2, 2006


/s/ Shannon McCallum
------------------------
Shannon McCallum             Director                               May 2, 2006


                                      -51-
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
                     (FORMERLY KNOWN AS ALPHA VIRTUAL, INC.)
                          INDEX TO FINANCIAL STATEMENTS


                                                                          PAGE


Reports of Independent Registered Public Accounting Firms                  F-1

Consolidated Balance Sheets                                                F-3

Consolidated Statements of Operations and Other Comprehensive
 Income (Loss)                                                             F-4

Consolidated Statement of Changes in Stockholders' Equity (Deficit)        F-5

Consolidated Statements of Cash Flows                                      F-6

Notes to Consolidated Financial Statements                                 F-7


<PAGE>

                               [GRAPHIC OMITTED]

MANNING ELLIOTT                            11th floor, 1050 West Pender Street,
CHARTERED ACCOUNTANTS                      Vancouver, BC, Canada V6E 3S7
                                           Phone: 604.714.3600 Fax: 604.714.3669
                                           Web: manningelliott.com

             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' equity, 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.


/s/ Manning Elliot LLP

CHARTERED ACCOUNTANTS
Vancouver, Canada
April 14, 2006


                                      F-1
<PAGE>

                                AJ. ROBBINS, P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
                              216 SIXTEENTH STREET
                                    SUITE 600
                             DENVER, COLORADO 80202

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Veridicom International, Inc.
Seattle, Washington

We have  audited  the  accompanying  consolidated  balance  sheet  of  Veridicom
International,  Inc.  as of December  31,  2004,  and the  related  consolidated
statements of operations,  changes in stockholders'  equity,  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.

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
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  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 provides 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, 2004,  and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements,  the Company has suffered recurring losses from operations
and has a net  capital  deficiency  that  raises  substantial  doubt  about  the
entity's ability to continue as a going concern. Management's plans in regard to
these  matters are also  described in Note 1. The  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.


                                AJ. ROBBINS, P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS

Denver, Colorado
February 11, 2005


                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                                                        2005            2004
                                                                   ------------    ------------
<S>                                                                <C>             <C>
Current assets
   Cash                                                            $         --    $     53,866
   Accounts receivable, net                                              47,358          15,791
   Accounts receivable, related party                                   119,378          32,794
   Subscriptions receivable                                                  --         420,000
   Inventory                                                            469,609          72,793
   Other current assets                                                  18,457          26,603
                                                                   ------------    ------------
      Total current assets                                              654,802         621,847

Property & equipment, net                                               107,897         206,697
Patents                                                                 200,000         200,000
Goodwill                                                              2,570,806       4,728,546
Deferred finance costs, net                                             807,969              --
Other assets                                                                 --           3,302
                                                                   ------------    ------------
                                                                   $  4,341,474    $  5,760,392
                                                                   ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Bank indebtedness                                                        769              --
   Accounts payable                                                $  1,456,722    $  1,808,828
   Accrued expenses                                                     980,008         785,889
   Due to related party                                                 117,237         610,003
   Notes payable, current                                                80,050         254,549
   Notes payable, related party                                          53,000         582,681
   Notes payable, current portion of convertible notes payable          393,529              --
   Other current liabilities                                             52,306          37,799
                                                                   ------------    ------------
      Total current liabilities                                       3,133,621       4,079,749

Notes payable, related parties, less current portion                     36,812              --
Convertible notes payable, less current portion                         226,121              --
Notes payable, less current portion                                     366,214
Other liabilities                                                        89,044              --

Noncontrolling interest                                                  28,980          18,698

Commitments and contingencies

Stockholders' equity
   Preferred stock, $.001 par value 2,000,000
   authorized; NIL issued and outstanding                                    --              --
   Common stock, $.001 par value, 60,000,000
   authorized; 26,246,981 and 15,781,107 issued and outstanding,
   respectively                                                          26,246          15,781
   Additional paid in capital                                        20,804,835      13,591,671
   Accumulated other comprehensive loss                                (230,634)       (144,695)
   Deficit                                                          (20,139,765)    (11,800,812)
                                                                   ------------    ------------
      Stockholders' equity                                              460,682       1,661,945
                                                                   ------------    ------------
                                                                   $  4,341,474    $  5,760,392
                                                                   ============    ============
</TABLE>

         SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
       CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                                                      2005              2004
                                                 ------------      ------------
<S>                                              <C>               <C>
   Revenue                                       $    392,734      $    384,853
   Cost of goods sold                                 344,764           212,063
                                                 ------------      ------------
   Gross profit                                        47,970           172,790

Expenses
   General and administrative                       3,526,264         3,441,793
   Research and development                         1,274,127           495,577
   Depreciation                                       158,172            47,188
   Impairment of goodwill                           2,157,740                --
                                                 ------------      ------------
Loss from operations                               (7,068,333)       (3,811,768)

Other income (expense):
   Other income                                       545,291           179,344
   Interest expense                                (2,000,249)          (94,145)
   Gain on forgiveness of debt                        194,620                --
                                                 ------------      ------------
Loss before noncontrolling interest                (8,328,671)       (3,726,569)

Noncontrolling interest                               (10,282)            6,308
                                                 ------------      ------------
Net loss                                           (8,338,953)       (3,720,261)

Other comprehensive loss:
   Foreign currency translation                       (85,939)         (141,002)
                                                 ------------      ------------
Total comprehensive loss                         $ (8,424,892)     $ (3,861,263)
                                                 ============      ============

Loss per share (basic and diluted)               $      (0.55)     $      (0.27)

Weighted average common shares
 (basic and fully diluted)                         15,060,000        14,416,000
</TABLE>


              SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
       CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY (DEFICIT)
                  FOR THE YEARS ENDEDDECEMBER 31,2005 AND 2004

                     Common Stock $.001 par                                                                           Total
                             value                     Common       Additional     Accumulated                      Stockholders
                                                       Stock          Paid In     Comprehensive                   Equity (Deficit)
                         Shares        Amount        Committed        Capital         Loss         (Deficit)
                     ------------   ------------   ------------    ------------   ------------    ------------    ----------------
<S>                     <C>         <C>            <C>             <C>            <C>             <C>             <C>
BALANCES,               9,450,689   $      9,450   $     10,000    $  7,280,603   $     (3,693)   $ (8,080,551)   $   (784,191)
DECEMBER 31, 2003
Sales of common         1,020,578          1,021             --       2,040,063             --              --       2,041,084
stock net of
offering costs of
$ 673,978

Stocks issued for         157,140            157             --         164,843             --              --         165,000
conversion of debt
Stocks issued as           25,000             25             --         106,225             --              --         106,250
loan fee
(Beaufort)
Stock issued in         5,119,140          5,119             --         424,401             --              --         429,520
Cavio merger

Stock options                  --             --             --         359,100             --              --         359,100
granted for CEO

Exercise of Stock           8,560              9             --          13,817             --              --          13,826
options

Cavio's                        --             --             --       3,192,619             --              --       3,192,619
subscription
received

Common stock                   --             --        (10,000)         10,000             --              --              --
comitted
reclassified

Foreign currency               --             --             --              --       (141,002)             --        (141,002)
translation
adjustment

Net (loss)                     --             --             --              --             --      (3,720,261)     (3,720,261)
                     ------------   ------------   ------------    ------------   ------------    ------------    ------------
BALANCES,              15,781,107   $     15,781   $         --    $ 13,591,671   $   (144,695)   $(11,800,812)   $  1,661,945
DECEMBER 31, 2004
Sales of common            61,000             61             --          95,589             --              --          95,650
stock net of
offering costs of
$5,000

Stocks issued for      10,343,504         10,343             --         699,470             --              --         709,813
conversion of debt

Stocks issued for          50,000             50             --         139,950             --              --         140,000
services

Beneficial                     --             --             --       5,559,579             --              --       5,559,579
conversion rights

Stock options                  --             --             --         704,149             --              --         704,149
granted for CEO
and employees

Stocks issued as           11,370             11             --          14,427             --              --          14,438
interest expense

Foreign currency               --             --             --              --        (85,939)             --         (85,939)
translation
adjustment

Net (loss)                     --             --             --              --             --      (8,338,953)     (8,338,953)
                     ------------   ------------   ------------    ------------   ------------    ------------    ------------
BALANCES,              26,246,981   $     26,246   $         --    $ 20,804,835   $   (230,634)   $(20,139,765)   $    460,682
DECEMBER 31, 2005    ============   ============   ============    ============   ============    ============    ============
</TABLE>

        SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                            2005           2004
                                                        -----------    -----------
<S>                                                     <C>            <C>
Cashflow from operating activities:
Net loss from operations                                $(8,338,953)   $(3,720,261)

Adjustments to reconcile net loss to net cash used in
operating activities
   Depreciation of property and equipment                   158,172         47,188
   Amortization of deferred financing costs                 225,317             --
   Stock based compensation                                 858,587        465,350
   Common stock issued for debt conversion                  709,813       (165,000)
   Gain on forgiveness of debt                             (194,620)            --
   Accretion of interest expense on convertible debt        925,387             --
   Interest expense on beneficial conversion features       320,524             --
   Impairment of goodwill                                 2,157,740             --
   Non-controlling interest                                  10,282         (6,308)

Change in operating assets and liabilities:
   Accounts receivable                                      (31,564)        11,749
   Related party receivables                                (86,584)        45,166
   Subscriptions receivables                                     --       (420,000)
   Inventory                                               (396,816)        17,010
   Other assets                                              12,131        (11,474)
   Accounts payable                                        (143,635)       605,443
   Accrued expenses                                         194,227        (98,880)
   Due to related parties                                  (469,079)       234,304
   Other current liabilities                                103,549         37,799
   Convertible notes payable                               (317,171)            --
   Bank indebtedness                                            769             --
                                                        -----------    -----------
Net cash used in operating activities                    (4,301,924)    (2,957,914)
                                                        -----------    -----------
Cash flows from investing activities
   Cash acquired through merger and acquisition                  --        164,791
   Purchase of property and equipment                       (66,888)       (70,609)
                                                        -----------    -----------
Net cash provided by (used in) investing activities         (66,888)        94,182
                                                        -----------    -----------
Cash flows from financing activities
   Proceeds from notes payable                            5,020,000        582,681
   Payment on notes payable                                (633,932)      (130,000)
   Deferred finance costs                                  (493,707)            --
   Collection of subscriptions receivable                   420,000        129,821
   Payment of offering costs                                 (5,000)      (673,968)
   Proceeds from sale of common stock and warrants
   exercised                                                100,650      3,023,699
                                                        -----------    -----------
Net cash provided by financing activities                 4,408,011      2,932,233
                                                        -----------    -----------
Effect of exchange rate changes on cash                     (93,065)      (141,002)
                                                        -----------    -----------
Decrease in cash                                            (53,866)       (72,501)
Cash, beginning of period                                    53,866        126,367
                                                        -----------    -----------
Cash, end of period                                     $        --    $    53,866
                                                        ===========    ===========
Supplemental disclosures of cash flow information
   Interest paid                                            136,683         22,676
   Income taxes paid                                             --             --
</TABLE>

         SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


                                      F-6
<PAGE>

                 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 $9,230,263 and has a working capital deficit of $2,781,476, 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-7
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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                                         $   164,791
          Receivables                                       14,043
          Stock subscription receivable                    129,821
          Prepaid expenses                                   4,874
          Fixed assets, net                                109,473
                                                       -----------
                                                           423,002
                                                       -----------
          Less liabilities assumed
          Accounts payable and accrued expenses           (694,009)
          Loans payable                                    (28,693)
                                                       -----------
                                                          (722,702)
                                                       -----------
          Net liabilities                              $  (299,700)
                                                       ===========
          Net liabilities assumed                      $   299,700
          Stock issued for acquisition                     299,700
          Common stock issued into escrow                3,192,619
                                                       -----------
          Goodwill                                     $ 3,792,019
                                                       ===========


                                      F-8
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.


                                      F-9
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

     -----------------------------------------------------------------------
                                        For the year          For the year
     Exchange Rates                        Ending                Ending
     (indirect quotation)            December 31, 2005     December 31, 2004
     -----------------------------------------------------------------------
     Rupee Average                          .01671                .01715
     Rupee Period end                       .01673                .01682
     Canadian Dollar Average                .86135                .76847
     Canadian 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-10
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.


                                      F-11
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.


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.


                                      F-12
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.


                                      F-13
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.


                                      F-14
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

                                                   December 31     December 31
                                                       2005            2004
                                                   -----------     -----------
Tooling equipment                                     $203,651        $161,595
Furniture and fixtures                                  33,932          33,932
Office equipment                                        31,891          30,954
Computer hardware                                      289,853         278,185
Computer software                                      163,162         158,539
Vehicles                                                27,422          19,818
                                                      --------        --------
                                                       749,911         683,023
Less accumulated depreciation and amortization         642,014         476,326
                                                      --------        --------
Net carrying value                                     107,897        $206,697
                                                      ========        ========

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.


                                      F-15
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Unsecured short term loan from Tall  Enterprises  Ltd. (a company  controlled by
Terry  Laferte,  an 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.

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.

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


                                      F-16
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Additional  information regarding options outstanding as at December 31, 2005 is
as follows:
<TABLE>
<CAPTION>
                                          Outstanding                            Vested and Exercisable
                           ---------------------------------------------         ----------------------------
                                               Weighted         Weighted                            Weighted
                                                average          average                             average
      Range of                                 remaining        exercise                             exercise
   Exercise prices            Number of       contractual        price            Number of           price
          $                     shares        life (years)          $              shares              $
<S>                          <C>                 <C>              <C>            <C>                 <C>
     0.00 - 1.00                294,426           2.76             0.70            294,426             0.70
     1.01 - 2.00              2,022,368           3.03             1.47          1,297,368             1.30
     2.01 - 3.00                      -              -                -                  -                -
     3.01 - 4.00                712,500           2.02             3.50            712,500             3.50
                          ----------------------------------------------         ----------------------------
     4.01 - 5.00                145,000           2.00             5.00            145,000             5.00
                          ----------------------------------------------         ----------------------------
                              3,174,294                                          2,449,294
                          ==============================================         ============================
</TABLE>

The weighted average fair value of options granted during the year was $1.85.

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

                                                              Weighted average
                                               Number of       exercise price
                                               Warrants              $
        =====================================================================
        Balance, December 31, 2004                1,046,634           $  2.39
        Issued                                   10,736,511           $  3.88
        Exercised                                         -                 -
        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-17
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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-18
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.


                                      F-19
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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-20
<PAGE>


                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
                                                      For the Year Ended December 31, 2005
                                                -----------------------------------------------
                                                  Income            Shares        Per Share
                                                (Numerator)      (Denominator)      Amount
                                                -----------      ------------     -----------
<S>                                             <C>               <C>            <C>
Basic EPS
    (Loss) available to common stockholders     $(8,424,892)      15,060,000     $     (0.55)
Effect of Dilutive Securities                            --               --              --
                                                -----------      -----------     -----------
Diluted EPS
    (Loss) available to common stockholders     $(8,424,892)      15,060,000     $     (0.55)
                                                ===========      ===========     ===========

                                                       For the Year Ended December 31, 2004
                                                -----------------------------------------------
                                                   Income           Shares        Per Share
                                                (Numerator)      (Denominator)      Amount
                                                -----------      ------------     -----------
Basic EPS
    (Loss) available to common stockholders     $(3,861,263)      14,416,000     $     (0.27)
Effect of Dilutive Securities                            --               --              --
                                                -----------      -----------     -----------
Diluted EPS
    (Loss) available to common stockholders     $(3,861,263)      14,416,000     $     (0.27)
                                                ===========      ===========     ===========
</TABLE>


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-21
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.


NOTE 16 - INCOME TAX

      At December  31, 2005 and 2004,  the Company had net  operating  losses to
      carry  forward   totalling   approximately   $7,200,000  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 through to 2020.


                                      F-22
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

      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             2004

      Federal 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    2,520,000            1,330,000
     Less: valuation allowance              (2,520,000)          (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.

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.


                                      F-23
<PAGE>

                 VERIDICOM INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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-24