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

                            -------------------------

                                   FORM 10-KSB

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934:

                  For the fiscal year ended December 31, 2004.

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934:

                  For the transition period from _____ to _____

                            -------------------------

                         Commission file number 0-28685

                            -------------------------

                         VERTICAL COMPUTER SYSTEMS, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)

        Delaware                                         65-0393635
(State of Incorporation)                     (I.R.S. Employer Identification No)

                           201 Main Street, Suite 1175
                             Fort Worth, Texas 76102
                    (Address of Principal Executive Offices)

                                 (817) 348-8717
                           (Issuer's Telephone Number)

          Securities registered pursuant to section 12 (b) of the Act:

Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
        None                                             None

          Securities registered pursuant to section 12 (g) of the Act:

                   Common Stock, par value $0.00001 per share
                   ------------------------------------------
                                (Title of Class)

         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.

              (1) Yes |X| No |_|           (2) Yes |X| No |_|

      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. |_|

      Issuer's revenues for fiscal year ended December 31, 2004: $6,412,007.

      Aggregate  market  value  of  the  voting  and  on-voting  stock  held  by
non-affiliates  of the  registrant:  $3,591,486  based on the bid  price for the
common  stock of $0.005 per share on March 29,  2005,  as  reported on the Other
OTC.

      As of March 29, 2005, the issuer had  874,768,895  shares of common stock,
par value $.00001, issued and outstanding.

      Documents incorporated by reference: None

      Transitional Small Business Disclosure Format: No

<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                   FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                                     <C>
PART I....................................................................................................................1
   ITEM 1.  DESCRIPTION OF BUSINESS.......................................................................................1
   ITEM 2.  DESCRIPTION OF PROPERTY......................................................................................10
   ITEM 3.  LEGAL PROCEEDINGS............................................................................................10
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................................12

PART II..................................................................................................................13
   ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................................................13
   ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...................................................18
   ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS.............................................................................26
   PLEASE REFER TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND ITS SUBSIDIARIES WHICH ARE
   ATTACHED TO THIS REPORT...............................................................................................26
   ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................26
   ITEM 8A.  CONTROLS AND PROCEDURES.....................................................................................26
   ITEM 8B.  OTHER INFORMATION...........................................................................................26

PART III.................................................................................................................27
   ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
   OF THE EXCHANGE ACT ..................................................................................................27
   ITEM 10.  EXECUTIVE COMPENSATION......................................................................................29
   ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................32
   ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................34
   ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K............................................................................37
   ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................................45

SIGNATURES...............................................................................................................46

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>


                                        i
<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

      Vertical  Computer  Systems,   Inc.   ("Vertical"  or  the  "Company)  was
incorporated  in the State of Delaware in March 1992. The Company  operated as a
non-reporting  public shell company,  with a wholly owned subsidiary,  which was
sold at the time of acquiring  Externet World, Inc. In October 1999, the Company
acquired  all the  outstanding  capital  stock of  Externet  World,  an Internet
service provider ("ISP"),  and became an operating entity. In December 1999, the
Company  acquired the Web  technology of Emily  Solutions.  The Emily  framework
consists of executable  programs,  files,  configuration  data and documentation
needed to create  websites  that  communicate  via  Extensible  Markup  Language
("XML") and Hypertext  Transfer  Protocol  ("HTTP").  In April 2000, the Company
acquired 100% of the  outstanding  common stock of Scientific  Fuel  Technology,
Inc.,   ("SFT"),  a  company  with  no  operations.   In  connection  with  this
acquisition,  the Company issued 2,000,000 shares of common stock of the Company
to the former SFT shareholders.  Also in April 2000, the Company merged SFT into
the Company.  In connection with the merger,  the outstanding shares of SFT were
cancelled,  the Company  became the surviving  entity,  and the Company  assumed
SFT's reporting  obligations  under successor  issuer status pursuant to Section
12g-3(a) under the Securities Exchange Act of 1934, as amended (the "1934 Act").

      In May 2000, the Company acquired  Globalfare.com,  Inc. (Globalfare).  In
April 2003,  Globalfare,  entered into a services  agreement whereby  Globalfare
would  provide  fulfillment  services  for all leisure  travel  services  booked
through the Zegato Services  Concourse,  for a commission on all sales. In March
2003,  Globalfare entered into an agreement with Picasso Travel,  Inc. (Picasso)
to provide the fulfillment requirement for the Zegato agreement.

      Also in May 2000,  the  Company  paid  $400,000  to acquire a 2.5%  equity
interest in  iNetPurchasing,  Inc.  ("iNet"),  and another $100,000 to receive a
royalty on all iNetPurchasing transactions for 20 years.

      In June 2000, the Company acquired Pointmail.com, Inc.

      In October  2000,  the  Company  agreed to provide  $250,000 in funding to
TranStar Systems,  Inc. (TranStar),  formerly Apollo Industries,  Inc., a Nevada
corporation,  in exchange for a 30% equity interest.  In April 2003, the Company
and Mike Radlovic  (Radlovic)  entered into an agreement  whereby Radlovic would
purchase the Company's  interest in TranStar.  Pursuant to this  agreement,  the
Company  transferred  all of its  ownership  representing  3,000,000  shares  of
TranStar  common  stock to Radlovic.  In  consideration  of this sale,  Radlovic
issued a $250,000 note bearing  interest at 10% per annum due in April 2007. The
note is secured by  5,000,000  shares of  TranStar  common  stock.  Radlovic  is
currently the President,  CEO, and a major  shareholder of TranStar.  In October
2000, in  consideration  for $25,000 from the Company,  TranStar agreed to pay a
royalty of 2% of all transaction fees up to $275,000 and 1% up to $3,000,000. In
June 2002, Apollo Industries, Inc. changed is name to TranStar Services, Inc. In
April 2003, the Company and TranStar  Systems,  Inc.  (TranStar) agreed to amend
two $24,000  promissory  notes bearing interest at 10% payable to the Company by
TranStar,  dated  April 19 and May 8, 2001,  as well as the  royalty  agreement,
dated  October 14, 2000.  As part of the  purchase by Radlovic of the  Company's
TranStar ownership interest, the due date for the two $24,000 notes was extended
to April 5, 2006. The royalty rate in the royalty  agreement  dated October 2000
was increased to 3% of any transaction fees and any other revenues  generated in
perpetuity. In August 2004, the Company accepted an $8,000 payment from TranStar
in full  satisfaction of one of the $24,000 loans and the Company  cancelled the
note and returned 500,000  TranStar's  shares held as collateral.  In connection
with April 2003 transactions, TranStar also released and indemnified the Company
from any obligations owed to TranStar or any third party.

      On February 28, 2001,  the Company  invested  $1,000,000  to obtain a 60 %
majority  interest  in Now  Solutions,  Inc.  ("Now  Solutions").  In  order  to
facilitate the financing  process,  the Company had pledged a $1,500,000 deposit
as collateral  pursuant to a deposit pledge  agreement to guarantee the payments
of the loan to  finance  the  purchase  of  Human  Resource  Information  System
("HRIS").  In March 2001,  Now Solutions  acquired the  Renaissance  CS(R) Human
Resources and Payroll assets from Ross Systems, Inc. ("Ross") for $6,100,000 and
financed the purchase with a $5,500,000  loan from Coast Bank.  The  Renaissance
Payroll System, which serves small and growing businesses, was a human resources
software  system and used by over 150 companies in North America.  In April 2002
the  Company  took  control  of the  Executive  Committee  of Now  Solutions  by
appointing   the  fifth   representative   thus   giving   the   Company   three
representatives on the five member board.


                                       1
<PAGE>

      In January 2004, in connection  with settlement of certain  disputes,  the
Company  purchased  from the largest  minority  owner of Now  Solutions,  Arglen
Acquisitions  LLC ("Arglen") its 35% interest in Now Solutions for $1,400,000 in
the form of a note and  20,000,000  unregistered  shares of common  stock of the
Company, subject to registration rights and a "lock up" provision. The Company's
purchase of Arglen's interest resulted in the Company recognizing  $1,680,000 of
goodwill,  which was written off in 2004. The $1,400,000 was payable as follows:
(a)  $800,000,  which was paid at the  closing and (b)  $600,000,  pursuant to a
non-interest  bearing secured promissory note providing for payments of $200,000
in April 2004,  $100,000 in June 2004, and $300,000 in September 2004, which was
issued at closing.  When the Company did not make the April 2004  payment  under
the note, the Company began accruing  interest under the note at the rate of 10%
from its  inception.  Arglen bought suit to enforce the terms of the note and in
August 2004,  Arglen  obtained a default  judgment in Los Angeles  court for the
outstanding  principal,  plus attorney's fees and interest.  The Company filed a
motion in the Delaware  court to stay the  enforcement  of the judgment  pending
resolution of the Delaware action.  Pursuant to a settlement  agreement  between
the Company and Arglen,  the Company cancelled  warrants to purchase  80,763,943
common shares of the Company that were issued to Arglen in  connection  with the
Company's acquisition of its 60% majority interest in Now Solutions. In December
2004, the Company recorded the expense of issuing 5,000,000  unregistered shares
to Arglen at a fair market value of $82,273.  These shares were issued  pursuant
to Arglen's  settlement  agreement  whereby the Company was  obligated  to issue
5,000,000  unregistered  shares of common stock of the Company to Arglen, due to
the Company's failure to file a registration  statement within 180 days from the
closing date of the settlement.  In March 2005, the Company issued the 5,000,000
shares to Arglen.  In January  2004,  the Company  purchased  the  remaining  5%
minority interest in Now Solutions from Stephen Parnes for $77,000 and 1,000,000
unregistered  shares of the Company's  common stock,  which is subject to "piggy
back" registration rights and a "lock up" provision.  This transaction  resulted
in the Company recognizing  $80,000 of goodwill,  which was written off in 2004.
In March 2004,  Now Solutions,  LLC was converted  into a corporation  named Now
Solutions, Inc.

      In May 2001,  the  Company  paid  $2,500 and  issued  3-year  warrants  to
purchase  1,000,000  shares of common stock at a strike price of $0.05 per share
for  exclusive  licensing  rights to a  patent-pending  fiber optics  technology
application  created and owned by Aluizio  Cruz.  The United  States  Patent and
Trademark Office (the "USPTO") granted a patent (No. 6,718,103) for an invention
for  "Transmission  of Images over a Single Filament Fiber Optic Cable" in April
2004 in connection with this fiber optics technology application.

      In August 2001, the Company acquired EnFacet, Inc. ("EnFacet")

      In  November  2001,  the  Company  acquired  certain  assets  of  Adhesive
Software,  including  the  SiteFlash  technology.  EnFacet  sold  two  products,
NewsFlash,   which  catered  to  the  publishing   industry  and  newspapers  in
particular, and SiteFlash, an affiliation/syndication  Web product). The Company
continues  to  develop  and  market  its  other   SiteFlash   based  products  -
ResponseFlash,  AffiliateFlash, and UniversityFlash.  In April 2003, the Company
entered  into a software  reseller  agreement  with  Infotec,  Inc.,  a Japanese
systems  integrator  and  outsourcer to market  SiteFlash's  dynamic web content
management  product in Japan.  On November 30, 2004,  the USPTO granted a patent
(No. 6,826,744) for an invention for "System and Method for Generating Web Sites
in  an  Arbitrary   Object   Framework".   This  patent  is  the  foundation  of
SiteFlash(TM),  and  forms the  basis of the  ResponseFlash(TM),  NewsFlash(TM),
UniversityFlash(TM) and AffiliateFlash(TM) products.

      In November 2001, the Company  entered into a license  agreement with iNet
whereby it licensed the Emily software and technology for use in connection with
iNet's e-procurement system in Texas, Maine and Idaho.

      In October 2002, the Company's wholly owned  subsidiary,  Emily Solutions,
Inc., a Nevada  corporation,  changed its name to Government  Internet  Systems,
Inc. ("GIS"). The Company is licensing its proprietary technology  ResponseFlash
for  use by  GIS.  GIS  will  market  and  distribute  ResponseFlash  and  other
technologies to government entities of the United States.

      In February  2004,  the  Company  purchased  a 21%  ownership  interest in
MedData Solutions,  Inc. ("MedData") for 9,000,000 unregistered shares of common
stock of the  Company.  Since the Company  could not  ascertain  the fair market
value of MedData,  the investment was written off in 2004. MedData is a provider
of Internet and Palm-based  software for real-time  emergency  medical  services
("EMS") and trauma data management.

      In August  2004,  the Company  licensed the use of the Forums and calendar
applications of the Company's  SiteFlash  technology to Basix1,  Inc. ("Basix1")
for use in Basix1's Enterprise  Knowledge Gateway ("EKG") software.  Pursuant to
the terms of the  license,  Basix1 is  obligated  to pay the  Company 10% of all
license fees generated from the exploitation Basix1's EKG software. Mr. Kensicki
is a Director of GIS and of Now Solutions, Inc. and the President of Basix1.

      During 2004,  the Company and its  subsidiaries  have entered into various
marketing and  co-marketing  agreements with Total Care Solutions,  InfraHealth,
Inc. and Basix1.  The Company is  refocusing  its resources to capitalize on its
proprietary  technology through either licensing the technology to third parties
or  marketing  the  technology  through  subsidiaries  that  are  funded  at the
subsidiary  level.  The  Company  intends  to become a  software  developer  and
distributor  of products  through  subsidiaries  that will  specialize  in niche
markets except for GIS, which will market the  ResponseFlash  and other products
particularly  those  in  the  homeland  security  sector  to the  United  States
government.


                                       2
<PAGE>

      The Company's  software  products  that are presently  being sold are HRIS
emPath 6.3,  ResponseFlash,  SiteFlash,  NewsFlash,  and Emily. Now Solutions is
marketing its new web-based human resource payroll and information system in the
United States and Canadian markets as well as launching a hosted  solution.  The
Company  intents to market its other  software  products  in the United  States,
either  through the  Company or through its  subsidiaries  via  agreements  with
national distributors.

      Business Overview

      The  Company  is a  multinational  provider  of  administrative  software,
internet core technologies, and derivative software application products through
its distribution network. The Company's main administrative  software product is
emPath 6.3,  which is developed and  distributed  by Now  Solutions,  Inc.,  the
Company's  subsidiary.  The Company's primary internet core technologies include
SiteFlash and the Emily XML Scripting  Language,  which can be used to build web
services.  The Company attempts to acquire and operate companies whose products,
in the Company's belief:  are proven and best of the breed; are profitable or on
the path to  profitability;  complement  each other;  and provide  cross-product
distribution   channels.   The  Company's  ownership  interest  is  typically  a
controlling  interest.  The Company's  business  model  combines  complementary,
integrated  software products,  internet core technologies,  and a multinational
distribution  system of partners,  in order to create a distribution matrix that
we believe is capable of penetrating multiple sectors through cross promotion.

      The Company's current products address the following market segments:

<TABLE>
<CAPTION>
      MARKET                                       PRODUCT             OWNERSHIP            LICENSEE
      ------                                       -------             ---------            --------
<S>                                                <C>                 <C>                  <C>
      Human Resources and Payroll                  emPath 6.3          Now Solutions        Now Solutions
      Large Corporations and Universities          SiteFlash           Vertical Computer    Vertical Computer
      Government Sector- Emergency Response        ResponseFlash       Vertical Computer    GIS
      Publishing Content                           NewsFlash           Vertical Computer    EnFacet
      Emily XML Scripting Language                 Emily               Vertical Computer    VIS
</TABLE>

      Administrative Software

      The Company's primary administrative  software technology is emPath 6.3, a
human resources/payroll software, which is developed, marketed and maintained by
its  subsidiary,   Now  Solutions.  The  Company's  administrative  software  is
web-based,  meaning  that it can be accessed on the  Internet,  and  exploratory
analysis is being done to develop an application  service  provider  application
for emPath 6.3. The Company believes that its  administrative  software services
provide upfront cost savings and productivity  increases for everyday operations
with competitive set-up charges and implementation times.

      Internet Core Technologies

      Internet  core  technologies  provide the software  foundation  to support
internet-based  platforms for the delivery of individual  software products that
can be sold  independently  or combined with another  software product for rapid
deployment  of all  software  products  throughout  the  Company's  distribution
system.  The Company  acquired its internet  core  technologies,  continuing  to
develop  specialized  software  applications that the Company can utilize in new
products.

      The Company's primary core internet technology is SiteFlash. The SiteFlash
technology  utilizes XML and publishes  content on the web, enabling the user to
build and efficiently operate websites with the unique ability to separate form,
function, and content.  SiteFlash uses an advanced component-based  structure to
separate,  parse, and store the various  components of even the most complex web
pages,  which  permits  these  components  to be  named,  organized,  filed  and
eventually  redeployed  onto  the  web  pages  of a  website.  Once  all  of the
components of the web page are converted into "objects," they can be grouped, as
required by the user, into the three main types of web page components: content,
form and  function.  Content  consists  of text,  pictures or  multimedia.  Form
includes graphics and web site colors, layout and design. Function refers to the
activities  performed by or actions  executed on the website.  In this way, each
element of a web site created using SiteFlash is interchangeable  with any other
similar  element,  and these  elements  may be  grouped  together  in almost any
combination to create complex web sites. This separation of form, function,  and
content also allows for the rapid creation of affiliated  websites.  This unique
ability is patented (U.S.  Patent number 6,826,744) and has many applications in
the web arena.


                                       3
<PAGE>

      The  Company  offers  SiteFlash  as a  stand-alone  product  and also as a
technology  platform for products  targeted at specific  vertical  markets.  The
SiteFlash technology focuses on content management, e-commerce, and workflow and
has led to the  development of two  additional  software  application  products:
ResponseFlash  and NewsFlash.  ResponseFlash has been installed and approved and
is currently  being  implemented by the  Metropolitan  Emergency  Communications
Agency in Marion County, which includes Indianapolis, Indiana. NewsFlash is used
by newspapers (e.g. La Opinion and Japan's Hochi), UniversityFlash is being used
in higher education (e.g., California State Fullerton University), and SiteFlash
is used by  consulting  organizations  for  resale  (e.g.,  Infotec  in  Japan).
SiteFlash  architectural concepts enable integration with existing technological
components within many organizations. Additional key features that differentiate
SiteFlash from other products are its  affiliation/syndication  capability,  its
multi-lingual  capability and its multi-modal (any output device including PDAs,
wireless phones,  etc) framework.  Initially,  Government  Internet  Systems,  a
majority owned subsidiary of the Company, will focus in marketing ResponseFlash,
a web based emergency communication system, in the homeland security area to all
government sectors excluding the public education (i.e., schools,  colleges, and
universities).

      The second core  Internet  technology  the Company  has  developed  is the
patent-pending  Emily XML  scripting  language,  which is Java  compatible.  XML
(Extensible  Markup  Language)  is a flexible way to create  common  information
formats and share both the format and the date on the World Wide Web, intranets,
and elsewhere.

      BUSINESS OPERATIONS AND DIVISIONS

      The Company  markets  SiteFlash  directly.  SiteFlash is a technology that
provides  dynamic web content  management,  e-commerce  and workflow.  SiteFlash
allows  for   massive   affiliation/replication/syndication   of   content   and
application  services and has both  multi-lingual  and multi-modal  capabilities
(meaning it is accessible through any output device,  including computers,  cell
phones,  blackberry pagers, and PDAs). This core product is rooted in a patented
(US Patent  number  6,826,744)  technology  that  layers the web site into three
distinct  components  - form,  function and  content.  SiteFlash  then allows an
arbitrary  combination of these  components - which means that  re-usability  of
code,  graphical user interface  ("GUI")  elements and content can be increased,
without significant additional programming.  SiteFlash is XML-enabled and easily
integrates  with  diverse   software  systems  that  may  exist  in  the  target
environment.  In addition, the Company continues to develop and market its other
SiteFlash  based  products:  ResponseFlash,   NewsFlash,   AffiliateFlash,   and
UniversityFlash.  The  Company  intends  to  market  ResponseFlash  through  its
subsidiary GIS and NewsFlash through its subsidiary EnFacet.

      The  Company's   business   operations  are  grouped  into  the  following
divisions:  Now Solutions,  GIS, Vertical Internet Solutions  ("VIS"),  EnFacet,
Globalfare.com ("Globalfare"),  Pointmail, minority and other limited interests,
joint ventures, and strategic partnerships. Each of these divisions is discussed
below.

      Now Solutions, Inc.

      On  February  28,  2001,  the Company  acquired  60% of Now  Solutions,  a
Delaware  corporation which develops and maintains human resource software.  The
remaining 40% of Now Solutions was purchased  from Arglen and Stephen  Parnes in
2004 as described above.

      In March  2001,  Now  Solutions  purchased  the rights to HRIS and various
other  assets  and  liabilities  relating  to  HRIS  fromRoss  in  exchange  for
approximately $5,100,000 in cash and a promissory note of $1,000,000.

      Now Solutions is a company  specializing in end-to-end,  fully  integrated
human  resource  and payroll  solutions  to large and  mid-size  companies.  Now
Solutions has over 120 clients,  encompassing private businesses to governmental
agencies, who typically employ 500 or more employees. Now Solutions has recently
released a new version of their product  offering  called  "emPath  6.3",  which
handles complex human resource and payroll situations where the clients may have
employees  from  different  unions,  multiple  state  locations,  and  intricate
compensation circumstances.  The Company believes that the competitive advantage
of  emPath  6.3  is  its  speed  of  implementation  through  a  formula-builder
technology,  which  may  increase  the  customer's  return  on  investment.  Now
Solutions'  product  suite is  targeted to address  the needs of  management  in
today's dynamic business  environment and gives  organizations a "user friendly"
and flexible software solution,  without the multi-million dollar implementation
budgets of the major competitors.


                                       4
<PAGE>

      The  existing   revenue  model  of  Now  Solutions  is  based  upon  three
components:  licensing fees,  professional  consulting  services,  and renewable
maintenance  fees.  However,  Now Solutions  intends to offer its software on an
application  service provider ("ASP") model in order to be able to service small
customers,  which  management  believes  will  increase  the market reach of its
products. When this is implemented,  Now Solutions plans to collect service fees
associated with this service.

      For  the  twelve  months  ended  December  31,  2004,  Now  Solutions  had
approximately  $3,700,000 of total assets, revenues of approximately  $6,300,000
and a net loss of approximately $423,000.

      Government Internet Systems, Inc.

      The Company's 85% owned subsidiary, GIS, a Nevada corporation was formerly
Emily  Solutions,  Inc.  The Company will  license its  proprietary  technology,
ResponseFlash,  to GIS to market and  distribute  this  technology to government
entities  (excluding state  universities and schools) in the United States.  GIS
seeks  to  enter  into  agreements  to  distribute  other  non-Company  products
particularly  in the  homeland  security  sector.  GIS has already  entered into
co-marketing  agreements with Basix1 and InfraHealth.  The Company has completed
development and  installation of ResponseFlash  for the  Metropolitan  Emergency
Communications  Agency,  Indiana.  The Company is in the  process of  submitting
proposals to various city, county and state governments.

      For the twelve  months ended  December 31, 2004,  GIS had no assets and no
material revenue or expenses.

      Vertical Internet Solutions, Inc

      VIS.,  a  California  corporation,  is a  wholly-owned  subsidiary  of the
Company formed in May 2000. The Company  acquired the rights to Emily  Solutions
Web technology in December 1999. The Emily Solutions' work platform,  "the Emily
Framework",  consists of  executable  programs,  files,  configuration  data and
documentation  needed to create Web-based  applications that communicate via XML
and HTTP. HTTP is the set of rules for exchanging  files (text,  graphic images,
sound,  video, and other  multimedia  files) on the Web. The Emily Framework was
developed  to be an  engineering  package  comparable  to other Web  development
tools, such as Allaire Cold Fusion or Microsoft FrontPage. The primary component
of the Emily  Framework is Markup  Language  Executive  ("MLE"),  a  programming
language  that runs on Windows,  Linux and  several  UNIX  platforms.  The Emily
scripting  language  has been  enabled to work on Java.  The Company has various
patents pending on the Emily technology. Emily's marketing is currently on hold.

      For the twelve  months ended  December 31, 2004,  VIS had no assets and no
material revenue or expenses.

      EnFacet, Inc.

      EnFacet is a software-products  company that markets NewsFlash.  NewsFlash
is  based on  SiteFlash,  which  is a  patented  (US  patent  number  6,826,744)
technology.  NewsFlash  caters to the  publishing  industry  and  newspapers  in
particular.

      For the twelve  months ended  December  31, 2004,  EnFacet had no material
assets, revenue of $4,000, and a net loss of approximately $32,000.

      Globalfare.com

      In May 2000, the Company acquired Globalfare.  After the terrorist attacks
at the World  Trade  Center,  the  Company  had  suspended  website  and  travel
fulfillment  operations.  In April  2003,  Globalfare  entered  into a  services
agreement whereby Globalfare would provide fulfillment  services for all leisure
travel services booked through the Zegato Services  Concourse,  for a commission
on all sales. In March 2003,  Globalfare  entered into an agreement with Picasso
Travel,  Inc.  (Picasso) to provide the  fulfillment  requirement for the Zegato
agreement.  The  interface  between  Picasso and Zegato  became  operational  in
November 2004.

      For the twelve  months  ended  December 31,  2004,  Globalfare.com  had no
assets, no revenue and no expenses.


                                       5
<PAGE>

      Pointmail.com, Inc.

      In June 2000,  the  Company  acquired  Pointmail,  which owned a web based
e-mail  software,  to  compliment  the  Company's  existing  "ThePostmaster.Net"
Internet  email  service.  "ThePostmaster.Net"  is  currently  inactive  and the
Company has no plans for "ThePostmaster.Net" at this time.

      For the twelve  months  ended  December  31,  2004,  Pointmail.com  had no
assets, no revenues and no expenses.

      Minority Interests and Royalty Interests

      MedData Solutions, Inc.

      In February  2004,  the  Company  purchased  a 21%  ownership  interest in
MedData  from Robert  Farias,  who is  currently  a director  of Now  Solutions.
MedData is a provider of Internet and Palm-based  software for real-time EMS and
trauma data management.

      Basix1, Inc.

      In August  2004,  the Company  licensed the use of the Forums and calendar
applications of the Company's SiteFlash technology to Basix1 for use in Basix1's
EKG software.  Pursuant to the terms of the license,  Basix1 is obligated to pay
the Company 10% of all license fees generated from the exploitation Basix1's EKG
software.  Also in August 2004,  the Company and its  subsidiaries  have entered
into various  marketing  and  co-marketing  agreements  with  Basix1.  Mr. Chuck
Kensicki,  the  President  of Basix1,  is currently a Director of GIS and of Now
Solutions, Inc.

      iNet Purchasing, Inc.

      In May 2000, the Company acquired a 2.5% minority  interest in iNet and is
entitled  to a royalty on all iNet  transactions  for 20 years.  iNet,  based in
Bethesda,  Maryland,  is a  developer  of  Internet-based  procurement  services
targeted at the  specific  needs of public  sector  purchasing  in the state and
local  government  arena through  PublicBuy.net.  In November  2001, the Company
entered  into a license  agreement  with  iNet,  where the  Emily  software  and
technology were licensed for use in connection with iNet's  e-procurement system
in Texas,  Maine,  and Idaho in exchange for a 20%  commission  on  subscription
fees. The Company is entitled to retain the entire $495 sales price for sales to
any vendors., although no royalties have been received from iNet as of March 29,
2005.

      As of December 31, 2004, all of the iNet investments and advances paid for
royalties  were fully  reserved.  There have been no  revenues  or  expenses  in
relation to the investments for the twelve months ended December 31, 2004.

      TranStar, Inc.

      TranStar, formerly Apollo, is based in Claremont,  California. TranStar is
a systems  integrator and  consulting  firm that is  establishing  an e-business
platform focused on multiple-application  smart card based solutions for credit,
debit and other high volume  informational  transactions  with a large  customer
base.

      As of December 31, 2004, the investment in notes receivable and all of the
advances paid to TranStar for royalties have been fully  reserved.  No royalties
have been received from TranStar as of March 29, 2005.

      Joint Ventures

      ZAP Quote, S.A. In March 2000, the Company entered into two joint ventures
with ZAP Quote,  S.A. ("Zap") Both joint venture  ownerships are held 50% by the
Company  and  50% by ZAP.  As of  March  29,  2005,  neither  joint  venture  is
operational.

      Wireless Learning Systems, LLC. In June 2001, Epsylon Technologies, Taurus
Global,  LLC and the Company formed Wireless  Learning  Systems,  LLC ("Wireless
Learning"),  which was  formulating  plans to  develop  wireless  solutions  for
schools to support teacher and student wireless educational systems. As of March
29, 2005, this joint venture is not operational.


                                       6
<PAGE>

      For the twelve  months ended  December 31, 2004,  all of the joint venture
investments  are fully  reserved.  There have been no  revenues  or  expenses in
relation to the investments for the twelve months ended December 31, 2004.

      Software Distributors and Strategic Marketing Alliances

      Infotec,  Inc. In April 2003,  the Company and  Infotec,  Inc., a Japanese
corporation entered into a software reseller agreement whereby Infotec agreed to
market, distribute,  provide maintenance and technical support for the Company's
SiteFlash  software in the  territory  of Japan and pay the Company a fee on all
sales and maintenance fees.

      Defense Solutions, LLC. In November 2002, GIS, a majority owned subsidiary
of the Company, and Defense Solutions, L.L.C., entered into an agreement whereby
Defense  Solutions  agreed  to  assist  in the  marketing  of the its web  based
emergency response management products and services to federal, state, and local
governments  of the United  States in  exchange  for one seat on GIS's  Board of
Directors,  and a fifteen  percent  commission  on all  contracts and first year
maintenance  fees  from  any  United  State's  government,   non-government,  or
commercial  enterprise or  organization  resulting  from a contact  initiated by
Defense Solutions. In connection with this agreement,  the Company issued 3-year
warrants to purchase  4,000,000 shares of the Company's common stock at a strike
price of $0.0075.

      During 2004,  the Company,  GIS and Now Solutions  entered into  marketing
agreements  with Total Care  Technologies,  Basix1,  and  InfraHealth,  Inc. The
Company  has also  retained  consultants  to advise the  Company  regarding  the
government sector.

      Competition

      In general,  the Company has  substantial  competition  from  software and
hardware vendors,  system integrators,  and multinational  corporations  focused
upon information  technology.  Now Solutions'  competitors  include  PeopleSoft,
Oracle,  Lawson,  Cyborg/Hewitt,  Kronos,  DLGL, Ultimate and SAP. The Company's
competitors have longer operating  histories,  greater name recognition,  larger
customer  bases and  significantly  greater  financial,  technical and marketing
resources than the Company. The Company cannot guarantee that it will be able to
compete  successfully  against current or future competitors or that competitive
pressures will not have a material and adverse effect on the Company's financial
position, results of operations and cash flows.

      The  Company's  ability to compete  will also  depend  upon its ability to
continually  improve its products and  services,  the  enhancements  the Company
develops, the quality of its customer service, and the ease of use, performance,
price and reliability of its products and services.

      Strategic Overview

      The Company  believes that each of Vertical's  business units has distinct
marketing advantages for the niche markets they serve. The Company plans to find
national marketers,  such as Defense Solutions, LLC, and international resellers
such as Infotec,  who can commercially  exploit the Company's  products in these
niche markets.  By utilizing the strategic  advantages each individual  business
unit  possesses,  the Company  plans to leverage its  strengths  and exploit the
network of customers,  vendors, and support agencies that the Company has built.
The Company has three  business  units in North  America  (Now  Solutions,  GIS,
Globalfare)  that focus either in a selective  targeted market like GIS does for
the  federal   governmental  market  with  ResponseFlash  or  with  marketing  a
best-of-breed  software product to all potential  markets such as Now Solutions.
The  Company  currently  seeks to use a  combination  of  direct  marketing  and
strategic  partnerships  to  commercially  exploit  its  products  derived  from
SiteFlash, namely NewsFlash,  UniversityFlash,  and AffiliateFlash.  In this way
the  Company  hopes to  define  the best  potential  markets  for its  SiteFlash
products,  and then license the product to one of the Company's  subsidiaries to
exploit.  At this time,  the  Company  has placed  both its Emily  software  and
international  bridge network on hold while it  concentrates  on these immediate
opportunities within its existing business units.


                                       7
<PAGE>

      One of the Company's  strategies is to enter into co-marketing  agreements
with other  companies,  particularly  those  with  best-of-breed  products  that
compliment its business units. The existing strategy with potential co-marketing
partners is to segregate the co marketing  agreements whereby each business unit
will  have a  separate  agreement  with  the co-  marketing  partner  for  their
particularly  target market.  For example,  Basix1 and InfraHealth have separate
agreements  with  Now  Solutions  and  GIS and the  Company.  Additionally,  the
business units will enter into  agreements with each other where the opportunity
exist to  cross-promote/market  their products. For example GIS will promote Now
Solutions' products to federal governmental agencies.

      The Company believes it possesses certain  competitive  advantages because
of its proprietary software, including the recently issued patent for SiteFlash.
The  Company is  exploring  various  opportunities  to exploit  the  proprietary
software,  which  includes the  possibility  of licensing  the software to major
companies in non-competitive niche markets.

      Although  the  Company's  current  marketing  effort  focuses upon several
sectors,  it has recently  concentrated on the United States  government for the
following reasons:  (i) companies which it either controls or is affiliated with
have government clients which has created the potential to  cross-promote/market
the Company's  products and web services;  (ii) products which are suited to the
current governmental  environment demanding for cross-agency and federal,  state
and  local  interface  like  ResponseFlash;  and (iii)  the  increased  security
environment  caused by the terrorist  attacks of September 11, 2001 necessitates
improvements in secure communications and agency-to-agency  contacts that can be
facilitated by ResponseFlash.

      Proprietary Rights

      The Company relies upon a combination  of contract  provisions and patent,
copyright,  trademark and trade secret laws to protect its proprietary rights in
its products and  services.  The Company  distributes  its products and services
under agreements that grant users or customers a license to use its products and
services and relies on the protections afforded by the copyright laws to protect
against the unauthorized  reproduction of its products. In addition, the Company
protects its trade secrets and other proprietary  information through agreements
with employees and  consultants.  Now Solutions'  emPath software  technology is
protected by copyright and trademark. The USPTO granted a patent (No. 6,718,103)
for an invention for  "Transmission of Images over a Single Filament Fiber Optic
Cable" in April 2004. This patent is in a theoretical stage only and is intended
to be used for transmitting  images on fiber optics that might improve in orders
of magnitude  today's  capacity of fiber optics to transmit images and data. The
Company has filed for a  Continuation  in Part for patent  number  6,718,103  to
pursue possible additional  derivative patents.  The USPTO granted a patent (No.
6,826,744)  for an invention for "System and Method for  Generating Web Sites in
an Arbitrary Object Framework" on November 30, 2004. The Company has filed for a
Continuation in Part for patent number  6,826,744 to pursue possible  additional
derivative  patents.  This  patent  is the  foundation  of  Vertical's  product,
SiteFlash(TM),  and  forms the  basis of the  ResponseFlash(TM),  NewsFlash(TM),
UniversityFlash(TM)  and  AffiliateFlash(TM)  products. In addition, the Company
has also  filed  for a number  of  patents  related  to  Emily:  (a) one  patent
application  related  to  the  Emily  programming   language;   (b)  one  patent
application  related to the Emily XML Enabler  Agent and Emily XML  Broker.  The
patent  application  for the Emily  XML  Scripting  Language  was  published  in
February 2003.

      Although  the Company  intends to protect its rights as  described  above,
there can be no  assurance  that these  measures  will be  successful.  Policing
unauthorized use of Vertical's  products and services is difficult and the steps
taken may not prevent the  misappropriation  of its technology and  intellectual
property rights.  In addition,  effective  patent,  trademark,  trade secret and
copyright protection may be unavailable or limited in certain foreign countries.
The Company  seeks to protect the source code of its  products as a trade secret
and as an unpublished  copyright work. Source code for certain products has been
or will be  published  in order  to  obtain  patent  protection  or to  register
copyright  in  such  source  code.  The  Company  believes  that  its  products,
trademarks  and other  proprietary  rights do not  infringe  on the  proprietary
rights of third  parties.  There can be no assurance that third parties will not
assert  infringement  claims  against the Company in the future with  respect to
current or future  features or contents of services or products or that any such
assertion  may not result in  litigation  or require  the  Company to enter into
royalty arrangements.


                                       8
<PAGE>

      Regulatory Environment; Public Policy

      In the United States and most countries in which the Company  conducts its
operations,  the Company is generally not regulated  other than pursuant to laws
applicable to businesses in general and value-added  services  specifically.  In
some  countries,  the  Company  is  subject  to  specific  laws  regulating  the
availability  of certain  material  related to, or to the obtaining of, personal
information.  Adverse  developments  in  the  legal  or  regulatory  environment
relating to the interactive  online services and Internet industry in the United
States,  Europe,  Asia, Latin America or elsewhere could have a material adverse
effect on the Company business,  financial  condition and operating  results.  A
number of legislative and regulatory proposals from various international bodies
and  foreign  and  domestic  governments  in  the  areas  of  telecommunications
regulation,  particularly  related to the  infrastructures on which the Internet
rests, access charges, encryption standards and related export controls, content
regulation,  consumer protection,  advertising,  intellectual property, privacy,
electronic  commerce,  and  taxation,  tariff and other  trade  barriers,  among
others, have been adopted or are now under consideration.  The Company is unable
at this time to predict which, if any, of the proposals under  consideration may
be adopted and,  with  respect to  proposals  that have been or will be adopted,
whether  they will  have a  beneficial  or an  adverse  effect on the  Company's
business, financial condition and operating results.

      Employees

      As of March 29, 2005, the Company has 25 full-time employees,  1 part-time
employee and 21  consultants,  of which 21 full-time  employees  and 1 part-time
employee is employed at Now  Solutions  (of which 14 are  employed in the United
States  and 7 are  employed  in  Canada)..  The  Company  is not a party  to any
collective bargaining agreements.


                                       9
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

      The Company and Now Solution's  headquarters are currently  located at 201
Main Street,  Suite 1175, Fort Worth,  Texas, and comprises  approximately 3,450
square feet.  In addition,  Now  Solutions  has an office at 6205 Airport  Road,
Building B, Suite 100,  Mississauga,  Ontario,  Canada,  which  comprises  2,800
square feet. All of the locations are leased from third parties and the premises
are in good condition. The Company believes that its facilities are adequate for
its present needs and its near term growth, and that additional  facilities will
be available at acceptable  rates as the Company needs them. The Company's other
subsidiaries may be reached through the Company's Texas headquarters.

ITEM 3. LEGAL PROCEEDINGS

      The Company is, from time to time,  involved in various  lawsuits.  In the
opinion of management,  the ultimate  resolution of these  matters,  if any, may
have a significant effect on the financial position, operations or cash flows of
the Company.

      In addition,  the Company is involved in the following  additional ongoing
matters:

      In February 2003,  the Company filed a lawsuit and a derivative  action in
New York Supreme  Court Case against  defendants  Ross Systems,  Inc.  ("Ross"),
Arglen Acquisitions,  LLC ("Arglen"), James Patrick Tinley ("Tinley"), and Garry
Gyselen  ("Gyselen").  The Company  filed a  derivative  action on behalf of its
subsidiary Now Solutions when Arglen refused to authorize a lawsuit  against any
parties  who  were  alleged  to have  acted  against  the best  interest  of Now
Solutions.  In conjunction with the Company's claim, Now Solutions  withheld its
payments  on the  remaining  $750,000  note  that  was due in  February  2003 in
connection with the acquisition of Ross against the unpaid  maintenance fees and
gave  notice in February  2003 to Ross of Now  Solutions'  claim of offset.  Now
Solutions  claimed a total amount of approximately  $3,562,000 to offset against
the note, plus other damages.  The Company's  original claims sought damages and
equitable relief arising out of actions of the defendants constituting breach of
contract,  fraud,  conspiracy  and breach of fiduciary  duty in connection  with
certain  transactions  entered  into between  Ross and Now  Solutions;  Ross and
Arglen; Arglen and Now Solutions; Gyselen and Now Solutions; and the Company and
Arglen.

      This action concerns offsets of payment on the note payable to Ross by the
maintenance  fee charged by Now  Solutions  to Ross to which Now  Solutions  was
entitled  per the  asset  purchase  agreement  between  Now  Solutions  and Ross
regarding  the HRIS  assets  Now  Solutions  purchased  from  Ross in  2001;  an
undisclosed transaction between Ross and Gyselen around the time of the purchase
of these  assets;  and the failure of Gyselen to enforce  the offset  provisions
which caused Coast  Business  Credit to declare Now  Solutions in default of the
$5,500,000 loan to purchase the HRIS asset from Ross covenant in 2001 (which has
since been cured).  In November 2003,  the New York Supreme Court  dismissed all
claims against Ross and Tinley and stayed the  Derivative  Action against Arglen
and Gyselen pending  conclusion of the  Arbitration.  The portion of the lawsuit
involving  Arglen and Gyselen was settled in December 2003 and,  pursuant to the
settlement,  dismissed in February 2004.  The court  dismissed the entire action
against Ross and Tinley.  The Company  appealed the decision  with regard to its
claim for breach of contract  for Ross'  failure to give the proper  maintenance
fee  adjustment.  On June 1,  2004,  the appeal of the  dismissal  of the action
against Ross was  submitted  to the court for  decision.  On appeal,  the claims
against Ross were  reinstated  pursuant to the order of the Appellate  Division,
dated  October 26,  2004.  In  November  2004,  Ross filed an answer  containing
affirmative defenses in the Derivative Action.

      In March  2003,  Ross  commenced  an action in New York  Supreme  Court by
filing a motion for summary judgment in lieu of complaint  against Now Solutions
to collect the note  payable in the amount of  $750,000  plus 10%  interest.  In
August 2003,  the New York Supreme Court denied the motion and dismissed  Ross's
action without prejudice. In October 2003, the motion of Ross for reargument was
denied.  Ross appealed the August 2003 court order, but  subsequently  abandoned
its appeal.


                                       10
<PAGE>

      In December 2003, the Company  settled its arbitration and litigation with
Arglen,  a minority  partner of Now Solutions,  regarding  issues related to Now
Solutions. The settlement resolved various allegations by the Company and Arglen
concerning violations of Now Solutions' Operating Agreement. The arbitration has
been  dismissed  and any actions with respect to Arglen and Gary Gyselen and the
Company and its related parties,  including Now Solutions,  were also dismissed,
except  that  the  California   Superior  Court,  Los  Angeles  County  retained
jurisdiction  regarding  the terms of the  settlement  between the  parties.  In
February 2004, the Company completed the settlement with Arglen. Pursuant to the
terms  of  the  settlement,  the  Company  purchased  Arglen's  interest  in Now
Solutions for $1,400,000 as follows: (a) $800,000, which was paid at the closing
and (b) $600,000,  pursuant to a non-interest  bearing  secured  promissory note
providing  for  payments of $200,000 in April 2004,  $100,000 in June 2004,  and
$300,000 in September 2004, which was issued at closing.  The Company's purchase
of Arglen's interest resulted in the Company recognizing $1,680,000 of goodwill,
which was  written  off in 2004.  When the  Company  did not make the April 2004
payment, the Company began accruing interest on the note at the rate of 10% from
its inception.  The security  interest of Now  Solutions'  assets on the secured
promissory  note is junior to Now Solutions'  present  indebtedness to WAMCO 32,
Ltd. The note is in default.  In August 2004, Arglen obtained a default judgment
in Los Angeles court for the  outstanding  principal,  plus  attorney's fees and
interest  at the rate of 10% per annum.  The  Company  has filed a motion in the
Delaware court to stay the enforcement of the judgment pending resolution of the
Delaware action.  Also at the closing of the settlement,  the Company  cancelled
80,763,943 warrants held by Arglen and issued to Arglen 20,000,000  unregistered
shares of the common stock of the Company (at a fair market value of  $280,000),
which is  subject  to a "lock up"  provision.  In  December  2004,  the  Company
recorded  the expense of issuing  5,000,000  unregistered  shares to Arglen at a
fair market value of $82,273,  which was based on an average  share price during
11 days of  August  2004.  These  shares  were due  pursuant  to the  settlement
agreement  whereby the Company was  obligated  to issue  5,000,000  unregistered
shares of common  stock of the  Company to Arglen,  due to its failure to file a
registration  statement within 180 days from the closing date of the settlement.
In March 2005, the Company issued these 5,000,000 shares to Arglen.

      In March 2004,  Ross  commenced an action in the New York Supreme Court by
filing a motion for summary judgment in lieu of complaint  against Now Solutions
to collect the note  payable in the amount of  $750,000  plus 10%  interest  and
attorneys  fees. Now Solutions  filed its opposition to Ross' motion,  which was
submitted to the court for decision on May 20, 2004.  Now Solutions  opposed the
Ross motion and, on October 7, 2004,  the Court ruled in favor of Now  Solutions
and denied the motion for summary  judgment.  Pursuant to New York State law, in
the event a motion for summary  judgment  in lieu of  complaint  is denied,  the
action  continues  and  the  pleadings  supporting  the  motion  are  deemed  to
constitute the complaint.  Accordingly, Now Solutions filed an answer containing
affirmative  defenses and nine (9)  counterclaims  against Ross. The affirmative
defenses  asserted by Now Solutions  include the same grounds which comprise the
causes of action against Ross in the Derivative  Action,  namely Ross' breach of
the Asset Purchase  Agreement as a result of its failure to credit Now Solutions
with  adjustments at closing in an amount not less than  $3,562,201.  All of the
counterclaims  asserted  by Now  Solutions  against  Ross  relate  to the  Asset
Purchase Agreement and Ross' breaches thereof.  The counterclaims  include:  (i)
breach of the covenant not to compete,  whereby Now  Solutions  seeks damages in
excess of $10,000,000;  (ii) breach of the covenant to deliver all assets to Now
Solutions at closing,  whereby Now Solutions seeks damages in an amount not less
than  $300,000;  (iii)  breach  of a  certain  Transitional  Services  Agreement
(executed  in  conjunction  with the  Asset  Purchase  Agreement),  whereby  Now
Solutions seeks damages in an amount not less than $73,129;  and (iv) reasonable
attorney's  fees.  In December  2004,  Ross filed a motion to dismiss two of Now
Solutions' nine counterclaims:  one which alleges that Ross and Chinadotcom used
Ross to breach a covenant  not to compete and the second  which  requested  that
Ross be enjoined from further competition with Now Solutions in violation of the
covenant.  In February  2005,  Ross' motion was granted  based upon a procedural
default.  Thereafter,  Now Solutions filed a motion to vacate the default, which
motion was granted thereby  reinstating the two counterclaims.  However,  at the
same  hearing,  Ross'  motion to dismiss  was  granted  on the  merits  over the
objection of Now Solutions.  Now Solutions intends to appeal this decision.  Now
Solutions' remaining seven counterclaims remain unaffected.

      In March 2004, Ross commenced an action in the Court of Chancery, State of
Delaware by filing a summons and  complaint  against the Company,  Now Solutions
and Arglen  alleging a  fraudulent  transfer in  connection  with the  Company's
payment of monies to Arglen pursuant to the settlement  dated December 2003. The
Company  and Now  Solutions  have  filed a motion  to stay the  Delaware  action
pending the resolution of the parties' rights in Supreme Court,  New York County
and Appellate Division. Specifically, Ross seeks a judgment against the Company:
(i)  attaching  the assets  transferred  to Arglen  pursuant  to the  Settlement
Agreement;  (ii)  enjoining  the Company and Now Solutions  from making  further
transfers to Arglen pursuant to the Arglen Note; (iii) avoiding the transfers to
the Company and Arglen or for judgment in the amount  equivalent to the value of
the asserts transferred to them pursuant to the Settlement  Agreement;  and (iv)
appointing  a  receiver  to take  possession  of the assets  transferred  to the
Company  and Arglen  pursuant to the  Settlement  Agreement.  In July 2004,  the
Company and Now Solutions filed a motion to stay the Delaware Action pending the
resolution of the parties' rights in the Derivative  Action and Ross Action.  In
October 2004, the motion was granted and the Delaware action has been stayed.

      In January 2005,  Parker,  Mills, and Patel filed a lawsuit in Los Angeles
Superior  Court to collect  the  outstanding  balance  of $23,974  due under the
promissory  note  issued to them by the  Company and for failure to pay fees for
professional  services in the amount of $89,930  rendered to the  Company,  plus
interest. In March 2005, the Company filed a demurrer.


                                       11
<PAGE>

      Matters Involving the United States Securities and Exchange Commission

      In December 2004, the Company was notified by the United States Securities
Exchanges  Commission  ("SEC") that the SEC had suspended trading of VCSY common
stock for the period of December 1, 2004 through  December 14, 2004  pursuant to
an Order  Filed by the SEC  because  the  Company  had  been  delinquent  in its
periodic filing  obligations under Section 13(a) of the Securities  Exchange Act
of 1934, as amended, since the period ending September 30, 2003.

      Also  in  December  2004,  the  Company  was  notified  by  the  SEC of an
administrative  proceeding  pursuant  to the  filing  of an  "Order  Instituting
Administrative  Proceedings  and Notice of Hearing  Pursuant to Section 12(j) of
the  Securities  Exchange Act of 1934" due to the  delinquency  of filing of the
Form  10-KSB  for the year ended  2003 and the Form  10-QSB for the first  three
quarters of 2004.

      The  Company  filed its Form 10-KSB for the year ended 2003 on January 19,
2005.  The Company  filed its Form 10-QSB for the three  months  ended March 31,
2004 and its Form  10-QSB for the three  months  ended June 30, 2004 on March 7,
2005. The Company filed its Form 10-QSB for the three months ended September 30,
2004 on March 8, 2005.

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

      None


                                       12
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The  Company's  common equity is quoted on the Other OTC. The Other OTC is
the trading of a security that is not listed on any stock  exchange or quoted on
the Pink Sheets or the Over-The-Counter  Bulletin Board ("OTCBB").  Up until May
29, 2003, the Company's  common stock was quoted on Pink Sheets under the symbol
"VCSY.PK" and prior to May 30, 2003,  the  Company's  common stock was quoted on
the OTCBB under the symbol "VCSY" (which commenced in October 1999).

      In December 2004, the Company was notified by the United States Securities
Exchanges  Commission  ("SEC") that the SEC had suspended trading of VCSY common
stock for the period of December 1, 2004 through  December 14, 2004  pursuant to
an Order  Filed by the SEC  because  the  Company  had  been  delinquent  in its
periodic filing  obligations under Section 13(a) of the Securities  Exchange Act
of 1934, as amended, since the period ending September 30, 2003.

      Also  in  December  2004,  the  Company  was  notified  by  the  SEC of an
administrative  proceeding  pursuant  to the  filing  of an  "Order  Instituting
Administrative  Proceedings  and Notice of Hearing  Pursuant to Section 12(j) of
the  Securities  Exchange Act of 1934" due to the  delinquency  of filing of the
Form  10-KSB  for the year ended  2003 and the Form  10-QSB for the first  three
quarters of 2004.

      The  Company  filed its Form 10-KSB for the year ended 2003 on January 19,
2005.  The Company  filed its Form 10-QSB for the three  months  ended March 31,
2004 and its Form  10-QSB for the three  months  ended June 30, 2004 on March 7,
2005. The Company filed its Form 10-QSB for the three months ended September 30,
2004 on March 8, 2005.

      The  following  is the  range of high and low  closing  bid  prices of our
stock, for the periods indicated below.

                                                      High              Low
                                                      ----              ---

             Quarter Ended December 31, 2004         $0.0180           $0.0001
             Quarter Ended September 30, 2004        $0.0310           $0.0120
             Quarter Ended June 30, 2004             $0.0590           $0.0140
             Quarter Ended March 31, 2004            $0.0360           $0.0030

             Quarter Ended December 31, 2003         $0.0060           $0.0030
             Quarter Ended September 30, 2003        $0.0080           $0.0050
             Quarter Ended June 30, 2003             $0.0510           $0.0030
             Quarter Ended March 31, 2003            $0.0082           $0.0040

      The above quotations reflect inter-dealer prices,  without retail mark-up,
      mark-down or commission and may not represent actual transactions.

      Number of Holders

      As of March 29, 2005, there were approximately  1,603 holders of record of
our common stock.

      Dividends

      The Company has outstanding Series A 4% Convertible  Cumulative  Preferred
Stock that accrues dividends at a rate of 4% on a semi-annual basis. The Company
also has  outstanding  Series C 4% Convertible  Cumulated  Preferred  Stock that
accrues  dividends  at a rate of 4% on a quarterly  basis.  The total  dividends
applicable  to Series A and Series C Preferred  Stock were $600,000 and $600,000
for the years ended  December 31, 2004 and 2003,  respectively.  The Company did
not pay any dividends on its  outstanding  shares of Series A Preferred Stock or
Series C Preferred Stock during 2004 or 2003. The Company  presently  intends to
retain  future  earnings,  if any, to provide funds for use in the operation and
expansion of its businesses. Accordingly, the Company does not anticipate paying
cash dividends on its common stock in the near future.


                                       13
<PAGE>

Unregistered Sales of Securities

      On August 21, 2001, the Company  entered into a stock  purchase  agreement
with  EnFacet to  purchase  100% of  EnFacet,  Inc.  by paying  $30,000 in cash,
incurring transaction expenses of $85,000, assuming liabilities of $642,075, and
issuing  30,000 shares of Series C 4%  Cumulative  Convertible  preferred  stock
valued at $312,000 (each share of the underlying  preferred stock is convertible
into 400 shares of the Company's common stock). 15,000 shares of preferred stock
were  originally to be distributed  among the employees in EnFacet and the other
15,000 shares were to be available for future fund raising purposes),  resulting
a goodwill in EnFacet totaling  $1,069,075.  Accordingly,  the $312,000 value of
30,000  shares  of  Series C  preferred  stock  and the  corresponding  value of
goodwill were  eliminated in the process of  consolidation  at December 31, 2003
and 2002. In February 2003, the Company and EnFacet,  Inc.,  agreed to amend the
aforementioned stock purchase agreement.  Pursuant to the amendment, the Company
had the  right to  substitute  400  common  shares  for each  share of  Series C
preferred  stock (up to  12,000,000  shares of the  Company's  common  stock) in
connection  with  purchase of EnFacet,  Inc.  The Company  also had the right to
cancel any Series C preferred  stock for which common stock is substituted or as
otherwise specified in the amended agreement.  In April 2003, the Company issued
3,000,000  restricted  shares of the  Company's  common  stock (at a fair market
value of $14,693) to former  employees and consultants of EnFacet,  Inc. per the
above-executed  stock agreement,  as amended. The Company cancelled 7,500 shares
of Series C preferred stock reserved for the former employees. In February 2004,
an additional 7,500 shares of Series C preferred stock, reserved for an employee
under his employment agreement, were cancelled after he terminated his agreement
with the Company.  Pursuant to the February 2003 amendment, the remaining 15,000
preferred  C shares were also  cancelled  since the  Company  determined  not to
utilize these shares for any future funding activities for EnFacet.

      In March 2002, the Company issued a $100,000  convertible  debenture.  The
debt accrued  interest at 5% per annum and was due April 2004. The debenture was
convertible  into shares of common stock at either 120% of the closing bid price
on the date of agreement or 80% of the lowest closing bid prices 5 days prior to
the conversion.  The debenture was convertible at the option of the holder,  any
time after  purchase.  In April  2003,  $40,000  principal  of  debentures  were
converted  into  10,245,900  shares of the Company's  common stock.  In December
2003, $20,000 of principal of debentures and $1,726 in interest was redeemed for
a total of $25,726,  which includes a 20% premium on the principal.  In February
2004, $10,000 of principal of debentures and $925 in interest was redeemed for a
total of $10,925.  In July 2004, $20,000 of principal and $2,277 in interest was
converted  into 1,076,170  shares of common stock of the Company.  The holder of
the remaining $10,000 of debentures is a third party.

      In January 2003, the Company's  subsidiary,  Government  Internet Systems,
Inc.  (GIS)  retained  David Kinney to serve as CTO.  The Company  issued 5 year
warrants to purchase 500,000 shares of the Company's common stock at an exercise
price of $0.01 in connection with retaining this executive. The warrants, at the
time  of  issuance,  had a  fair  market  value  of  $3,067  (valued  using  the
Black-Scholes  valuation  model).  In the event that GIS achieves  certain sales
targets or receives $2.5 million in financing, Kinney has the option to become a
salaried employee for 2 years at an annual salary of $125,000.

      Also in January 2003, the Company,  acting as the majority  shareholder of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the  services  of Basil  Nikas as a Director of GIS for 250 shares of the 25,000
shares of the outstanding  common stock of GIS,  subject to a buyback  agreement
between the Company and the director.  The value of these shares is nominal.  In
addition,  the Company issued  five-year  warrants to purchase 250,000 shares of
the  Company's  common stock at an exercise  price of $0.01 in  connection  with
retaining  this  director.  The warrants were issued at an estimated fair market
value of $1,486 (valued using the Black-Scholes valuation model).

      In  March  2003,  the  Company,  acting  as the  majority  shareholder  of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the services of Thomas  Beeson as a Director of GIS for 250 shares of the 25,000
shares of the outstanding  common stock of GIS,  subject to a buyback  agreement
between the Company and the director.  The value of these shares is nominal.  In
addition,  the Company  issued five year warrants to purchase  250,000 shares of
the  Company's  common stock at an exercise  price of $0.01 in  connection  with
retaining  this  director.  The warrants were issued at an estimated fair market
value of $1090 (valued using the Black-Scholes valuation model).

      In April 2003,  the Company  and the third party  seller of the  SiteFlash
technology agreed to amend the put and call agreement of October 2002, which was
made in  connection  with the  amendment of the $280,000  note issued in October
2001. Pursuant to this amendment, the Company issued 1,000,000 restricted shares
of common  stock of the Company  (at a fair  market  value of $5,015) in lieu of
issuing  2,500  shares of Class C  Preferred  Stock of the  Company to the third
party when the Company did not purchase the underlying  common stock represented
by 12,500 shares of Class C Preferred Stock of the Company in March 2003.


                                       14
<PAGE>

      Also in April  2003,  the  Company  issued  5 year  warrants  to  purchase
5,000,000  shares of common  stock of the Company at an exercise  price of $0.01
per share to Wolman, Babbitt, & King for legal services rendered to the Company.
The  warrants,  at the time of issuance,  had an estimated  fair market value of
$22,704 (valued using the Black-Scholes valuation model).

      Also in April 2003,  the Company  issued  1,100,000  restricted  shares of
common stock (at a fair market value of $4,468) to a third party  consultant and
extended 750,000 options and 750,000 warrants that vested in November 2001 at an
exercise  price of $0.025 per share for an additional 1 year in connection  with
consulting services.  The extension of the options and warrants had an estimated
fair market value of $6,396 (valued using the Black-Scholes valuation model).

      Also in April 2003,  the Equity Line of Credit  agreement  entered into in
August 2001 was cancelled and a new Equity Line of Credit Agreement was executed
between  the  Company  and  Cornell  Capital  Partners,   L.P.,  whereby  up  to
$10,000,000  worth of the Company's common stock could have been purchased.  The
Equity Line of Credit Agreement contained a commitment fee of $190,000,  payable
in a convertible debenture,  which was issued to Cornell, and a placement fee of
$10,000,  payable to the third party placement  agent. In July 2003, the Company
issued 2,049,180 shares of common stock as payment of the $10,000 placement fee.
As of March 29, 2005, no debentures have been converted.

      Also in April 2003, the Company issued $200,000 of convertible  debentures
to Cornell Capital Partners,  L.P. The debt accrues interest at 5% per annum and
is due April 2006.  The holder may convert the  debenture  into shares of common
stock at either $0.03 or 80 % of the lowest  closing bid price for the 5 trading
days prior to the  conversion.  In  accordance  with the  beneficial  conversion
feature,  the  Company  recognized  deemed  interest  expense of  $45,000,  with
contribution to paid-in  capital.  As of March 29, 2005, no debentures have been
converted.

      In May 2003, the Company issued two promissory notes, each for a principal
amount  of  $17,500,   bearing  no  interest  to  two  third  party  lenders  in
consideration  of two loans in the aggregate  amount of $30,000.  The notes were
due in June 2003. The Company pledged  distributions  of funds owed to it by its
subsidiary  Now Solutions  toward  payment of the loan.  In connection  with the
notes the Company paid a commitment fee of $2,500 on each note and issued 5 year
warrants  to  purchase  250,000  shares of  common  stock of the  Company  at an
exercise price of $0.0075 per share to each lender.  The warrants were issued at
an  estimated  fair  market  value of $2,826  (valued  using  the  Black-Scholes
valuation model). In connection with these loans, the Company also issued 5 year
warrants  to  purchase  250,000  shares of  common  stock of the  Company  at an
exercise  price of $0.0075 per share to a third party  consultant.  The warrants
were  issued at an  estimated  fair  market  value of $1,413  (valued  using the
Black-Scholes  valuation model). In February 2004, the parties amended the terms
of the loans.  The lenders  waived any  default on the note and in exchange  the
Company agreed to issue 500,000  unregistered shares of the Company common stock
to each lender (at a total fair market value of  $14,000),  and to pay $8,750 by
March 31, 2004 and $8,750 plus all accrued interest by April 30, 2004 under each
note.  The stock issued to each lender is subject to "piggy  back"  registration
rights and a "lock up" provision. These notes are currently in default.

      In June 2003,  the Company  retained the services of  Equitilink,  Inc. to
provide  investor  relations  services.  As  compensation,  the  Company  issued
15,000,000  unregistered  shares of  Company's  common  stock with a fair market
value of $60,922.

      In July 2003, the Company issued 8,000,000  unregistered  shares of common
stock of the Company to Victor  Weber in  connection  with $60,000 in loans made
and services  rendered to the Company.  Victor Weber is a Director and President
of Government  Internet  Systems,  Inc., a subsidiary  of the Company.  The fair
market value of these shares was $40,000.

      In October 2003,  the Company  agreed to issue a 2% ownership  interest of
its subsidiary, Government Internet Systems, Inc. to a third party in connection
with a loan of $60,000 to GIS,  which  issued the note on November  5, 2003,  in
amount of $60,000 to the lender once all funds were received. In connection with
the loan,  the lender  will be  entitled to receive a 2% royalty on net sales of
products  by GIS in the United  States up to  $300,000  and the  Company  issued
1,000,000 unregistered shares of Company's common stock with a fair market value
of $5,000.  The note will bear  interest at 10% per annum,  was due  November 5,
2004, and is secured by 4,000,000 shares of common stock of the Company that are
owned  by  Mountain  Reservoir  Corporation.   Mountain  Reservoir  Corp.  is  a
corporation  controlled by the W5 Family Trust.  Mr. Wade, the President and CEO
of the Company,  is the trustee of the W5 Family  Trust.  The Company  currently
owns 85% of Government  Internet  Systems,  Inc.,  and will issue a 2% ownership
interest from its share of stock in GIS.

      In November 2003, the Company agreed to issue a 1.5% ownership interest of
its subsidiary, Government Internet Systems, Inc. to a third party in connection
with a loan of $40,000 to GIS,  which issued the note on November  19, 2003,  in
amount of $40,000 to the lender once all funds were received. In connection with
the loan,  the lender will be entitled to receive a 1.5% royalty on net sales of
products  by GIS in the United  States up to  $200,000  and the  Company  issued
1,000,000  unregistered  shares of  Company's  common  stock (with a fair market
value of $4,000). The note will bear interest at 10% per annum, was due November
19, 2004, and is secured by 3,000,000 shares of common stock of the Company that
are owned by Mountain  Reservoir  Corporation.  Mountain  Reservoir  Corp.  is a
corporation  controlled by the W5 Family Trust.  Mr. Wade, the President and CEO
of the Company,  is the trustee of the W5 Family  Trust.  The Company  currently
owns 85% of Government  Internet Systems,  Inc., and will issue a 1.5% ownership
interest from its share of stock in GIS.


                                       15
<PAGE>

      In December  2003, the Company issued a debenture in the amount of $30,000
to a  third  party.  The  Company  received  net  proceeds  of  $26,000  for the
debenture.  The debt accrues  interest at 5% per annum and is due December 2005.
The holder may convert the debenture  into shares of common stock at 100% of the
lowest closing price for the 5 trading days prior to the conversion. As of March
29, 2005, no conversions  have taken place. In connection with the issuance of a
$30,000  debenture to the third party and the Company's  agreement to redeem the
debenture  by February 1, 2004,  the  payments  due under a note  payable to the
third party in the amount of $239,004,  bearing interest at 13% per annum,  were
extended.  Pursuant to the  extension,  the Company is required to make  monthly
installment payments of $7,500, beginning on February 1, 2004, until the balance
under the note has been paid. The note is currently in default and the debenture
has not been redeemed.

      During  the year ended  December  31,  2003,  incentive  stock  options to
purchase  2,500,000  shares of common  stock of the  Company  at a share  prices
ranging from $0.025 to $0.47 per share expired.

      During the year ended  December 31, 2003,  non-statutory  stock options to
purchase  13,300,000  shares  of common  stock of the  Company  at share  prices
ranging from $0.001 to $1.25 per share expired.

      During the year ended  December 31, 2003,  warrants to purchase  3,795,455
shares  of  common  stock of the  Company  at a share  price of $0.11  per share
expired.

      In January  2004,  the Company  issued  1,500,000  unregistered  shares of
common stock of the Company to two consultants of the Company for services (at a
fair-market value of $4,500).

      Also in January 2004,  the Company  purchased a 5% membership  interest in
Now Solutions from Stephen Parnes for $75,000 and 1,000,000  unregistered shares
of  common  stock  of the  Company  (at a fair  market  value of  $3,000).  This
transaction  resulted in the Company recognizing $80,000 of goodwill,  which was
written  off in the first  quarter of 2004.  The Company  also paid Mr.  Parnes'
legal  fees in the  amount of  $2,000.  The  stock is  subject  to  "piggy-back"
registration rights and a "lock-up" provision.

      Also in January 2004, the Company issued 10,000,000 unregistered shares of
common  stock  of  the  Company  (at  a  fair  market  value  of  $30,000)  with
"piggy-back" registration rights and subject to a "lock-up" provision to Wolman,
Babbit, and King in connection with legal services provided to the Company.

      Also in January 2004, the Company  retained two individuals for consulting
services. In exchange for these services, the Company agreed to issue a total of
4,000,000  unregistered  shares of common stock of the Company (at a fair market
value of $12,000) with "piggy-back"  registration  rights stock and subject to a
"lock up" provision.

      Also in January 2004, the Company agreed to issue  1,000,000  unregistered
shares of the  Company's  common stock (at a fair market value of $3,000),  with
"piggy back" registration  rights, in connection with a $10,000 loan made by Jim
Salz to the Company in June 2003. In addition,  the Company  issued a promissory
note for $10,000  bearing  interest at 10%,  which was due in April 30, 2004. In
April 2004,  the due date on the note was extended to August 1, 2004. In January
2005,  the due date on the note was extended to April 30, 2005.  Mr. Salz is the
Company's corporate counsel.

      In February 2004, in connection with a $500,000 loan made by Robert Farias
to Now Solutions,  the Company issued (i) 5 year warrants to purchase  5,000,000
unregistered shares of common stock at $0.01 per share at a fair market value at
the date of  issuance  of  $74,538  (valued  using the  Black-Scholes  valuation
model); (ii) 5 year warrants to purchase 5,000,000 unregistered shares of common
stock of the  Company at $0.02 per share at a fair  market  value at the date of
issuance of $74,344 (valued using the Black-Scholes  valuation  model);  (iii) 5
year warrants to purchase 5,000,000  unregistered  shares of common stock of the
Company at $0.03 per share at a fair  market  value at the date of  issuance  of
$74,200  (valued  using  the  Black-Scholes  valuation  model);  (iv)  5,000,000
unregistered  shares of common  stock of the Company (at a fair market  value of
$75,000), and (v) an additional 5,000,000 unregistered shares of common stock of
the Company in the event that $250,000 was not paid toward the loan on or before
March 15, 2004,  which were issued (at a fair market value of $125,000).  All of
the  foregoing  warrants  and stock are  subject  to  "piggy-back"  registration
rights. Robert Farias is a director of Now Solutions.


                                       16
<PAGE>

      Also in February 2004, the Company  purchased a 21% ownership  interest in
MedData  Solutions,  Inc. from Robert  Farias.  In exchange,  the Company issued
9,000,000  unregistered  shares of the common  stock of the  Company  (at a fair
market  value of  $135,000),  which are  subject  to  "piggy-back"  registration
rights.  Since the Company could not ascertain the fair market value of MedData,
the  investment  was  written  off in 2004.  Robert  Farias is a director of Now
Solutions.

      Also  in  February  2004,  the  Company  issued  to  Arglen   Acquisitions
("Arglen") 20,000,000 unregistered shares of the common stock of the Company (at
a fair market value of  $280,000),  which are subject to a "lock-up"  provision.
These  shares  were  issued in  connection  with the  closing  of the  Company's
settlement  with  Arglen.  In  addition,   at  closing,  the  Company  cancelled
80,763,943 warrants held by Arglen.

      In March 2004,  the  Company  issued  5-year  incentive  stock  options to
purchase 2,500,000 shares of common stock of the Company at an exercise price of
$0.014  per share to Sheri  Pantermuehl  in  connection  with Ms.  Pantermuehl's
employment agreement to serve as CFO of the Company and Now Solutions.  The fair
market value of these warrants at the date of issuance was $74,616 (valued using
the Black-Scholes  valuation  model). In addition,  Now Solutions issued 1.5% of
so-called "phantom stock" of Now Solutions to Ms. Pantermuehl.

      During  the  three  months  ended  March 31,  2004,  the  Company  granted
five-year  incentive stock options to two employees of Now Solutions to purchase
a total of 3,000,000  shares of common stock of the Company at an exercise price
of $0.01 per  share,  which are  subject  to a  "lock-up"  provision.  The stock
options were issued in connection with employment agreements executed in January
2004. The fair market value of these warrants at the date of issuance was $8,878
(valued using the Black-Scholes  valuation  model).  In addition,  Now Solutions
entered  into  agreements  with these two  employees  pursuant to which they are
entitled to receive a total of 3% ownership  interest of "phantom"  stock in Now
Solutions. In September 2004, one of the employees resigned.  Consequently,  the
Company  cancelled  options to purchase  1,500,000 shares of common stock of the
Company and Now Solutions cancelled 1.5% ownership interest of "phantom" stock.

      In June 2004,  the  Company  and Now  Solutions  agreed with a third party
consultant to provide  governmental  relations services concerning the state and
local  governments of the state of Texas. In connection with the agreement,  the
Company issued five-year  warrants to purchase 250,000 shares of common stock of
the Company at an exercise  price of $0.025 per share at a fair market  value at
the date of issuance of $6,185 (valued using the Black-Scholes valuation model).

      Also in June 2004, the Company and Now Solutions agreed with a third party
consultant  services  concerning the  solicitation and preparation of government
grants.  In connection  with the agreement,  the Company agreed to issue 250,000
unregistered  shares of common stock of the Company,  vested as follows:  90,000
shares after 30 days from the  execution of this  agreement,  (b) 80,000  shares
after 60 days from the execution of the  agreement,  and (c) 80,000 shares after
90 days from the  execution  of the  agreement.  In September  2004,  all of the
shares vested and were issued (at a fair market value of $5,190).

      Also in June  2004,  the  Company  issued  warrants  to WAMCO  32,  Ltd to
purchase  3,000,000  shares of the common  stock of the  Company at an  exercise
price of $0.03 per share or at the holder's election,  by surrendering an amount
of common stock equal to or greater than (but only if by a fractional share) the
required  aggregate  exercise price, in which the holder would receive an amount
of common stock to which it would otherwise be entitled upon such exercise, less
the surrendered  shares.  The holder may also utilize a combination of either of
the  foregoing  methods.  The warrants are subject to "piggy back"  registration
rights and a "lock-up"  provision.  The fair market  value of the  warrants  was
$74,142 (valued using the Black-Scholes  valuation  model).  These warrants were
issued in  connection  with the  amendment of the note payable to the  successor
lender, WAMCO 32, Ltd.

      Also in June 2004,  a third  party  consultant  exercised  the  warrant to
purchase 1,170,424 shares of common stock of the Company at an exercise price of
$0.037 per share. The parties also entered into an agreement whereby the Company
offset the total  purchase  price of the shares as full payment for  outstanding
debt of $43,306 and other obligations owed by the Company to the consultant.

      In September  2004, the Company issued  2,000,000  unregistered  shares of
common  stock at a fair market  value of $24,000 to Victor  Weber in  connection
with an amendment to the terms of the $215,000  note issued by Now  Solutions to
the Company and assigned to Mr. Weber. Mr. Weber is the President and a Director
of GIS.

      In October 2004, the Company issued warrants to purchase  3,000,000 shares
of common stock at an exercise price of $0.0165 per share at a fair market value
at the date of issuance of $49,385  (valued  using the  Black-Scholes  valuation
model) in  connection  with an agreement  between GIS and Grant  Consultants  of
America ("GCA") to provide services  concerning  government grants. In the event
that the GCA did not  procure  a  government  contract  for the  state of Nevada
within 90 days, the warrant would automatically be cancelled. Accordingly, these
warrants were  automatically  cancelled in January 2005 pursuant to the terms of
the agreement.


                                       17
<PAGE>

      Also in October 2004, the Company issued 6,500,000  unregistered shares of
common  stock of the  Company  (at a fair  market  value of  $84,500) to Stephen
Rossetti  pursuant to an amendment  in which full payment for services  rendered
under the consulting agreement was made and a $7,500 note payable was cancelled.
Stephen  Rossetti  is the  CEO  and a  Director  of GIS  and a  Director  of Now
Solutions.

      In December  2004, the Company  recorded the expense of issuing  5,000,000
unregistered shares to Arglen at a fair market value of $82,273, which was based
on an average  share  price  during 11 days of August  2004.  These  shares were
issued pursuant to the settlement  agreement with Arglen whereby the Company was
obligated to issue 5,000,000  unregistered shares of common stock of the Company
to Arglen,  due to its failure to file a SB-2 registration  statement within 180
days from the closing date of the  settlement  in February  2004. In March 2005,
the Company issued these 5,000,000 shares to Arglen.

      During  the year ended  December  31,  2004,  incentive  stock  options to
purchase  12,590,000  shares of common stock of the Company at a price of $0.010
to $0.086 per share expired.

      During the year ended  December 31, 2004,  non-incentive  stock options to
purchase 1,500,000 shares of common stock of the Company at a price of $0.041 to
$0.086 per share expired.

      During the year ended December 31, 2004, warrants to purchase  101,092,952
shares of common  stock of the  Company  at a price of $0.012 to $0.35 per share
expired or were cancelled,  of which  82,523,256 were cancelled  pursuant to the
settlement with Arglen.

      Unless otherwise  noted, the offers,  sales and issuances of the Company's
unregistered  securities set forth above involved no underwriter's  discounts or
commissions.  In engaging in the transactions described above which involved the
Company's unregistered securities,  the Company relied upon the private offering
exemption provided under Section 4(2) of the Securities Act of 1933, as amended,
in  that  the  transactions   involved   private   offerings  of  the  Company's
unregistered  securities,  the Company did not make a public offering or sale of
its  securities,  the  investors  were either  accredited  or  unaccredited  but
sophisticated,  and the  investors  represented  to the  Company  that they were
acquiring the securities for investment purposes and for their own accounts, and
not with an eye toward  further  distribution.  With regard to the  unaccredited
investors,  all  information  required to be  delivered to them  concerning  the
Company, including financial statements, was in fact delivered to them.

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

Forward-Looking Statements.

      This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities Exchange Act, as amended. Such statements include Vertical's beliefs,
expectations,  hopes,  goals and plans  regarding the future,  including but not
limited to statements regarding Vertical's  strategy,  competition,  development
plans, financing,  revenue and operations.  Forward-looking statements often can
be identified by the use of terms such as "may," "will," "expect," "anticipate",
"estimate,"  or  "continue,"  or  the  negative  thereof.  Such  forward-looking
statements  speak  only as of the  date  made.  Any  forward-looking  statements
represent  management's  best  judgment  as to what  may  occur  in the  future.
However,  forward-looking  statements are subject to risks,  uncertainties,  and
important factors beyond the control of Vertical that could cause actual results
and events to differ materially from historical results of operations and events
and those presently anticipated or projected.  Vertical disclaims any obligation
subsequently  to revise any  forward-looking  statements  to  reflect  events or
circumstances  after the date of such  statement or to reflect the occurrence of
anticipated or unanticipated events.

Management's Discussion And Analysis Or Plan Of Operation

      The  following  discussion  is a  summary  of the key  factors  management
considers  necessary or useful in reviewing the Company's results of operations,
liquidity and capital resources. The following discussion and analysis should be
read together with the Consolidated  Financial  Statements and Notes of Vertical
and its  subsidiaries  included  in Item 7 of this  report,  and the  cautionary
statements and risk factors included below in this item of the report.


                                       18
<PAGE>

Critical Accounting Policies

      Use of Estimates

      The  preparation  of financial  statements in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of  financial  statements  and the  reported  amounts  of  revenue  and
expenses  during the  reporting  period.  Among the more  significant  estimates
included in these financial  statements are the estimated allowance for doubtful
accounts receivable and the deferred income tax asset allowance.  Actual results
could materially differ from those estimates.

      Capitalized Software Costs

      Software costs incurred  internally in creating computer software products
are  expensed  until   technological   feasibility  has  been  established  upon
completion of a detailed program design.  Thereafter,  all software  development
costs are  capitalized  until the point  that the  product is ready for sale and
subsequently  reported at the lower of unamortized cost or net realizable value.
The Company considers annual amortization of capitalized software costs based on
the ratio of current year revenues by product to the total estimated revenues by
the product,  subject to an annual minimum based on  straight-line  amortization
over the product's estimated economic useful life, not to exceed five years. The
Company periodically reviews capitalized software costs for impairment where the
fair value is less than the carrying  value.  During the year ended December 31,
2004 and 2003, no costs were capitalized.

      Impairment of Long-Lived Assets

      Effective  January 1, 2002,  the Company began  applying the provisions of
Statement  of  Financial  Accounting  Standard  No.  144,  "Accounting  for  the
Impairment or Disposal of  Long-Lived  Assets"  ("SFAS No.  144").  SFAS No. 144
requires that  long-lived  assets be reviewed for impairment  whenever events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable through the estimated  undiscounted cash flows expected to result
from  the  use  and  eventual  disposition  of the  assets.  Whenever  any  such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.  During 2003, the Company  determined
that there was a $2,873,997 of impairment in goodwill,  of which  $1,610,524 was
located in Now Solutions and $1,263,473 in the Company itself.  During 2004, the
Company  determined  that there was  $1,760,000  impairment in goodwill,  all of
which was located in the Company.

      Revenue Recognition

      Service  revenue  generated  from  professional  consulting  and  training
services are  recognized  as the services are  performed.  Maintenance  revenue,
including revenues bundled with original software product license revenues,  are
deferred and  recognized  over the related  contract  period,  generally  twelve
months. The Company's revenue  recognition  policies are designed to comply with
American Institute of Certified Public  Accountants  Statement of Position 97-2,
"Software  Revenue  Recognition"  (SOP 97-2) and with Emerging Issues Task Force
Issued No 00-21, "Revenue Arrangement with Multiple Deliverables."

      Deferred  revenue on  maintenance  contracts  represent  cash  received in
advance  or  accounts  receivable  from  systems,   maintenance  services,   and
consulting sales, which is recognized over the life of the contact.

      In  accordance  with  SEC  Staff  Accounting  Bulletin  No.  104  "Revenue
Recognition",  the Company  recognizes revenue from license of computer software
"up-front" provide that a non-cancelable  license agreement has been signed, the
software  and related  documentation  have been  shipped,  there are no material
uncertainties regarding customer acceptance,  collection of resulting receivable
is deemed probable, and no significant other vendor obligation exist.


                                       19
<PAGE>

      Stock-Based Compensation

      Effective  January 1, 2004, the Company adopted the fair value  provisions
of SFAS 123 for share based payments to employees. In accordance with transition
provisions  under SFAS 148, the Company has adopted the  prospective  method for
transitional recognition.

      Investments

      Investments  in  entities  in  which  the  Company  exercises  significant
influence,  but does not control,  are  accounted for using the equity method of
accounting in accordance  with Accounting  Principles  Board Opinion No. 18 "The
Equity Method of Accounting for  Investments  in Common  Stock".  Investments in
securities  with a readily  determinable  market value in which the Company does
not exercise significant influence,  does not have control, and does not plan on
selling in the near term are accounted  for as available for sale  securities in
accordance with Statement of Financial  Accounting  Standard No. 115 "Accounting
for Certain Investments in Debt and Equity Securities".

Results of Operations

Year Ended December 31, 2004 Compared To Year Ended December 31, 2003

      Total  Revenues.   The  Company  had  total  revenues  of  $6,412,007  and
$6,656,572  for the years ended  December 31, 2004 and 2003,  respectively.  The
decrease in total  revenue was  $244,565  for the year ended  December  31, 2004
representing  approximately a 4% decrease  compared to the total revenue for the
year ended  December 31, 2003. Of the $6,412,007 for the year ended December 31,
2004 and the  $6,656,572  for the year ended  December 31, 2003,  $6,305,212 and
$6,599,604,  respectively,  was  related  to  the  business  operations  of  Now
Solutions, a subsidiary in which the Company owns a 100% interest since February
2004. The Company  acquired a 60% interest in Now Solutions in February 2001 and
the  remaining  40% interest in January and February  2004.  The total  revenues
primarily  consist of software  licenses,  consulting and maintenance  fees. The
revenue  from  license  and  maintenance  for the year ended  December  31, 2004
increased  by  $409,458  from the same  period in the prior  year,  representing
approximately  an 8%  increase,  due to selling  more new or  upgraded  software
licenses and contractual  increases in maintenance fees.  Consulting revenue for
the year ended December 31, 2004, decreased by $601,224, from the same period in
the prior year,  which  represented  approximately  a 42% decrease,  due to less
implementation  consulting  services as a result of decreasing  software license
sales since 2002. Consulting revenues lag behind software license revenues.  The
higher software licenses revenues in 2002 resulted in greater consulting revenue
in  2003.  With  software  licensing  revenue  being  lower  in 2003  and  2004,
consulting   revenue  was  down.  Other  revenue,   with  consist  primarily  of
reimbursable travel expenses, for the year ended December 31, 2004, decreased by
approximately $52,799 from the prior year, which represented approximately a 28%
decrease. This decrease was a direct result of lower consulting revenue.

      Selling,  General and  Administrative  Expenses.  The Company had selling,
general and administrative  expenses of $8,877,495 and $10,124,809 for the years
ended December 31, 2004 and 2003,  respectively.  The total selling, general and
administrative  expenses  for the year ended  December  31,  2004  decreased  by
$1,247,314 compared to the selling,  general and administrative expenses for the
year ended December 31, 2003 representing  approximately a 12% increase.  Of the
$8,877,495 for the year ended December 31, 2004 and the $10,124,809 for the year
ended December 31, 2003, Now Solutions accounted for $6,247,516, and $6,943,860,
respectively.  The decrease of $1,247,314 was primarily  attributed to decreases
in salary and related costs and decreases in outside consulting, legal and other
professional fees.

      Goodwill  Impairment.  The  Company  assessed  the  carrying  value of its
goodwill for  impairment  at December 31, 2003 in accordance  with  Statement of
Financial  Accounting  Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") and in connection with this assessment  determined its goodwill
was fully impaired. As a result, the Company wrote-off the entire carrying value
of the recorded  goodwill  totaling  $2,873,997 in 2003 relating to Vertical and
Now Solutions.  The Company acquired the remaining 40% interest in Now Solutions
in  January  and  February  2004.  Since the  Company  had  determined  that Now
Solutions did not have any goodwill as of December 31, 2003, the $1,760,000 cost
to acquire the remaining 40% was written-off at the time of the acquisition.

      Operating  Loss.  The  Company had an  operating  loss of  $4,225,488  and
$6,342,234  for the years ended  December 31, 2004 and 2003,  respectively.  The
operating  loss  decreased by $2,116,746  compared to the operating loss for the
year ended December 31, 2003, representing an increase of approximately 33%. The
increase was primarily attributable to the combination of a decrease in selling,
general and administrative  expenses  $1,247,314 and a decrease in impairment of
goodwill of $1,113,997.  These decreases in expenses were partially  offset by a
$244,565 reduction in revenues.


                                       20
<PAGE>

      Interest  Expense.  The  Company  had  interest  expense of  $478,732  and
$510,050 for the years ended December 31, 2004 and 2003, respectively.  Interest
expense decreased for the year ended December 31, 2004 by $31,318,  representing
a decrease  of  approximately  6%,  compared to the same type of expense for the
year  ended  December  31,  2003.  The  decrease  was  primarily  related to the
reduction  of the Now  Solutions  loan from WAMCO 32, Ltd.  which was  partially
offset by interest expense associated with new borrowings.

      Minority  Interest.  There was no minority in Now Solutions in 2004 as the
Company acquired 100% ownership in Now Solutions in 2004. The minority  interest
in the net  loss of Now  Solutions  for the year  ended  December  31,  2003 was
$299,283. In 2003, the Company recognized as minority interest Now Solutions net
loss only to the extent that it had previously recognized its net income.

      Net Loss.  The Company had a net loss of $4,702,210 and $6,518,408 for the
years  ended  December  31, 2004 and 2003,  respectively.  Net loss for the year
ended  December 31, 2004  decreased  by  $1,816,198  representing  a decrease of
approximately  28%. The  decrease in the net loss of  $1,816,197  was  primarily
attributable  to  the  combination  of  a  decrease  in  selling,   general  and
administrative  expenses  $1,247,314 and a decrease in impairment of goodwill of
$1,113,997.  These  decreases in expenses  were  partially  offset by a $244,565
reduction in revenues.

      Dividends  Applicable  to  Preferred  Stock.  The Company has  outstanding
Series A 4% Convertible  Cumulative  Preferred Stock that accrues dividends at a
rate of 4% on a semi-annual  basis. The Company also has outstanding Series C 4%
Convertible  Cumulated Preferred Stock that accrues dividends at a rate of 4% on
a  quarterly  basis.  The total  dividends  applicable  to Series A and Series C
Preferred Stock were $600,000 and $600,000 for the years ended December 31, 2004
and 2003, respectively. The Company did not pay any dividends in 2003 or 2004.

      Net Loss  Applicable  to Common  Stockholders.  The Company had a net loss
attributed to common  stockholders  of $5,302,210  and  $7,118,408 for the years
ended December 31, 2004 and 2003,  respectively.  Net loss  applicable to common
stockholders  for the year ended  December  31,  2004  decreased  by  $1,816,198
representing  a  decrease  of  approximately  26%,  compared  to  the  net  loss
applicable  to common  stockholders  for the year ended  December 31, 2002.  The
decrease  in the net  loss  of  $1,816,197  was  primarily  attributable  to the
combination  of a decrease  in  selling,  general  and  administrative  expenses
$1,247,314  and a decrease  in  impairment  of  goodwill  of  $1,113,997.  These
decreases in expenses were partially offset by a $244,565 reduction in revenues.

      Net Loss Per  Share.  The  Company  had a net loss per  share of $0.01 and
$0.01 for the years ended December 31, 2004 and 2003, respectively.

Financial Condition, Liquidity, Capital Resources And Recent Developments

      At December  31,  2004,  the Company had  non-restricted  cash-on-hand  of
$330,780.

      Net cash generated  from operating  activities for the year ended December
31, 2004 was  approximately  $464,000.  This  positive  cash flow was  primarily
related  to a net  loss of  $4,702,210  adjusted  by  total  non-cash  items  of
approximately   $4,071,787   (including   depreciation   and   amortization   of
approximately  $1,268,000,  the  impairment of goodwill of $1,760,000  and stock
compensation  of  approximately  $892,000),  an increase in all  receivables  of
approximately $366,000,  decreases in prepaid expenses of approximately $187,000
and increases in all liabilities items of approximately $1,273,000.

      Net cash used in investing activities for the year ended December 31, 2004
was approximately $923,000, which consisted of the purchase of the remaining 40%
interest in Now Solution and the purchase of  equipment,  leasehold  improvement
and software of approximately $46,000.

      Net cash used in financing activities for the year ended December 31, 2004
was approximately $173,000,  consisting primarily of proceeds from issuing notes
payable  of  $500,000,  and  the  release  of  restricted  and  pledged  cash of
approximately $103,000 and offset by repayments of note payable of approximately
$766,000 and the repayment of convertible debentures of $10,000

      The total change in cash and cash  equivalents for the year ended December
31,  2004 when  compared  to year ended  December  31,  2003 was a  decrease  of
approximately $632,000.  Currently, the Company does not have sufficient capital
resources to finance its on-going operations.


                                       21
<PAGE>

      From 1999 to the  acquisition  of the minority  owners of Now Solutions in
February  2004,  the Company had been  primarily  dependent on external  cash to
support its  operations.  Until  February  2004,  the Company has  financed  its
operations through the sale of securities, including common and preferred stock,
convertible debts, and notes payable. Since the Company became the 100% owner of
Now Solutions,  it has been able to fund a substantial portion of its operations
internally.

      As of the date of this filing, the Company believes that it had sufficient
funds available to fund its operations only for one month, should the Company be
unable to obtain any relief on its debt structure  during such time.  Therefore,
the  Company  needs  to  raise  additional  funds  through  selling  securities,
obtaining  loans  and/or  renegotiating  the  terms of its  existing  debt.  The
Company's  inability to raise such funds will have a material  adverse effect on
its finances and could jeopardize its ability to continue operations.

Contractual Obligations and Commercial Commitments

         As of December 31, 2004,  the  following  contractual  obligations  and
commercial commitments were outstanding:

<TABLE>
<CAPTION>
      Contractual Obligations        Balance at                         Due in Next Five Years
      Including Now Solutions         12/31/04       2005          2006          2007          2008          2009
      -----------------------        ---------     ---------     ---------     ---------     ---------     ---------
<S>                                  <C>           <C>             <C>            <C>           <C>           <C>
      Notes payable                  4,580,899     4,580,899

      Convertible debts                430,000        40,000       390,000

      Operating lease                  443,809       140,615       147,994        61,477        53,556        40,167
                                     ---------     ---------     ---------     ---------     ---------     ---------

      Total                          5,454,708     4,761,514       537,994        61,477        53,556        40,167
                                     =========     =========     =========     =========     =========     =========
</TABLE>

      In 2004, the Company had new borrowing of  approximately  $1,100,000 which
has maturity through 2005.

      Of the above notes  payable of  $4,580,899,  the default  situation  is as
follows:

                Notes Payable                   2004           2003
                                             ----------     ----------

      In default                             $4,338,899     $1,721,121
      Current                                   242,000      2,505,361
                                             ----------     ----------

      Total Notes Payable                    $4,580,899     $4,226,482
                                             ----------     ----------

New Accounting Pronouncements

      In January  2003,  the FASB  issued FASB  Interpretation  No. 46 (FIN 46),
"Consolidation of Variable Interest  Entities." FIN 46, as amended by FIN 46(R),
issued in January  2003,  requires an investor  with a majority of the  variable
interests  in a  variable  interest  entity to  consolidate  the entity and also
requires majority and significant variable interest investors to provide certain
disclosures.  A  variable  interest  entity is an  entity  in which  the  equity
investors do not have a controlling  financial interest or the equity investment
at risk is insufficient  to finance the entity's  activities  without  receiving
additional  subordinated financial support from other parties. The provisions of
FIN 46(R) are  applicable  for fiscal years ending after  December 15, 2004. The
Company does not have any variable interest entities that must be consolidated.

New Accounting Announcements Not Adopted Yet

      In December 2004, the FASB announced that SFAS No. 123R (revised  December
2004),  "Share-Based  Payment," sets accounting  requirements for  "share-based"
compensation to employees, including  employee-stock-purchase-plans  (ESPPs) and
provides guidance on accounting for awards to non-employees. This statement will
require the Company to recognize in the income  statement  the  grant-date  fair
value of stock options and other equity-based  compensation issued to employees,
but expresses no preference for a type of valuation  model. For public entities,
this  Statement is effective for the first interim period  beginning  after June
15, 2005.  The Company will adopt this Statement in the beginning of 2006 and is
evaluating this  pronouncement's  effect on the Company's financial position and
net income.


                                       22
<PAGE>

Factors  Affecting  the  Company's  Business,  Operating  Results And  Financial
Condition

      We are subject to various  risks that may  materially  harm our  business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before  deciding  to  purchase  our  common  stock.  If any of  these  risks  or
uncertainties  actually occurs, our business,  financial  condition or operating
results  could be  materially  harmed.  In that case,  the trading  price of our
common stock could decline and you could lose all or part of your investment.

      We Have  Historically  Incurred  Losses And May  Continue  To Do So In The
      Future

      We have  historically  incurred  losses.  For the years ended December 31,
2004 and 2003, the Company had net losses  applicable to common  shareholders of
$(5,302,210) and $(7,118,408),  respectively. Future losses are likely to occur.
Accordingly,  we have and may continue to experience  significant  liquidity and
cash flow problems because our operations are not profitable.  No assurances can
be given  that we will be  successful  in  reaching  or  maintaining  profitable
operations.

      We Have Been  Subject  To A Going  Concern  Opinion  From Our  Independent
      Auditors,  Which  Means  That We May Not Be  Able To  Continue  Operations
      Unless We Obtain Additional Funding

      The report of our independent  registered  public accounting firm included
an  explanatory  paragraph in connection  with our financial  statements for the
year ended December 31, 2004. This paragraph states that our recurring operating
losses,  negative working capital and accumulated deficit, the substantial funds
used in our operations and the need to raise  additional funds to accomplish our
objectives  raise  substantial  doubt  about our  ability to continue as a going
concern.  Our  ability to develop our  business  plan and to continue as a going
concern  depends  upon our  ability to raise  capital  and to  achieve  improved
operating results.  Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

      The  Company's  ability to continue as a going concern is dependent on its
      ability to raise additional funds and to establish profitable operations.

      The accompanying  consolidated  financial statements for the twelve months
ended  December 31, 2004 and 2003 have been  prepared  assuming that the Company
will continue as a going concern,  which  contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.

      The carrying amounts of assets and liabilities  presented in the financial
statements  do not purport to represent  realizable or  settlement  values.  The
Company has suffered  significant  recurring  operating losses, used substantial
funds in its operations,  and needs to raise  additional funds to accomplish its
objectives.  Negative  shareholders'  equity  at  December  31,  2004 was  $13.3
million.  Additionally,  at December 31, 2004, the Company had negative  working
capital of approximately $11.6 million (although it includes deferred revenue of
approximately   $2.7   million)  and  has  defaulted  on  several  of  its  debt
obligations.  These  conditions  raise  substantial  doubt  about the  Company's
ability to continue as a going concern.

      t 6 0 Management  of the Company is  continuing  its efforts to attempt to
secure  funds  through  equity  and/or  debt  instruments  for  its  operations,
expansion  and possible  acquisitions,  mergers,  joint  ventures,  and/or other
business  combinations.  The  Company  will  require  additional  funds  for its
operations  and to pay down its  liabilities,  as well as finance its  expansion
plans  consistent  with the  Company's  anticipated  changes in  operations  and
infrastructure. However, there can be no assurance that the Company will be able
to secure  additional  fund and that if such funds are  available,  whether  the
terms or  conditions  would be acceptable to the Company and whether the Company
will be able to turn into a profitable  position and generate positive operating
cash flow. The consolidated  financial  statements contain no adjustment for the
outcome of this uncertainty.

      Our Success Depends On Our Ability To Generate  Sufficient Revenues To Pay
      For The Expenses Of Our Operations

      We believe  that our  success  will  depend  upon our  ability to generate
revenues  from  sales  of  our  SiteFlash  and  Emily  technology  products  and
sponsorship and e-commerce  fees from our Internet sites and increased  revenues
from Now  Solutions  products,  none of which can be  assured.  Our  ability  to
generate  revenues is subject to  substantial  uncertainty  and our inability to
generate  sufficient  revenues to support  our  operations  could  require us to
curtail or suspend operations. Such an event would likely result in a decline in
our stock price.


                                       23
<PAGE>

      Our Success Depends On Our Ability To Obtain Additional Capital

      The  Company has funding  that is  expected to be  sufficient  to fund its
present operations for one month. After one month, the Company's  operations may
need to be curtailed or suspended if  additional  funding is not  received.  The
Company,  however, will need significant additional funding in order to complete
its business plan  objectives.  Accordingly,  the Company will have to rely upon
additional external financing sources to meet its cash requirements.  Management
will continue to seek  additional  funding in the form of equity or debt to meet
its cash  requirements.  However,  there is no guarantee  the Company will raise
sufficient  capital to execute its business  plan. In the event that the Company
is  unable  to raise  sufficient  capital,  our  business  plan  will have to be
substantially modified and our operations curtailed or suspended.

      We Have A Working Capital Deficit,  Which Means That Our Current Assets On
      December 31, 2004 Were Not  Sufficient To Satisfy Our Current  Liabilities
      On That Date

      We had a  working  capital  deficit  of  approximately  $11.6  million  at
December 31, 2004, which means that our current liabilities exceeded our current
assets by approximately  $11.6 million (although it includes deferred revenue of
approximately  $2.7 million).  Current assets are assets that are expected to be
converted into cash within one year and,  therefore,  may be used to pay current
liabilities  as they become  due.  Our working  capital  deficit  means that our
current  assets on December 31, 2004 were not  sufficient  to satisfy all of our
current liabilities on that date.

      Our Operating Results May Fluctuate  Because Of A Number Of Factors,  Many
      Of Which Are Outside Of Our Control

      Our operating  results may fluctuate  significantly as a result of variety
of factors,  many of which are outside of our control.  These  factors  include,
among others:

      o     the demand for our SiteFlash and Emily technology;

      o     the demands for Now Solutions' emPath product;

      o     the level of usage of the Internet;

      o     the level of user traffic on our Web sites;

      o     seasonal trends and budgeting cycles in sponsorship;

      o     incurrence  of costs  relating  to the  development,  operation  and
            expansion of our Internet operations;

      o     introduction of new products and services by us and our competitors;

      o     costs incurred with respect to acquisitions;

      o     price  competition or pricing  changes in the industry;  o technical
            difficulties or system failures; and

      o     general economic  conditions and economic conditions specific to the
            Internet and Internet media.

      We May Have  Difficulty  Managing  Our  Growth  And  Integrating  Recently
      Acquired Companies

      Our  recent  growth  has placed a  significant  strain on our  managerial,
operational,  and financial resources. To manage our growth, we must continue to
implement  and  improve our  operational  and  financial  systems and to expand,
train, and manage our employee base. Any inability to manage growth  effectively
could have a material  adverse effect on our business,  operating  results,  and
financial  condition.  Acquisition  transactions  are accompanied by a number of
risks,  including:

      o     the difficulty of  assimilating  the operations and personnel of the
            acquired companies;

      o     the potential  disruption of our ongoing business and distraction of
            management;

      o     the difficulty of incorporating  acquired  technology or content and
            rights into our products and media properties;

      o     the correct  assessment  of the relative  percentages  of in-process
            research  and  development  expense  which  needs to be  immediately
            written off as compared to the amount which must be  amortized  over
            the appropriate life of the asset;

      o     the  failure  to   successfully   develop  an  acquired   in-process
            technology   resulting  in  the  impairment  of  amounts   currently
            capitalized as intangible assets;

      o     unanticipated expenses related to technology integration;

      o     the  maintenance  of uniform  standards,  controls,  procedures  and
            policies;

      o     the  impairment of  relationships  with employees and customers as a
            result of any integration of new management personnel; and

      o     the  potential   unknown   liabilities   associated   with  acquired
            businesses.


                                       24
<PAGE>

     We may not be successful in addressing  these risks or any other  problems
encountered in connection with these acquisitions.  Our failure to address these
risks  could   negatively   affect  our   business   operations   through   lost
opportunities,  revenues or profits, any of which would likely result in a lower
stock price.

      Our Success Depends On Our Ability To Protect Our Proprietary Technology

      Our  success is  dependent,  in part,  upon our  ability  to  protect  and
leverage the value of our original  SiteFlash and Emily technology  products and
Internet content, as well as our trade secrets, trade names, trademarks, service
marks, domain names and other proprietary rights we either currently have or may
have in the future.  Given the uncertain  application of existing trademark laws
to the  Internet and  copyright  laws to software  development,  there can be no
assurance  that  existing  laws  will  provide   adequate   protection  for  our
technologies,   sites  or  domain  names.   Policing  unauthorized  use  of  our
technologies, content and other intellectual property rights entails significant
expenses and could  otherwise be difficult or  impossible to do given the global
nature of the Internet and our potential markets.

      Our Stock Price Has  Historically  Been  Volatile,  Which May Make It More
      Difficult  For You To Resell  Shares When You Choose To At Prices You Find
      Attractive

      The  trading  price of our common  stock has been and may  continue  to be
subject to wide  fluctuations.  The stock price may  fluctuate  in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological  innovations or new products and media properties
by us or our competitors,  changes in financial estimates and recommendations by
securities  analysts,  the  operating  and  stock  price  performance  of  other
companies  that  investors  may deem  comparable,  and news reports  relating to
trends in our markets. In addition,  the stock market in general, and the market
prices for Internet-related and technology-related companies in particular, have
experienced  extreme  volatility  that often has been unrelated to the operating
performance of such companies.  These broad market and industry fluctuations may
adversely   affect  the  price  of  our  stock,   regardless  of  our  operating
performance.

      Our  Common  Stock Is Deemed To Be "Penny  Stock,"  Which May Make It More
      Difficult  For   Investors  To  Sell  Their  Shares  Due  To   Suitability
      Requirements

      Our common stock is deemed to be "penny  stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities  Exchange Act of 1934. Penny stocks
are stock:

      o     With a price of less than $5.00 per share;

      o     That are not traded on a "recognized" national exchange;

      o     Whose prices are not quoted on the NASDAQ automated quotation system
            (NASDAQ  listed stock must still have a price of not less than $5.00
            per share); or

      o     In issuers with net  tangible  assets less than $2.0 million (if the
            issuer has been in continuous operation for at least three years) or
            $5.0 million (if in continuous operation for less than three years),
            or with  average  revenues  of less than $6.0  million  for the last
            three years.

      Broker/dealers  dealing in penny stocks are required to provide  potential
investors  with a  document  disclosing  the  risks of penny  stocks.  Moreover,
broker/dealers  are required to determine whether an investment in a penny stock
is a suitable  investment for a prospective  investor.  These  requirements  may
reduce  the  potential  market for our common  stock by  reducing  the number of
potential investors. This may make it more difficult for investors in our common
stock to sell  shares to third  parties or to  otherwise  dispose of them.  This
could cause our stock price to decline.

      The Company Will Likely Experience Losses For the Foreseeable Future

      Our lack of an extensive  operating  history  makes  prediction  of future
operating  results  difficult.  We believe  that a comparison  of our  quarterly
results is not meaningful.  As a result,  you should not rely on the results for
any period as an indication of our future performance. Accordingly, there can be
no assurance that we will generate significant revenues or that we will attain a
level of profitability in the future.  We currently intend to expand and improve
our Internet  operations,  fund  increased  advertising  and marketing  efforts,
expand and  improve  our  Internet  user  support  capabilities  and develop new
internet  technologies,  products and services.  As a result,  we may experience
significant losses on a quarterly and annual basis.


                                       25
<PAGE>

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

Please refer to the Audited Consolidated Financial Statements of the Company and
its subsidiaries which are attached to this report.

ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE

      None.

ITEM 8A. CONTROLS AND PROCEDURES

(A)   Evaluation Of Disclosure Controls And Procedures

      As of the end of the period  covered by this report,  the Company  carried
out an  evaluation,  under the  supervision  and with the  participation  of the
Company's  Principal  Executive Officer and Principal  Financial Officer, of the
effectiveness of the design and operation of the Company's  disclosure  controls
and procedures. The Company's disclosure controls and procedures are designed to
provide a reasonable  level of assurance of achieving the  Company's  disclosure
control  objectives.  The Company's  Principal  Executive  Officer and Principal
Accounting  Officer have  concluded that the Company's  disclosure  controls and
procedures are, in fact,  effective at this reasonable assurance level as of the
of period covered.

(B)   Changes In Internal Controls Over Financial Reporting

      In  connection  with the  evaluation of the  Company's  internal  controls
during the  Company's  fourth  fiscal  quarter  ended  December  31,  2004,  the
Company's  Principal  Executive  Officer and  Principal  Financial  Officer have
determined  that there are no changes to the  Company's  internal  controls over
financial  reporting that has materially  affected,  or is reasonably  likely to
materially effect, the Company's internal controls over financial reporting.

ITEM 8B. OTHER INFORMATION

      None.


                                       26
<PAGE>

                                    PART III

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

      The Company's present directors and executive officers are as follows:

<TABLE>
<CAPTION>
 Name                  Age        Position                                                             Tenure
 ----                  ---        --------                                                             ------
<S>                    <C>        <C>                                                                  <C>
 Richard S. Wade       61         President, Chief Executive Officer and Director                      5 years
 William K. Mills      46         Secretary and Director                                               5 years
 Sheri Pantermuehl     48         Chief Financial Officer of the Company and Now Solutions, Inc.       1 year
</TABLE>

      Richard S. Wade, President, Chief Executive Officer and Director

      Richard S. Wade is President of the Company and has been a director  since
October  1999.  Before  coming to Externet  World,  Inc. in  mid-1999,  and then
transitioning to what is now the Company in late 1999, Mr. Wade held a number of
executive  positions  with  companies in the Pacific Rim from 1983 through early
1999, including the position of Chief Operating Officer of Struthers Industries,
Inc., a public company in the business of wireless applications.  In March 1998,
Struthers  Industries,  Inc.  filed a petition for  bankruptcy  under the United
States Bankruptcy Act. Prior to these executive  positions,  Mr. Wade spent over
10 years  with  Duty Free  Shoppers,  Inc.,  culminating  in his  attaining  the
position of President,  U.S.  Division from 1978 to 1981. Over the course of his
career, Mr. Wade has accumulated experience in retail operations,  distribution,
and financial matters.  Mr. Wade is a certified public  accountant,  earning his
Bachelor of Science in Accounting at Brigham  Young  University  and a Master of
Science in Business Policy from Columbia University Business School.

      William K. Mills, Secretary and Director

      William K. Mills has been a director  since  December 2000. Mr. Mills is a
founding  partner of Parker Mills & Patel LLP,  where he  specializes in complex
commercial  business  representations,  including  transactional  and litigation
matters, such as legal malpractice,  intellectual property and general corporate
and governmental  representations  since 1995.  Between 1991 and 1994, Mr. Mills
was a senior  attorney  and partner  with Lewis,  D'Amato,  Brisbois & Bisgaard,
prior to which he was a senior  attorney with Radcliff & West from 1989 to 1991,
senior associate with Buchalter, Nemer Fields & Younger from 1987 to 1991 and an
attorney with Daniels,  Baratta & Fine from 1982 to 1987. Mr. Mills holds a J.D.
from UCLA Law School and an A.B. in American  Government  from Harvard  College.
Active in  professional  and  community  organizations,  Mr. Mills has served as
General Counsel to the California  Association of Black Lawyers, a member of the
Los Angeles County Bar Judicial  Appointments  Committee,  and a Board Member of
the John M. Langston Bar Association. Mr. Mills has also served on the boards of
the  Didi  Hirsch  Dental  Health  Foundation,  the  United  Way's  Los  Angeles
Metropolitan  Region Board, the Los Angeles City Ethics Commission,  and the Los
Angeles County Judicial Procedures Commission.

      Sheri  Pantermuehl,  Chief  Financial  Officer  of  the  Company  and  its
subsidiary Now Solutions, Inc.

      Ms.  Pantermuehl  joined the Company in March  2004.  Prior to joining the
Company, Ms. Sheri Pantermuehl was a financial consultant performing back office
functions  and acting as the Chief  Financial  Officer  for small to medium size
firms, including Now Solutions,  Inc. Ms. Pantermuehl was a Director of Finance,
Blockbuster,  Inc. from 2000 to June 2003.  Prior to that Ms.  Pantermuehl was a
Senior Manager of Business Consulting at Arthur Andersen, LLP from 1998 to 2000.
Ms.  Pantermuehl  has also  served  as  Chief  Financial  Officer/Treasurer  for
Carrington  Laboratories,  Inc. from 1994 to 1997,  Chief  Financial  Officer at
Toppan  Printronics  (USA) from 1990 to 1994,  and in the  capacities of Project
Manager of Corporate Development and Audit Supervisor for Texas Instruments Inc.
from 1980 to 1990. Ms. Pantermuehl began her career as a Staff Auditor at Touche
Ross & Company from 1978 to 1980. Ms.  Pantermuehl  completed a Bachelors degree
in  Business   Administration  with  an  emphasis  in  Accounting  and  Finance,
graduating  Magna Cum  Laude in 1978 from  Texas  A&M  University  and  became a
Certified Public Accountant in the State of Texas in 1981.


                                       27
<PAGE>

      Election of Directors; Family Relationships; Legal Proceedings

      Directors  are  elected at the annual  meeting of  stockholders  and serve
until their  successors have been elected and qualified.  Officers are appointed
by and serve at the  discretion of the Board of  Directors.  There are no family
relationships  between any of the executive  officers or directors.  None of the
Company's  directors  have been  involved in legal  proceedings  except as noted
under the section of this report entitled "Legal Proceedings."

Compliance With Section 16(a) Of The Exchange Act Of 1934

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the  Company's  officers and  directors,  and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
and  changes  in  ownership  with the  United  States  Securities  and  Exchange
Commission (the "SEC").  Officers,  directors and greater than 10%  stockholders
are  required  by SEC  regulations  to furnish  the  Company  with copies of all
Section 16(a) forms they file.

      To the best of the  Company's  knowledge,  based  solely  on review of the
copies of such forms furnished to it, or written  representations  that no other
forms  were  required,  the  Company  believes  that all  Section  16(a)  filing
requirements  applicable  to  its  officers,  directors  and  greater  than  10%
stockholders were complied with during 2004 with the following exception:  Sheri
Pantermuehl did not timely file Form 3 or Form 4 for 2004.

Code of Ethics

      We have adopted a code of ethics that applies to our  principal  executive
officer,  principal  financial  officer  and other  persons  performing  similar
functions,  as well as all of our other  employees and  directors.  This code of
ethics was filed as  Exhibit  14.1 to the Form  10-KSB  filed for the year ended
December 31, 2003.

Significant Employees

      Luiz Valdetaro, Chief Technology Officer

      Prior to joining the Company,  Mr.  Valdetaro was  previously a consultant
(1993-1997)  and  Chief  Technology  Officer  (1997-1999)  of  Diversified  Data
Resources, a software company. Prior to that, Mr. Valdetaro was a Senior Systems
Engineer for System/One and EDS, after  System/One was acquired by EDS. Prior to
that,  Mr.  Valdetaro  was a senior  systems  engineer for Bank of America.  Mr.
Valdetaro is a graduate of Pontific Catholic University,  Rio de Janeiro, Brazil
with a B.S. in Electronic Engineering and a M.S. in Systems Engineering.

      Stephen O. Rossetti,  Chairman and Chief  Executive  Officer of Government
      Internet Systems, Inc. and Director of Now Solutions, Inc.

      As a former senior staff member of the House Armed Services  Committee and
as  director  of the  Readiness  Subcommittee  staff,  Mr.  Rossetti  brings his
extensive government  experience and contacts to the Company. In 1998, the White
House appointed Mr. Rossetti to reform Pentagon  business  processes,  including
service as Chairman of the Defense  Travel  Board to overhaul  the  Department's
travel and  relocation  services for its  employees.  During his tenure with the
U.S.  Federal  government,  Mr.  Rossetti  worked  with  the  Senate  and  House
Government Reform  Committees,  Budget  Committees,  Armed Services  Committees,
Appropriations  Committees,  and Federal  Agencies.  In 1996,  Mr.  Rossetti was
appointed  Executive  Director  for Morale,  Welfare and  Recreation  and Resale
Activities in the Office of the  Secretary of Defense  where he oversaw  on-base
military  businesses.  In  1999,  Mr.  Rossetti  was  appointed  to serve as the
Director of the Department of Defense  integrated travel and relocation  office.
Mr. Rossetti has received several honors for his service from the Congress,  the
President,  and the  Secretary  of Defense.  Since  January  2001,  he served as
President of Markquest, a lobbying and consulting practice in Washington D.C. He
now serves as our Executive Vice-President of Government Affairs.


                                       28
<PAGE>

Significant Employees of Now Solutions, Inc.

      Marianne M. Franklin, President and Chief Executive Officer

      Marianne  M.  Franklin is  President  and Chief  Executive  Officer of Now
Solutions. Ms. Franklin brings her experience in the payroll and human resources
industry, which included over eight years working at Ross Systems, most recently
as Vice-President of North American sales. Prior to this function,  Ms. Franklin
was  Director of Ross'  Canadian  Operations.  Ms.  Franklin's  background  also
includes two years with ADP and 13 years in the banking  industry,  working with
payroll products.

      Kent Orgain, Vice-President of Development

      Mr. Orgain joined Ross Systems in 1993.  From 1989 to 1993, Mr. Orgain was
Application  Maintenance  Manager for Tesseract  Corporation,  a human resources
management  software  vendor.  From 1985 to 1989, Mr. Orgain was a member of the
technical  management  staff  at  Argonaut  Information  Systems,  the  original
developer of the human resources and payroll  product  acquired by Ross Systems.
At Ross Systems,  Mr. Orgain was director of product  development  for the human
resources and payroll  product.  As Vice President of Now Solutions,  Mr. Orgain
manages the overall development and direction of the product and its technology,
from strategic definition and technology selection to end-of-life planning.  Mr.
Orgain's  responsibilities  include  competitive and market  research,  customer
needs assessment, and translation of customer/market needs into new features and
functionality.  Mr. Orgain holds a M.A. in Communications from the University of
North Carolina at Chapel Hill, and has completed doctoral work at the University
of Minnesota.

      Dorothy Spotts, Vice-President of Services And Support

      Ms. Spotts joined Ross Systems, Inc. in April 1991 as a Support Analyst in
the Customer Support Department progressing to Operations Manager. Subsequently,
she attained the position of Manager of Integration  Services in September 1997.
In March 1999,  she was  promoted to Director of  Integration  Services and then
became   Director  of   Professional   Services  in  July  2000.   Ms.   Spotts'
responsibilities  include  the overall  management  of  Application  Consulting,
Integration  Services and Customer Support. Ms. Spotts graduated with a BBA from
the University of Texas at Austin.

      Carmelina Uggenti, Vice President of Customer Development

      Prior to her current  position,  Ms. Uggenti joined Ross Systems,  Inc. in
January   1994   as  a   Senior   Consultant/Project   Manager   in  the   Human
Resources/Payroll  Professional Services Department. In 1998, Ms. Uggenti became
responsible   for  the   pre-sales   organization.   Ms.   Uggenti  has  overall
responsibility for Now Solutions' global sales, pre-sales, professional services
pre-sales and marketing.

ITEM 10. EXECUTIVE COMPENSATION

      The following table shows all the cash  compensation  paid by the Company,
as well as certain other  compensation paid or accrued,  during the fiscal years
ended December 31, 2004,  2003 and 2002 to the Company's  highest paid executive
officers  and  employees,  who were  employed by the  Company  during  2004.  No
restricted  stock  awards,  long-term  incentive  plan payouts or other types of
compensation,  other than the compensation  identified in the chart below,  were
paid to these executive officers during these fiscal years.  Except as set forth
below, no other executive officer earned a total annual salary and bonus for any
of these years in excess of $100,000.

                                       29
<PAGE>
<TABLE>
<CAPTION>
                                      Annual Compensation                       Long-Term Compensation
                          -------------------------------------------    ------------------------------------
                                                                                   Awards             Payouts
                                                                         ---------------------        --------
                                                            Other       Restricted
Name and                                                    Annual        Stock         Options/       LTIP       All Other
Principal Position        Year      Salary     Bonus     Compensation    Award(s)         SARs        Payouts   Compensation
------------------        ----      ------     -----     ------------    --------         ----        -------   ------------
                                     ($)        ($)          ($)           ($)            (#)           ($)          ($)
                                    ------     -----     ------------    --------         ----        -------   ------------
<S>                       <C>     <C>            <C>           <C>         <C>       <C>                  <C>        <C>
Richard Wade,(1)          2004    $300,000(1)    --            --          --        20,600,000(1)        --         --
President and Chief       2003    $300,000       --            --          --                             --         --
Executive Officer         2002    $300,000       --            --          --                   --        --         --

Luiz Valdetaro, (2)       2004    $150,000       --            --          --                   --        --         --
Chief Technology          2003    $150,000                                                      --
Officer                   2002    $150,000       --            --          --            1,000,000        --         --

Aubrey McAuley (3)        2004      $9,000       --            --          --                   --        --         --
Executive V.P., Product   2003     120,000       --            --          --                   --        --         --
Development & Sales       2002     120,000       --            --          --                   --        --         --
Support

Sheri Pantermuehl(4)      2004    $104,167       --            --          --            2,500,000        --         --
Chief Financial Officer   2003          --       --            --          --                   --        --         --
                          2002          --       --            --          --                   --        --         --

James Salz (5)            2004    $100,000       --            --          --                             --         --
Corporate Counsel         2003    $100,000       --            --          --                             --         --
                          2002    $100,000       --           ---          --            5,000,000        --         --
</TABLE>

      No stock options were exercised by the named executive officers during the
fiscal year ended December 31, 2002, 2003 or 2004.

(1)   Mr. Wade  deferred  $47,218,  $155,270 and $300,000 of his salary in 2004,
      2003 and 2002,  respectively.  The Form  10-KSB  for the year  ended  2003
      erroneously  indicated  that all of Mr. Wade's salary was deferred in 2003
      when, in fact, only $155,270 was deferred. This discrepancy was due to the
      2003 amounts being  mischaracterized as an Employee Receivable in the Form
      10-KSB for the year ended 2003.  These 2003  amounts  have been offset and
      classified to Deferred Compensation in this Form 10-KSB for the year ended
      2004.  Pursuant to his employment  agreement,  dated December 1, 2001, Mr.
      Wade,  as President  and CEO,  was  entitled to purchase up to  20,600,000
      shares of common stock for three years at a strike price of $0.10, vesting
      in equal  monthly  amounts  over a 36-month  period.  Of the  warrants  to
      purchase  20,600,000  shares of  common  stock of the  Company,  1,716,667
      expired as of March 29,  2005.  Mr.  Wade also serves as a Director of the
      Company.  As a  Director,  he was  entitled  to options to  purchase up to
      250,000 shares of Common Stock that expired on February 5, 2004.

(2)   Mr.  Valdetaro  deferred  $86,766,  $150,000 and $137,500 of his salary in
      2004,  2003 and 2002,  respectively.  In 2002,  Mr.  Valdetaro was granted
      3-year  warrants to purchase  1,000,000  shares of the common stock of the
      Company at an exercise price of $0.005 per share in connection with a loan
      he made to the Company.

(3)   Mr.  McAuley's  salary was raised in July 2002 to $120,000  pursuant to an
      employment agreement. Mr. McAuley's services terminated in January 2004.

(4)   In March 2004,  the  Company  issued  5-year  incentive  stock  options to
      purchase  2,500,000  shares of common  stock of the Company at an exercise
      price of $0.014  per share to Sheri  Pantermuehl  in  connection  with Ms.
      Pantermuehl's  employment agreement to serve as CFO of the Company and Now
      Solutions. The fair market value of these warrants at the date of issuance
      was $74,616 (valued using the Black-Scholes valuation model). In addition,
      Now  Solutions  issued  1.5% of  phantom  stock  of Now  Solutions  to Ms.
      Pantermuehl.

(5)   Mr. Salz is owed payment of $48,345, $55,000 and $58,333 for his salary in
      2004,  2003 and 2002,  respectively.  In January  2004,  Mr. Salz received
      1,000,000  unregistered  shares of common  stock  subject to  "piggy-back"
      registration  rights  in  connection  with a  $10,000  loan he made to the
      Company in June 2003. During 2002, the Company issued warrants to Mr. Salz
      to  purchase  5,000,000  unregistered  shares of the  common  stock of the
      Company at an average  price of $0.011,  which are  subject to  piggy-back
      registration  rights.  These stock options and warrants are vested and are
      exercisable  for a period of three  years after  vesting.  As of March 29,
      2005,  options to purchase  200,000 shares of common stock of the Company,
      which were issued in 2001, expired.


                                       30
<PAGE>

The  below  table  shows  information  regarding  options  granted  to the named
officers in 2004:

<TABLE>
<CAPTION>
                                                   OPTIONS/SAR GRANT TABLE
------------------------------------------------------------------------------------------------------------------------------
                      No. of         % Total
                    Securities     Options/SARs                                                                        Vesting
                    Underlying      Granted to                               Extended                      Option       from
                   Options/SARs     Employees     Exercise or   Expiration     Post      Strike   Grant     Price       Grant
Name                 Granted        in 2002(4)     Base Price      Date        Split     Price     Date    Extension    Date
----                 -------        ----------   -------------     ----        -----     -----     ----    ---------    ----
                       (#)             (%)       ($ Per Share)
                     -------        ----------   -------------     ----        -----     -----     ----    ---------    ----
<S>                <C>                   <C>          <C>          <C>       <C>         <C>     <C>           <C>      <C>
Sheri
Pantermuehl(1)     2,500,000             45%          $0.014       04/20/09  2,500,000   $0.014  04/20/04      35,000   1 year
</TABLE>

---------------
(1)   Sheri  Pantermuehl was granted 5-year  incentive stock options to purchase
      2,500,000  shares of common  stock of the Company at an exercise  price of
      $0.014 per share in connection with Ms. Pantermuehl's employment agreement
      to  serve  as CFO of the  Company  and Now  Solutions.  In  addition,  Now
      Solutions   issued  1.5%  of  phantom   stock  of  Now  Solutions  to  Ms.
      Pantermuehl.

The below table shows  information  aggregate options held by the named officers
at the end of 2004.

<TABLE>
<CAPTION>
                                                 YEAR-END OPTION VALUES (2003-2004)
------------------------------------------------------------------------------------------------------------------------------
                                                          No. of Securities Underlying
                                                              Options/SARs Granted         Value of Unexercised in-the-Money
                                                           As Of Fiscal Year End 2004     Options at Fiscal Year End 2003 (1)
                                                          ----------------------------    -----------------------------------
       Name                                               Exercisable    Unexercisable      Exercisable        Unexercisable
       ----                                               -----------    -------------      -----------        -------------
<S>                                                          <C>              <C>                <C>                <C>
       Richard Wade(2)                                       20,600,000              --          --                 --

       Luiz Valdetaro                                         1,000,000              --

       Sheri
       Pantermuehl(3)                                         2,500,000       2,500,000          --                 --

       Jim Salz (4)                                           5,000,000              --          --                 --
</TABLE>

(1)   Based on Share Price of $0.0050 on December 31, 2004.

(2)   Pursuant to his employment agreement, dated December 1, 2001, Mr. Wade, as
      President  and CEO,  was entitled to purchase up to  20,600,000  shares of
      common stock for three years at a strike  price of $0.10  vesting in equal
      amounts each over a 36 months  period.  Mr. Wade also serves as a Director
      of the Company.  As a Director,  he was entitled to options to purchase up
      to 250,000  shares of common  stock of the  Company  at a strike  price of
      $0.086  that  expired on  February  5, 2004.  Of the  warrants to purchase
      20,600,000  shares of common stock of the Company,  1,716,667 have expired
      as of March 29, 2005.

(3)   In March 2004,  the  Company  issued  5-year  incentive  stock  options to
      purchase  2,500,000  shares of common  stock of the Company at an exercise
      price of $0.014  per share to Sheri  Pantermuehl  in  connection  with Ms.
      Pantermuehl's  employment agreement to serve as CFO of the Company and Now
      Solutions. The fair market value of these warrants at the date of issuance
      was $74,616 (valued using the Black-Scholes valuation model).

(4)   During 2001, the Company  issued 3-year stock options to purchase  200,000
      shares of the  Company at a share price of $0.14 to Mr.  Salz,  which have
      expired.  During 2002, the Company issued warrants to Mr. Salz to purchase
      5,000,000  unregistered  shares of the common  stock of the  Company at an
      average  price of $0.011,  which are  subject to  piggy-back  registration
      rights.  These stock  options and warrants are vested and are  exercisable
      for a period of 3 years after vesting.

Stock Option Plan.

      In December 1999, the Company  established a stock option plan whereby the
Company may grant both  Incentive  Stock Options  (within the meaning of Section
422 and the Internal Revenue Code of 1986) and non-statutory  options. Under the
Plan, the Company may issue up to 50,000,000 shares (adjusted post stock split).
In November  2002,  the Company  cancelled  an amendment to the Plan which would
have provided for an additional  10,000,000 shares of common stock. Most options
issued  are  non-assignable,  non-transferable,  vest on the date of grant,  and
expire between three and five years from the date of grant.


                                       31
<PAGE>

Director Compensation

      In February  2001,  each member of the Board of  Directors  was granted an
option  exercisable  for a period of three  years to acquire  250,000  shares of
common stock at an exercise  price of $0.086.  These  options have  expired.  No
other  options or  warrants  were  granted as director  compensation  during the
fiscal year ended December 31, 2001, nor were any options or warrants granted as
director compensation during the fiscal years ended 2002,2003 or 2004 (excluding
warrants  granted  to  executives  and  directors  of the  Company's  85%  owned
subsidiary,  GIS).  Non-employee  directors  are entitled to receive  $3,500 per
meeting.

Employment Agreements

      In December  2001,  the  Company  executed an  employment  agreement  with
Richard Wade  pursuant to which Mr. Wade serves as Chief  Executive  Officer and
President  of the  Company,  under  which Mr.  Wade will  receive an annual base
salary of $300,000,  and the issuance of 5-year warrants to purchase  20,000,000
shares of the Company's common stock at an exercise price of $0.10 per share and
5-year warrants to purchase  600,000 shares of the Company's  common stock at an
exercise  price of $0.10 per share.  The warrants vest over a 36 month period in
equal amounts on a monthly  basis from the date of issuance.  Of the warrants to
purchase  20,600,000  shares  of common  stock of the  Company,  1,716,667  have
expired as of March 29, 2005.  Mr. Wade is also entitled to an annual bonus from
a bonus pool for executives equal to 5% of the Company's taxable income (without
deduction for depreciation).  Mr. Wade's share of the bonus pool is equal to the
percentage of his annual base  compensation  to the total of the combined annual
base  compensation  of all executives in the pool. In the event the agreement is
terminated  by Mr. Wade's  death,  his estate shall be entitled to  compensation
accrued to the time of death plus the lesser of one year's base  compensation or
the  compensation due through the remainder of the employment term. In the event
of  termination  by the  Company  without  cause,  Mr. Wade would  receive  base
compensation  for the remainder of the  employment  term and all of his warrants
would automatically  vest. Mr. Wade did not have a written employment  agreement
with the  Company  during the years 1999 and 2000.  Mr. Wade  deferred  $47,218,
$155,270 and $300,000 of his salary in 2004, 2003 and 2002, respectively.

      In July 2002, the Company entered into a 2-year employment  agreement with
Aubrey  McAuley,  whereby  McAuley  would  provide  services in the  capacity of
Executive Vice President of Product Development and Sales Support.  McAuley will
be paid an annual  salary of $120,000 and a bonus as  determined  in  accordance
with the  agreement.  In addition,  the agreement  contains  certain  performing
incentives  whereby McAuley can earn 7,500 shares of Series C Preferred Stock of
the pool of 30,000  shares of Series C Preferred  Stock,  which were reserved in
connection with the purchase of Company's subsidiary, EnFacet, Inc. These shares
of Series C Preferred Stock may be converted into 3,000,000  shares of Company's
common stock.  Mr. McAuley's  services  terminated in January 2004 and the 7,500
shares of Series "C" Preferred Stock have been cancelled.

      In March 2004, the Company and Sheri Pantermuehl  agreed to the terms of a
2-year employment agreement,  whereby Ms. Pantermuehl agreed to provide services
as the Chief Financial Officer for the Company and its subsidiary Now Solutions,
Inc..  Pursuant  to  the  employment  agreement,   the  Company  shall  pay  Ms.
Pantermuehl  a base  salary  of  $125,000  per  annum.  In  connection  with the
agreement,  the  Company  issued  5-year  incentive  stock  options to  purchase
2,500,000  shares of common stock of the Company at an exercise  price of $0.014
per share to Ms.  Pantermuehl.  The fair market  value of these  warrants at the
date of issuance was $74,616 (valued using the  Black-Scholes  valuation model).
In addition,  on March1, 2004, Now Solutions issued 1.5% of phantom stock of Now
Solutions to Ms. Pantermuehl.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership By Named Executive Officers, Directors And Beneficial Owners

      The  following  table  sets  forth  certain   information   regarding  the
beneficial ownership of the shares of common stock as of March 29, 2005, by each
of our directors and executive officers and any person or entity, known by us to
be the  beneficial  owner of more  than 5% of the  outstanding  shares of common
stock.  The  table  also  shows  the  beneficial  ownership  of our stock by all
directors and executive  officers as a group.  The table  includes the number of
shares subject to outstanding  options and warrants to purchase shares of common
stock.  The  percentages  are  based  on  874,768,895  shares  of  common  stock
outstanding  as of March 29,  2005,  together  with  options,  warrants or other
securities  convertible or exchangeable by the beneficial  owners into shares of
common stock within 60 days of March 29, 2005.


                                       32
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                                     Shares
                                                                                 of Common Stock                 Percent
Title of Class    Name and Address of Beneficial Owner(1)                       Beneficially Owned               of Class
--------------    ---------------------------------------                       ------------------               --------
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                         <C>
Common            Sheri Pantermuehl                                                        2,500,000(2)                  *
---------------------------------------------------------------------------------------------------------------------------
Common            Richard Wade                                                           135,108,833(3)             15.07%
---------------------------------------------------------------------------------------------------------------------------
Common            William K. Mills                                                         4,033,000(4)                  *
---------------------------------------------------------------------------------------------------------------------------
Common            All Directors and Executive Officers as a group                        141,641,833                15.80%
                  (3 persons)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

------------------------------------

*     Less than 1%.

(1)   Unless  otherwise  indicated,  the address of each director and officer is
      c/o Vertical  Computer  Systems,  Inc., 201 Main Street,  Suite 1175, Fort
      Worth, TX 76102.

(2)   In connection with Ms.  Pantermuehl's  employment  agreement,  the Company
      granted 5-year  incentive  stock options to purchase  2,500,000  shares of
      common stock at a strike  price of $0.014.  The fair market value of these
      warrants  at  the  date  of  issuance  was  $74,616   (valued   using  the
      Black-Scholes valuation model).

(3)   Includes  warrants to purchase up to 20,600,000  shares of common stock of
      the Company for services as CEO and President, less 1,716,667,  which have
      expired as of March 29, 2005.  Also includes  101,370,050  shares owned by
      Mountain Reservoir Corporation ("MRC"), a corporation controlled by the W5
      Family  Trust,  of  which  Richard  W.  Wade is a  trustee;  and  includes
      1,000,000  shares owned by Jennifer Wade, a child of Mr. Wade. MRC pledged
      10,450,000  shares of  common  stock of the  Company  as  collateral  on a
      $181,000 note issued in October 2002. MRC pledged 10,000,000 shares common
      stock of the  Company  shares as  collateral  on a $25,000  note issued in
      August 2002.  MRC pledged  4,000,000 and 3,000,000  shares common stock of
      the Company  shares as  collateral  on a $60,000 note and a $40,000  note,
      respectively, that were issued by the Company in November 2003.

(4)   Includes  33,000  shares of Common Stock  beneficially  owned  through Mr.
      Mill's law firm, Parker, Mills, & Patel, LLC.


                                       33
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      During the years  ended  December  31,  2002 and 2001,  the  Company  paid
Parker,   Mills  &  Patel  LLP  ("PMP"),   its  former  general  legal  counsel,
approximately  $4,000 and  $133,371  in  exchange  for  consideration  for legal
services  rendered.  William  Mills, a partner at PMP, is also a director of the
Company.  The Company issued  2,621,622  shares of common stock in July 2001 and
1,560,000  shares of common stock in November  2001 with an  aggregate  value of
$121,000 to William  Mills of PMP for  partial  payment of legal  services.  The
2,612,622  shares and  1,560,000  shares were  pursuant  to an S-8  registration
statement  filed on November 8, 2001.  Also,  during 2001,  PMP made advances of
approximately  $30,000  to third  party  vendors  on behalf of the  Company.  In
exchange,  PMP received a 6%  promissory  note due January  2002 and  three-year
warrants  to  purchase  300,000  shares of common  stock at a purchase  price of
$0.014 per share which  expired in November  2004.  At December  31,  2003,  the
outstanding  balance under of $23,974 was in default.  In January 2005,  Parker,
Mills,  and Patel filed a lawsuit in Los Angeles  Superior  Court to collect the
outstanding  balance of $23,974 due under the promissory  note issued to them by
the Company and for failure to pay fees for professional  services in the amount
of $89,930  rendered to the Company,  plus interest.  In March 2005, the Company
filed a demurrer.

      On August 7, 2002,  the  Company  issued a $25,000  note to a third  party
lender,  bearing  interest at 12% per annum and due on August 16, 2002. The note
is secured by 10,000,000  shares of the Company's common stock that are owned by
Mountain Reservoir Corporation ("Mountain Reservoir"), to cover any shortfall in
the event of default.  Mountain Reservoir is a corporation  controlled by the W5
Family Trust. Mr. Wade, the President and CEO of the Company,  is the trustee of
the W5 Family Trust.  The Company made payment of  approximately  $12,500 on the
$25,000 note in 2002 and was in a delinquent  position at December 31, 2003.  In
June 2002, the Company issued another  $50,000 note to the same lender,  bearing
interest at 12% per annum and due in January 2003. The second note is secured by
limited  interest in the Company's  deposit  pledge account on the behalf of Now
Solutions.  In March 2003, the parties entered into an amendment for both notes.
Pursuant to the  amendment,  the Company  agreed to pay accrued  interest in the
amount of $1,170  for the  $25,000  note and  $4,200  for the  $50,000  note and
monthly interest payments for both notes in April, May, and June 2003. Beginning
in July 2003, the above interest  payments were replaced with a monthly  payment
of $5,000,  which is applied  first to the $25,000  note and then to the $50,000
note.  The  maturity  date for the $50,000  note payable was extended to June 1,
2004 and the  maturity  date for the $25,000  note was extended to July 1, 2005.
This note is now in default.

      In July  2001,  the  Company  agreed to pay  $4,500  per month to  Stephen
Rossetti   to  provide   government   business   consultation   services   on  a
month-to-month basis. In addition,  the consultant is entitled to receive 3-year
warrants  to purchase  common  stock equal to $5,500 per month based on a strike
price of the previous average five day market price on the date of issuance.  In
May 2003, the Company issued a $7,500  promissory note bearing  interest at 12%,
due in June 2003,  to Stephen  Rossetti  in  connection  with a loan in the same
amount.  Mr.  Rossetti is the CEO and a Director  of GIS,  and a director of Now
Solutions.  In September 2002, the Company  amended the consulting  agreement of
Stephen Rossetti to provide services in the capacity of Executive Vice President
Governmental Affairs, in consideration for 3-year warrants to purchase 1,000,000
shares of its common  stock at a share  price of $0.012,  $30,000  for  services
rendered through August 31, 2002, and $5,000 per month for a period of one year.
The  warrants  were issued at a fair market  value of $6,191  (valued  using the
Black-Scholes  valuation  model).  In October  2004,  the  Company  and  Stephen
Rossetti agreed to amend the terms of the $7,500 note payable issued in May 2003
and the  agreement  for  consulting  services.  In  consideration  for canceling
outstanding  debt  under the note  payable  and the  consulting  agreement,  the
Company  issued  6,500,000  shares of the common  stock of the Company at a fair
market  value of  $84,500.  As of March 29,  2005,  2,900,145  of the  4,150,145
warrants  issued for  consulting  services for the Company and GIS expired.  Mr.
Rossetti is the CEO and a Director of GIS and Now Solutions.

      In November 2003,  Mountain  Reservoir  pledged 4,000,000 shares of common
stock to secure a loan of $60,000 to GIS, which issued a $60,000 note payable on
November  5, 2003  bearing  interest at 10% per annum,  and was due  November 5,
2004. Mountain Reservoir is a corporation controlled by the W5 Family Trust. Mr.
Wade,  the  President  and CEO of the  Company,  is the trustee of the W5 Family
Trust.

      Also in November 2003,  Mountain  Reservoir  pledged  3,000,000  shares of
common  stock to secure a loan of $40,000 to GIS,  which  issued a $40,000  note
payable on November  19,  2003  bearing  interest at 10% per annum,  and was due
November 19, 2004.  Mountain  Reservoir is a  corporation  controlled  by the W5
Family Trust. Mr. Wade, the President and CEO of the Company,  is the trustee of
the W5 Family Trust.

      In January 2004, the Company agreed to issue 1,000,000 unregistered shares
of the  Company's  common stock (at a fair market  value of $3,000),  subject to
piggy-back  registration  rights,  in connection with a $10,000 loan made by Jim
Salz to the Company in June 2003. In addition,  the Company  issued a promissory
note for $10,000  bearing  interest at 10%,  which was due in April 30, 2004. In
April 2004,  the due date on the note was extended to August 1, 2004. In January
2005,  the due date on the note was extended to April 30, 2005.  Mr. Salz is the
Company's corporate counsel.


                                       34
<PAGE>

      Also in January  2004,  Victor Weber  elected to make the  assignment of a
$215,000  promissory note due December 31, 2004,  issued by Now Solutions to the
Company in September 2003. In connection with the assignment,  the notes payable
for  $100,000,  $50,000 and $40,000  issued to Mr.  Weber as well as the $25,000
outstanding in accounts  payable owed to Weber were  cancelled.  The interest on
the $215,000 note for each month is the highest Prime Rate in effect during said
month,  but in no event  shall the rate of  interest  charged on the balance due
under the notes in any month be less than 8.5% per annum. In September 2004, the
Company and Victor Weber  agreed to amend the terms of the $215,000  note issued
by Now Solutions to the Company and assigned to Mr. Weber. Pursuant to the terms
of the amendment,  the Company agreed to issue 2,000,000  unregistered shares of
common stock of the Company (at a fair market value of $24,000), in exchange for
amending the note. In connection  with the amendment,  since the Company did not
make full  payment of the note by December  31,  2004,  the Company  issued,  in
January 2005, an additional  2,000,000  unregistered shares of common stock at a
fair market value of $10,000 and the note has been  amended as follows:  (a) the
maturity  date of the note shall be  extended  to  December  31,  2005;  (b) the
payment  terms of the note  shall be  amended so that,  beginning  in 2005,  Now
Solutions  shall make (i) monthly  interest  payments  for all accrued  interest
during the previous month, (ii) $50,000 in principal  payments which will be due
the end of each quarter  beginning  March 31, 2005 and (iii) a final  payment of
all accrued  interest and principal which will be due no later than December 31,
2005.  In  addition,  Mr.  Weber  shall  receive  2.5%  royalty  on sales by Now
Solutions of its software that exceed $8,000,000 per year up to $200,000.  As of
March 29,  2005,  the Company has made all interest  payments.  Mr. Weber is the
President and a Director of GIS

      In February  2004,  Robert Farias loaned  $500,000 to Now  Solutions,  the
Company's  wholly-owned  subsidiary and received a $500,000 promissory note from
Now  Solutions,  secured  by its  assets  and a 5%  royalty  on any sales by Now
Solutions of over $8,000,000 up to $500,000.  The note bears interest at 10% per
annum and Now  Solutions is required to make monthly  interest  payments for all
interest  accrued in the previous month on the first day of each month beginning
April 1, 2004 and  beginning on October 1, 2004 and  continuing on the first day
of every month thereafter,  monthly principal  payments of $91,500 plus interest
until the note has been paid in full. In the event Now  Solutions  receives cash
proceeds  due to a capital  infusion or upfront  licensing  fees from a reseller
that is outside its normal scope of business  (i.e.,  not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds  remaining  toward payment of the $500,000 note. In connection with the
loan, the Company issued (i) 5 year warrants to purchase 5,000,000  unregistered
shares of common  stock at $0.01 per share at a fair market value at the date of
issuance of $74,538 (valued using the  Black-Scholes  valuation  model);  (ii) 5
year warrants to purchase 5,000,000  unregistered  shares of common stock of the
Company at $0.02 per share at a fair  market  value at the date of  issuance  of
$74,344 (valued using the Black-Scholes  valuation model); (iii) 5 year warrants
to  purchase  5,000,000  unregistered  shares of common  stock of the Company at
$0.03  per  share at a fair  market  value at the date of  issuance  of  $74,200
(valued using the Black-Scholes  valuation model);  (iv) 5,000,000  unregistered
shares of common stock of the Company (at a fair market  value of $75,000);  and
(v) an additional  5,000,000  unregistered shares of common stock of the Company
in the event that  $250,000  was not paid toward the loan on or before March 15,
2004,  which  were  issued  (at a fair  market  value of  $125,000).  All of the
foregoing warrants and stock are subject to "piggy-back" registration rights. In
connection with the loan, Now Solutions  entered into a security  agreement with
the lender to guarantee the note. The security interest of Now Solutions' assets
on the secured promissory note is junior to Now Solutions' present  indebtedness
to WAMCO 32, Ltd and Arglen  Acquisitions.  Robert  Farias is a director  of Now
Solutions,  a 100% owned  subsidiary  of the  Company.  The note is currently in
default.  As of March  29,  2005,  Now  Solutions  had made  principal  payments
totaling $183,000 to Robert Farias. In January 2005, WAMCO 32, Ltd. notified Mr.
Farias that pursuant to the subordination  agreement  executed between WAMCO 32,
Ltd. and Mr. Farias, Mr. Farias was no longer to accept payments from or to take
any collection actions against Now Solutions for the repayment of junior debt.

      In  February  2004,  the note  payable in the amount of $84,000  issued by
EnFacet to Robert Farias, dated June 1, 2001, bearing interest at 12% per annum,
unsecured,  with  principal  and interest due on June 1, 2002 was amended by the
parties. Pursuant to the amendment Robert Farias waived any defaults on the note
and the note was amended as follows: once Vertical's subsidiary,  Now Solutions,
has paid off the  entire  balance  due under  the  $500,000  note  issued by Now
Solutions  to Mr.  Farias on February  13, 2004,  sixteen  percent  (16%) of any
remaining  amounts from the final  $91,500  installment  payment on the $500,000
note  shall  be  applied  to the  $84,000  note.  Thereafter,  Vertical  or,  at
Vertical's  option,  Now  Solutions,  shall  continue to make monthly  principal
payments of $14,640  beginning on the first day of the following month until all
monies  due  under the  $84,000  note have been  paid.  In  connection  with the
amendment,  Now Solutions  entered into a security  agreement with the lender to
guarantee  the note.  The  security  interest  of Now  Solutions'  assets on the
secured  promissory  note is junior to Now Solutions'  present  indebtedness  to
WAMCO 32, Ltd,  Arglen  Acquisitions,  and Robert Farias in connection  with the
$500,000  note. In an amendment  between the parties in March 2003, the interest
rate was increased  from 8% to 12% and accrued from the date the note was issued
in  exchange  for  extending  the  note.  Robert  Farias  is a  director  of Now
Solutions, a 100% owned subsidiary of the Company. This note is in default.


                                       35
<PAGE>

      In February  2004,  the note  payable in the amount of  $280,000,  bearing
interest at 4% per annum and issued to Robert  Farias on October 31,  2001,  was
amended by the parties. In connection with the amendment, the Company and Robert
Farias also amended the $181,583  note issued to Mr. Farias on October 17, 2002.
Pursuant  to the  amendment,  any  default on these  notes was  waived,  and the
Company agreed to make the following payments on these notes: (i) $20,000, which
was  paid  toward  the  $181,583  note on  February  20,  2004;  (ii) 50% of the
remaining  past-due  amounts  by March 20,  2004;  and  (iii) the all  remaining
past-due  amounts to bring the notes current by April 20, 2004. In the event the
Company  does not pay the amounts in a timely  manner,  all amounts  still owing
under these notes will be considered  in default and the following  shall apply:
(i) all such  remaining  amounts  will be added to the secured  loan amounts and
subject  to the  security  interest  and  pledge  agreements  under the  $84,000
promissory note issued by the Company's  subsidiary,  EnFacet,  to Mr. Farias on
June 1, 2001;  (ii) the  $14,640  monthly  payments to be made under the $84,000
note will be applied to the $280,000  and  $181,583  notes until these notes are
paid in full; and (iii) with respect to cash proceeds Now Solutions receives due
to a capital infusion or upfront  licensing fees from a reseller that is outside
its normal scope of business  (i.e.,  not part of software  sales in the regular
course of  business),  Now  Solutions  is required  to pay 50% of such  proceeds
remaining  after the $500,000 note payable issued by Now Solutions to Mr. Farias
on  February  13, 2004 has been paid in full toward the  $280,000  and  $181,583
notes if the  Company  is not  current in its  payments.  The  $280,000  note is
secured  by  SiteFlash  technology  owned by the  Company.  Robert  Farias  is a
director of Now Solutions,  a 100% owned subsidiary of the Company.  The note is
in default.

      In February  2004,  the note  payable in the amount of $181,584  issued to
Robert Farias in October 2003, bearing interest at 12% per annum was amended. In
connection  with the  amendment,  the  Company and Mr.  Farias also  amended the
$280,000  note  issued to Mr.  Farias  on  October  31,  2001.  Pursuant  to the
amendment, any default on these notes was waived, and the Company agreed to make
the following  payments on these notes:  (i) $20,000,  which was paid toward the
$181,583 note on February 20, 2004; (ii) 50% of the remaining  past-due  amounts
by March 20, 2004;  and (iii) the all  remaining  past-due  amounts to bring the
notes  current  by April 20,  2004.  In the event the  Company  does not pay the
amounts in a timely  manner,  all amounts  still owing under these notes will be
considered  in default and the  following  shall apply:  (i) all such  remaining
amounts  will be added to the  secured  loan  amounts and will be subject to the
security interest and pledge agreements under the $84,000 promissory note issued
by the Company's  subsidiary,  EnFacet,  to Mr. Farias on June 1, 2001; (ii) the
$14,640  monthly  payments to be made under the $84,000  note will be applied to
the $280,000 and  $181,583  notes until these notes are paid in full;  and (iii)
with respect to cash proceeds Now Solutions  receives due to a capital  infusion
or upfront  licensing  fees from a reseller  that is outside its normal scope of
business  (i.e.,  not part of software sales in the regular course of business),
Now  Solutions  is  required  to pay 50% of such  proceeds  remaining  after the
$500,000 note payable issued by Now Solutions to Mr. Farias on February 13, 2004
has been paid in full toward the $280,000  and $181,583  notes if the Company is
not current in its  payments.  Robert Farias is a director of Now  Solutions,  a
100% owned subsidiary of the Company.  The note is secured by 10,450,000  shares
of the Company's common stock that are owned by Mountain  Reservoir to cover any
shortfall.  Mountain  Reservoir  is a  corporation  controlled  by the W5 Family
Trust. Mr. Wade, the President and CEO of the Company,  is the trustee of the W5
Family Trust. The note is in default.

      In February  2004,  the  Company  purchased  a 21%  ownership  interest in
MedData  Solutions,  Inc. from Robert  Farias.  In exchange,  the Company issued
9,000,000  unregistered  shares of the common  stock of the  Company  (at a fair
market value of $135,000),  which are subject to piggy-back registration rights.
Since the Company  could not  ascertain  the fair market  value of MedData,  the
investment  was  written  off  in  2004.  Robert  Farias  is a  director  of Now
Solutions, a 100% owned subsidiary of the Company.

      In August  2004,  the Company  licensed the use of the Forums and calendar
applications of the Company's  SiteFlash  technology to Basix1,  Inc. ("Basix1")
for use in Basix1's Enterprise  Knowledge Gateway ("EKG") software.  Pursuant to
the terms of the  license,  Basix1 shall pay the Company 10% of all license fees
generated from the exploitation Basix1's EKG software.  Also in August 2004, the
Company  and  its   subsidiaries   have  entered  into  various   marketing  and
co-marketing  agreements  with Basix1.  Mr. Kensicki is a Director of GIS and of
Now Solutions, Inc. and the President of Basix1.


                                       36
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

      The following documents are filed as part of this report:

      (a)   Exhibits

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
2.1                   Certificate of Ownership and Merger Merging Scientific   Incorporated by reference to Exhibit 1.1 to
                      Fuel Technology, Inc. into Vertical Computer Systems,    the Company's Form 8-K 12G3 filed on May 2,
                      Inc.                                                     2000

2.2                   Stock Purchase Agreement dated April 5, 2000 between     Incorporated by reference to Exhibit 2.2 to
                      the Company and all the shareholders of Globalfare.com   the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

2.3                   Stockholders Agreement dated October 12, 2000 between    Incorporated by reference to Exhibit 2.3 to
                      the Company and Vijay Amritraj                           the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

2.4                   Vertical - iNPI LLC Operating Agreement dated            Incorporated by reference to Exhibit 2.4 to
                      April 26, 2000                                           the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

2.5                   iNet Government Services LLC Operating Agreement dated   Incorporated by reference to Exhibit 2.5 to
                      April 28, 2000                                           the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

3.1                   Original Unamended Certificate of Incorporation of       Incorporated by reference to Exhibit 1.2 to
                      Vertical Computer Systems, Inc. (f/k/a Xenogen           the Company's Form 8-K 12G3 filed on May 2,
                      Technology, Inc.)                                        2000

3.2                   Certificate of Amendment of Certificate of               Incorporated by reference to Exhibit 3.2 to
                      Incorporation (change name to Vertical Computer          the Company's Form 10-KSB/A filed on May 17,
                      Systems, Inc.)                                           2001

3.3                   Certificate of Designation of 10% Cumulative             Incorporated by reference to Exhibit 3.3 to
                      Redeemable Series B Preferred Stock                      the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

3.4                   Certificate of Designation of 15% Cumulative             Incorporated by reference to Exhibit 3.4 to
                      Redeemable Series D Preferred Stock                      the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

3.5                   Certificate of Amendment of Certificate of               Incorporated by reference to Exhibit 3.5 to
                      Incorporation (2000)                                     the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

3.6                   Certificate of Designation of 4% Cumulative Redeemable   Incorporated by reference to Exhibit 3.6 to
                      Series A Preferred Stock                                 the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

3.7                   Amended and Restated Bylaws of the Company               Incorporated by reference to Exhibit 3.7 to
                                                                               the Company's Form 10-KSB/A filed on May 17,
                                                                               2001
</TABLE>


                                       37
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
3.8                   Certificate of Designation of 4% Cumulative Redeemable   Attached herewith
                      Series C Preferred Stock

4.28                  Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.28 to
                      Company and William Mills dated February 5, 2001         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.29                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.29 to
                      and Richard Wade dated February 5, 2001                  the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.44                  Warrant Agreement between the Company and Phil           Incorporated by reference to Exhibit 4.44 to
                      Alexander dated October 23, 2000                         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.46                  Warrant Agreement between the Company and Michael Blum   Incorporated by reference to Exhibit 4.46 to
                      dated October 23, 2000                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.49                  Warrant Agreement between the Company and Donald P.      Incorporated by reference to Exhibit 4.49 to
                      Hateley dated March 5, 2001                              the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.54                  Warrant Agreement between the Company and Gary L. Blum   Incorporated by reference to Exhibit 4.54 to
                      dated June 15, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001
                      Form of Cashless Exercise Warrant
4.55                                                                           Attached herewith

10.1                  1999 Stock Option Plan of the Company                    Incorporated by reference to Exhibit 10.1 to
                                                                               the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

10.2                  Business Development and Marketing Agreement between     Incorporated by reference to Exhibit 10.2 to
                      the Company and Avenel Alliance, Inc.                    the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

10.12                 Letter Agreement dated as of February 23, 2001 between   Incorporated by reference to Exhibit 2.1 to
                      Arglen Acquisitions, LLC and the Company                 the Company's 8-K filed on May 16, 2001

10.13                 Now Solutions, Inc. Operating Agreement dated as of      Incorporated by reference to Exhibit 2.2 to
                      February 27, 2001 between Arglen Acquisitions LLC and    the Company's 8-K filed on May 16, 2001
                      the Company

10.14                 Certificate of Designation of Vertical Computer, Inc.    Incorporated by reference to Exhibit 3.1 to
                      Series "C" 4% Cumulative Convertible Preferred Stock     Company's Form 10-QSB/A filed on December 19,
                                                                               2001

10.15                 (a) Berche Promissory Note dated August 13, 2001         Incorporated by reference to Exhibit 10.1 to
                                                                               the Company's Form 10-QSB/A filed on December
                      (b) Berche Stock Pledge Agreement dated August 13, 2001  19, 2001

                      (c) Berche Warrants dated August 13, 2001

</TABLE>


                                       38
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
10.44                 Form of Debenture                                        Incorporated by reference to Exhibit 10.44 to
                                                                               the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.51                 Promissory Note dated as of November 2001 given by the   Incorporated by reference to Exhibit 10.51 to
                      Company to Parker, Mills & Patel, LLP                    the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.59                 Consulting Agreement dated as of January 2002 between    Incorporated by reference to Exhibit 10.59 to
                      the Company and Taurus Global, LLC                       the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.63                 Memorandum of Agreement dated as of January 2002         Incorporated by reference to Exhibit 10.63 to
                      between the Company and Strategic Media Alliance         the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.64                 Service Agreement dated as of October 31, 2001 between   Incorporated by reference to Exhibit 10.64 to
                      the Company and a third party                            the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.65                 Promissory Note as of October 31, 2001 between the       Incorporated by reference to Exhibit 10.65 to
                      Company and a third party                                the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.66                 Asset Pledge Agreement as of October 31, 2001 between    Incorporated by reference to Exhibit 10.66 to
                      the Company and a third party                            the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.72                 Employment Agreement as of December 1, 2001 between      Incorporated by reference to Exhibit 10.72 to
                      the Company and Richard Wade                             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.73                 Warrant Agreement as of December 19, 2001 between the    Incorporated by reference to Exhibit 10.73 to
                      Company and Richard Wade                                 the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.74                 Warrant Agreement as of December 19, 2001 between the    Incorporated by reference to Exhibit 10.74 to
                      Company and Richard Wade                                 the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.79                 Letter Amendment Agreement as of April 5, 2002 between   Incorporated by reference to Exhibit 10.79 to
                      the Company and a third party lender                     the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.80                 Letter Amendment Agreement as of April 12, 2002          Incorporated by reference to Exhibit 10.80 to
                      between the Company and third party lender               the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.81                 Asset Purchase Agreement dated November 14, 2001         Incorporated by reference to Exhibit 10.81 to
                      between the Company and Paradigm Sales, Inc.             the Company's Form 10-KSB A filed on May 20,
                                                                               2002
</TABLE>


                                       39
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
10.82                 (a) Promissory Note, dated June 3, 2002, between the     Incorporated by reference to Exhibit 10.82 to
                      Company and a third party lender                         the Company's Form 10-QSB filed on June 24,
                                                                               2002

                      (b) Pledge Agreement, dated June 3, 2002, between the
                      Company and a third party lender

                      (c) Warrants, dated June 3, 2002, between the Company
                      and a third party lender

10.83                 (a) Promissory Note, dated June 24, 2002, between the    Incorporated by reference to Exhibit 10.83 to
                      Company and a third party lender                         the Company's Form 10-QSB filed on September
                                                                               25, 2002

                      (b) Pledge Agreement, dated June 24, 2002, between the
                      Company and a third party lender

                      (c) Warrants dated June 24, 2002, between the Company
                      and a third party lender

10.84                 Second Amendment of Services Documents and Note,         Incorporated by reference to Exhibit 10.84 to
                      between a third party lender and the Company, dated      the Company's Form 10-QSB filed on September
                      June 25, 2003                                            25, 2002

10.85                 Employment Agreement, dated July 1, 2002, between the    Incorporated by reference to Exhibit 10.85 to
                      Company and Aubrey McAuley                               the Company's Form 10-QSB filed on September
                                                                               25, 2002

10.89                 (a) Valdetaro Promissory Note, dated August 20, 2002,    Incorporated by reference to Exhibit 10.89 to
                      between the Company and Valdetaro                        the Company's Form 10-QSB filed on September
                                                                               25, 2002
                      (b) Valdetaro Stock Pledge Agreement, dated August 20,
                      2002, between the Company and Valdetaro

                      (c) Valdetaro Warrants, dated August 20, 2002, between
                      the Company and Valdetaro

10.91                 Amendment Number Two to Deposit Account Pledge           Incorporated  by reference to Exhibit 10.91 to
                      Agreement, dated October 16, 2002, between the           the Company's Form 8-K filed on October 23,
                      Company and Coast Business Credit                        2002

10.93                 (a) Term Sheet, dated October 17, 2002, between the      Incorporated by reference to Exhibit 10.93 to
                      Company and a third party lender                         the Company's Form 10-QSB filed on December
                                                                               11, 2002

                      (b) Promissory Note, dated October 17, 2002, between
                      the Company and a third party lender

                      (c) Stock Pledge Agreement, dated October 17, 2002,
                      between the  Company and a third party  lender

                      (d) Put and Call Agreement, dated October 17, 2002,
                      between the Company and a third party lender

10.94                 Services Agreement, dated November 15, 2002 between      Incorporated by reference to Exhibit 10.94 to
                      Defense Solutions, LLC, and the Company's subsidiary,    the Company's Form 10-QSB filed on December
                      Government Internet Systems, Inc.                        11, 2002

10.96                 Warrants (FORM)                                          Incorporated by reference to Exhibit 10.96 to
                                                                               the Company's Form 10-KSB filed on August 7,
                                                                               2003
</TABLE>


                                       40
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
10.98                 (a) Form of Director Agreement of Company's              Incorporated by reference to Exhibit 10.98 to
                      subsidiary, Government Internet Systems, Inc. (GIS)      the Company's Form 10-KSB filed on August 7,
                      Director Agreement, between GIS and director             2003

                      (b) Form of Warrants in connection with GIS Director
                      2003 Agreement between the Company's Subsidiary, GIS,
                      and GIS director

10.99                 (a) Executive Agreement, dated December 19, 2002,        Incorporated by reference to Exhibit 10.99 to
                      between the Company's Subsidiary, GIS, and Victor Weber  the Company's Form 10-KSB filed on August 7,
                                                                               2003
                      (b) Warrants dated December 19, 2002 issued to Victor
                      Weber

10.100                Executive Agreement, dated December 26, 2002, between    Incorporated by reference to Exhibit 10.100 to the
                      Company's  Subsidiary,   GIS,  and  Stephen  Rossetti    Company's Form 10-KSB filed on August 7,
                                                                               2003

10.101                (a) Executive Agreement, dated January 8, 2003,          Incorporated by reference to Exhibit 10.101 to
                      between the Company's Subsidiary, GIS, and David Kinney  the Company's Form 10-KSB filed on August 7,
                                                                               2003
                      (b) Warrants, dated January 8, 2003 issued to David
                      Kinney in connection with Executive Agreement between
                      the Company's Subsidiary, GIS, and David Kinney

10.102                Amendment to Stock Purchase Agreement, dated February    Incorporated by reference to Exhibit 10.102 to
                      1, 2003, between the Company and Enfacet.                the Company's Form 10-KSB filed on August 7,
                                                                               2003

10.103                $200,000  Purchase  of  Convertible  Debentures,  dated  Incorporated by reference to Exhibit 10.103 to
                      April 14,  2003,  between  the  Company and third party  the Company's Form 10-KSB filed on August 7,
                      buyers.                                                  2003

                      (a) Securities Purchase Agreement (for $200,000 of
                      Convertible Debentures)

                      (b) Form of Debenture

                      (c) Registration Rights Agreement

10.104                Equity Line of Credit Agreement, dated April 14, 2003,   Incorporated by reference to Exhibit 10.104 to
                      between the Company and Cornell Capital Partners, L.P.   the Company's Form 10-KSB filed on August 7,
                                                                               2003
                      (a)  Equity  Line of Credit  Agreement,

                      (b)  Registration Rights Agreement

                      (c)  Compensation  Debenture

10.105                (a) Services agreement, dated April 10, 2003, between    Incorporated by reference to Exhibit 10.105 to
                      the Company and Vasu Vijay                               the Company's Form 10-KSB filed on August 7,
                                                                               2003
                      (b) Promissory note, dated April 10, 2003, issued by
                      the Company to Vasu Vijay

                      (c) Consulting Agreement, dated April 14 2003, between
                      the Company and Vasu Vijay.

</TABLE>


                                       41
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
10.106                Stock Sale Agreement, dated April 11, 2003, between      Incorporated by reference to Exhibit 10.106 to
                      the Company and Mike Radlovic                            the Company's Form 10-KSB filed on August 7,
                                                                               2003
                      (a) Stock Sale Agreement,

                      (b) Stock Pledge Agreement

                      (c) Promissory Note

10.107                Amendment Agreement, dated April 11, 2003, between       Incorporated by reference to Exhibit 10.107 to
                      TranStar Systems, Inc. and the Company,                  the Company's Form 10-KSB filed on August 7,
                                                                               2003

10.108                Loan Agreement, between the Company and a third party    Incorporated by reference to Exhibit 10.108 to
                      lender, dated May 9, 2003                                the Company's Form 10-KSB filed on August 7,
                                                                               2003
                      (a) Term Sheet

                      (b) Promissory Note

                      (c) Warrants

10.109                Loan Agreement, between the Company and a third party    Incorporated by reference to Exhibit 10.109 to
                      lender, dated May 9, 2003                                the Company's Form 10-KSB filed on August 7,
                                                                               2003
                      (a) Term Sheet

                      (b) Promissory Note
</TABLE>


                                       42
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
10.110                Equitilink Services Agreement, dated June 10, 2002,      Incorporated by reference to Exhibit 10.110 to
                      between the Company and Equitilink                       the Company's Form 10-QSB for the quarter
                                                                               ended March 31, 2003 filed on June 22, 2004

10.111                Loan, agreement, between the Company and a third party   Incorporated by reference to Exhibit 10.111 to
                      lender                                                   the Company's Form 10-QSB  for the quarter
                                                                               ended March 31, 2003, filed on June 22, 2004
                      (a) Term Sheet, dated June 25, 2003

                      (b)  $90,000 note, dated June 26, 2003

                      (c) Pledge Agreement, dated June 26, 2003

10.113                Loan Agreement, dated September 4, 2003, between the     Incorporated by reference to Exhibit 10.113 to
                      Company and Victor Weber                                 the Company's Form 10-QSB for the quarter
                                                                               ended March 31, 2003 filed on June 22, 2004
                      (a) Term Sheet

                      (b) $50,000 Promissory Note

10.114                $500,000 Farias Loan Agreement between Now Solutions     Incorporated by reference to Exhibit 10.114 to
                      and the Company and Robert Farias, dated February 13,    the Company's Form 10-QSB for the quarter
                      2004                                                     ended March 31, 2003 filed on June 22, 2004

                      (a) Loan Agreement

                      (b) Promissory Note, issued by Now Solutions

                      (c) Security Agreement between Robert Farias and Now
                      Solutions

                      (d) Ownership Pledge Agreement between Robert Farias
                      and the Company

10.115                Arglen Settlement between Arglen Acquisitions, LLC and   Incorporated by reference to Exhibit 10.115 to
                      the Company                                              the Company's Form 10-QSB for the quarter
                                                                               ended March 31, 2003 filed on June 22, 2004
                      (a) Arglen Settlement Agreement, dated December 4,
                      2004

                      (b) Promissory Note, dated February 13, 2004, issued
                      by Now Solutions to the Arglen Acquisitions, LLC

                      (c) Security Agreement, dated February 13, 2004
                      Employment Agreement between Now Solutions, Inc. and

10.116                Vertical Computer Systems, Inc. and Sheri Pantermuehl,   Incorporated by reference to Exhibit 10.115 to
                      dated March 1, 2004                                      the Company's Form 10-QSB for the quarter
                                                                               ended March 31, 2003 filed on June 22, 2004

10.117                Loan Amendment, dated June 15, 2004 between WAMCO 32     Incorporated by reference to Exhibit 10.117 to
                      Ltd. and the Company and Now Solutions                   the Company's Form 10-KSB filed on January 18,
                                                                               2005
                      (a) Amendment Number Five to Loan and Security
                      Agreement

                      (b) Amended and Restated Secured Term Promissory Note

10.118                Weber Loans Amendment, between the Company and Victor    Incorporated by reference to Exhibit 10.118 to
                      Weber, dated September 28, 2004                          the Company's Form 10-KSB filed on January 18,
                                                                               2005
                      Amendment to Consulting Agreement and $7,500
10.119                Promissory Note, between the Company and Stephen         Incorporated by reference to Exhibit 10.119 to
                      Rossetti, dated October 12, 2004                         the Company's Form 10-KSB filed on January 18,
                                                                               2005
</TABLE>


                                       43
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                              Location
-----------           ------------------------------------------------------   --------------------------------------------
<S>                   <C>                                                      <C>
14.1                  Code of Ethics                                           Incorporated by reference to Exhibit 14.1 to
                                                                               the Company's Form 10-KSB filed on January 18,
                                                                               2005

21.1                  Subsidiaries of the Company                              Incorporated by reference to Exhibit 21.1 to
                                                                               the Company's Form 10-KSB filed on August 7,
                                                                               2003

31.1                  Certification of Chief Executive Officer Pursuant to     Attached herewith
                      Section 302 of the Sarbanes-Oxley Act of 2002, dated
                      March 29, 2005

31.2                  Certification of Chief Financial Officer Pursuant to     Attached herewith
                      Section 302 of the Sarbanes-Oxley Act of 2002, dated
                      March 29, 2005

32.1                  Certification of Chief Executive Officer Pursuant to     Attached herewith
                      Section 906 of the Sarbanes-Oxley Act of 2002, dated
                      March 29, 2005

32.2                  Certification of Chief Financial Officer Pursuant to     Attached herewith
                      Section 906 of the Sarbanes-Oxley Act of 2002, dated
                      March 29, 2005
</TABLE>

      (b)   Reports on Form 8-K:

            On December 6, 2004,  the Company filed a report on Form 8-K for the
            following:

            (a)   Notice  of an Order  by the SEC of  suspended  trading  of the
                  common stock of the Company.

            (b)   Notice  of  Order  by  the  SEC   Instituting   Administrative
                  Proceedings and Notice of Hearing.

            (c)   Grant of a patent by the United  States  Patent and  Trademark
                  Office (No. 6,826,744) for an invention for "System and Method
                  for Generating Web Sites In an Arbitrary Object  Framework" on
                  November 30, 2004.

            On January 28, 2005, the Company filed a report on Form 8-K that BDO
            Seidman, LLP, the Company's auditor, had resigned.

            On January 28,  2005,  the Company  filed an amended  report on Form
            8-K/A that BDO Seidman, LLP, the Company's auditor, had resigned.

            On February 4, 2005,  the  Company  filed an amended  report on Form
            8-K/A that BDO Seidman, LLP, the Company's auditor, had resigned.

            On February 4, 2005, the Company filed a report on Form 8-K that the
            Company  engaged  Weaver  and  Tidwell,   L.L.P.  as  its  principal
            accountant to audit the Company's financial statements.


                                       44
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Audit Fees. The aggregate fees billed for professional  services  rendered
by the Company's  principal  accounting firm,  Weaver and Tidwell,  L.L.P.,  was
$75,000  for the audit of the  Company's  annual  financial  statements  for the
fiscal year ended 2004, and the reviews of the financial  statements included in
the Company's Forms 10-QSB for those fiscal years. The aggregate fees billed for
professional  services rendered by the Company's principal  accounting firm, BDO
Seidman,  LLP,  was  $152,740 for the audit of the  Company's  annual  financial
statements  for the fiscal  year ended 2003,  and the  reviews of the  financial
statements included in the Company's Forms 10-QSB for those fiscal years.

      Tax Fees. The principal accounting firm Weaver and Tidwell, L.L.P. did not
provide any tax services in 2004.  The aggregate  fees billed in the fiscal year
ended  2003 for  professional  services  rendered  by BDO  Seidman,  LLP for tax
advice,  tax planning and tax return  preparation were $11,050 and $29,198,  for
the years ended 2004 and 2003,  respectively.  In addition,  BDO Dunwoody LLP in
Toronto  billed  11,925 and  34,740 in  Canadian  dollars  for tax  advice,  tax
planning  and tax  return  preparation  for  the  years  ended  2004  and  2003,
respectively.  Dickstein  Shapiro Moran & Oshinsky LLP billed $3,427 and $31,690
for tax advice and tax planning for the years ended 2004 and 2003, respectively.

      All Other Fees.  Other than the services  described  above,  the aggregate
fees billed for services rendered by the either principal  accountant was $0 and
$0, respectively, for the fiscal years ended 2004 and 2003.


                                       45
<PAGE>

                                   SIGNATURES

      In accordance with the Securities  Exchange Act of 1934, as amended,  this
report  has been  signed  below by the  following  persons  or on  behalf of the
Registrant and in the capacities indicated as of March 30, 2005.

                                           By:      /s/ Richard Wade
                                                    ---------------------------
                                                    Richard Wade, President and
                                                    Chief Executive Officer

                                           By:      /s/ Sheri Pantermuehl
                                                    ---------------------------
                                                         Sheri Pantermuehl
                                                         Chief Financial Officer

                                           DIRECTORS:

                                           By:      /s/ Richard Wade
                                                    ---------------------------
                                                    Richard Wade, Director

                                           By:      /s/ William Mills
                                                    ---------------------------
                                                    William Mills, Director


                                       46
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm                  F-2
Report of Independent Registered Public Accounting Firm                  F-3

Consolidated Financial Statements
     Consolidated Balance Sheets                                         F-4
     Consolidated Statements of Operations                               F-6
     Consolidated Statement of Stockholders' Equity                      F-7
     Consolidated Statements of Cash Flows                               F-9

Notes to Consolidated Financial Statements                              F-10


                                       F-1
<PAGE>

Report of Independent Registered Public Accounting Firm

Board of Directors
Vertical Computer Systems, Inc. and Subsidiaries
Fort Worth, Texas

We have audited the accompanying consolidated balance sheet of Vertical Computer
Systems,  Inc.  and  Subsidiaries  as of  December  31,  2004  and  the  related
consolidated statements of operations,  stockholders' deficit and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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 these financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statements  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 Vertical Computer
Systems,  Inc. and Subsidiaries as of December 31, 2004 and the results of their
operations and cash flows for the year then ended in conformity  with accounting
principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As  discussed in Note 1 to the
consolidated   financial   statements,   the  Company  has  suffered   recurring
significant  operating losses and at December 31, 2004, the Company had negative
working capital of approximately $11.6 million, a stockholders' deficit of $13.3
million, and had defaulted on several of its debt obligations.  These conditions
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 1. The  consolidated  financial  statements do not include any  adjustments
that might result from the outcome of this uncertainty.

     /s/ Weaver and Tidwell L.L.P.

         Fort Worth, Texas
         March 18, 2005


                                      F-2
<PAGE>

Report of Independent Registered Public Accounting Firm

Board of Directors
Vertical Computer Systems, Inc. and Subsidiaries
Fort Worth, TX

We have audited the accompanying consolidated balance sheet of Vertical Computer
Systems,  Inc.  and  Subsidiaries  as of  December  31,  2003  and  the  related
consolidated   statements   of   operations   and  other   comprehensive   loss,
stockholders' deficit and cash flows for the year ended December 31, 2003. These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our 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 financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting the amounts and disclosures in these financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statements  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 Vertical Computer
Systems,  Inc. and Subsidiaries as of December 31, 2003 and the results of their
operations  and cash flows for the year ended  December  31, 2003 in  conformity
with accounting principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As  discussed in Note 1 to the
consolidated   financial   statements,   the  Company  has  suffered   recurring
significant  operating losses and at December 31, 2004, the Company had negative
working capital of approximately $11.6 million, a stockholders' deficit of $13.3
million, and had defaulted on several of its debt obligations.  These conditions
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 1. The  consolidated  financial  statements do not include any  adjustments
that might result from the outcome of this uncertainty.

     /s/ BDO Seidman

         Los Angeles, CA
         December 31, 2004


                                      F-3
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                               ------------------------------
                                                                                   2004              2003
                                                                               ------------      ------------
<S>                                                                            <C>               <C>
Assets

Current assets:
   Cash                                                                        $    330,780      $    962,454
   Restricted cash                                                                       --           102,655
   Securities available for sale                                                      9,128             9,128
   Accounts receivable, net of allowance for bad debts of $137,473 and
     $121,004                                                                     1,325,114           982,281
   Other receivable                                                                  75,085            75,085
   Employee receivables                                                              17,138            10,912
   Prepaid expenses and other assets                                                 23,789           220,784
                                                                               ------------      ------------

Total current assets                                                              1,781,034         2,363,299
                                                                               ------------      ------------

Property and equipment, net of accumulated depreciation                              82,824           197,502
Other intangibles, net                                                              944,298         2,051,355
Deposits and other                                                                   10,373               600
                                                                               ------------      ------------

Total assets                                                                   $  2,818,529      $  4,612,756
                                                                               ============      ============

Liabilities, Convertible Preferred Stock and Stockholder's Deficit

Current liabilities:
   Accounts payable and accrued liabilities                                    $  6,078,310      $  4,993,437
   Deferred revenue                                                               2,679,484         2,491,685
   Accrued income taxes                                                              18,000            18,000
   Current portion-convertible debentures                                            40,000            40,000
   Current portion-notes payable                                                  4,580,899         4,226,482
                                                                               ------------      ------------

Total current liabilities                                                        13,396,693        11,769,604

Convertible debentures                                                              390,000           420,000
Accrued dividends                                                                 2,313,712         1,713,712
                                                                               ------------      ------------

Total liabilities                                                              $ 16,100,405      $ 13,903,316
                                                                               ------------      ------------
</TABLE>


                                      F-4
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (Continued)

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                               ------------------------------
                                                                                   2004              2003
                                                                               ------------      ------------
<S>                                                                            <C>               <C>
Minority interest                                                                        --                --

Stockholders' Equity (Deficit)
   Series A 4% Convertible Cumulative Preferred stock; $0.001 par value;
     250,000 shares authorized; 50,000 shares issued and outstanding                     50                50
   Series B 10% Convertible Preferred stock; $0.001 par value; 375,000
     shares authorized; 7,200 shares issued and outstanding                          45,000            45,000
   Series C 4% Convertible Preferred stock; $100 par value; 200,000 shares
     authorized; 50,000 shares issued and outstanding                               350,000           350,000
   Series D 15% Convertible Preferred stock; $0.001 par value; 300,000
     shares authorized; 25,000 shares issued and outstanding                        156,250           156,250

Common stock: $.00001 par value, 1,000,000,000 shares authorized
   867,768,895 and 799,272,301 issued and outstanding                                 8,678             7,993

   Additional paid-in capital                                                    27,385,191        26,075,405
   Accumulated deficit                                                          (41,367,483)      (36,065,274)
   Accumulated other comprehensive income                                           140,438           140,016
                                                                               ------------      ------------

Total stockholders' deficit                                                     (13,281,876)       (9,290,560)
                                                                               ------------      ------------

Total liabilities and stockholders' deficit                                    $  2,818,529      $  4,612,756
                                                                               ============      ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                     Years ended December 31,
                                                                                 --------------------------------
                                                                                    2004                2003
                                                                                 -------------      -------------
<S>                                                                              <C>                <C>
Revenues

       Licensing and maintenance                                                 $   5,457,258      $   5,047,800

       Consulting Services                                                             818,033          1,419,257

       Other                                                                           136,716            189,515
                                                                                 -------------      -------------

Total Revenues                                                                       6,412,007          6,656,572

Selling , general and administrative expenses                                        8,877,495         10,124,809

Goodwill Impairment                                                                  1,760,000          2,873,997
                                                                                 -------------      -------------

Operating loss                                                                      (4,225,488)        (6,342,234)

Interest income                                                                          2,010              8,594
Interest expense                                                                      (478,732)          (510,050)
                                                                                 -------------      -------------

Net loss before minority interest and income taxes                                  (4,702,210)        (6,843,690)

Income Tax Provision  (benefit)                                                             --            (26,000)
                                                                                 -------------      -------------

Net loss before minority interest                                                   (4,702,210)        (6,817,690)

Minority interest in (income) loss of subsidiary                                            --            299,283
                                                                                 -------------      -------------

Net loss                                                                            (4,702,210)        (6,518,407)

Dividend applicable to preferred stock                                                (600,000)          (600,000)
                                                                                 -------------      -------------

Net loss applicable to common stockholders'                                      $  (5,302,210)     $  (7,118,407)
                                                                                 -------------      -------------

Basic and diluted loss per share                                                 $       (0.01)     $        (0.01)
                                                                                 -------------      -------------

Basic and diluted weighted average                                                 853,830,749        779,926,227
                                                                                 -------------      -------------
        of common shares outstanding

Comprehensive loss and its components consist of the following:

       Net loss                                                                  $  (4,702,210)     $  (6,518,407)

       Unrealized gain on securities available for sale                                     --              6,316

       Translation adjustments                                                            (422)           133,700

                                                                                 -------------      -------------
       Comprehensive loss                                                        $  (4,702,632)     $  (6,378,391)
                                                                                 =============      =============
</TABLE>

See accompanying notes to consolidated financial statements


                                      F-6
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                     YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>

                                                                              Common Stock                      Preferred Stock
                                                                      -----------------------------        ------------------------
                                                                        Shares            Amount            Shares        Amount
                                                                      -----------      ------------        -------     ------------
<S>                                                                   <C>              <C>                 <C>         <C>
  Balance, December 31, 2002                                          726,884,934      $      7,270        132,200     $    551,300

  Issuing shares upon conversion of
    convertible debentures                                             12,853,470               129             --               --

  Issuing shares upon conversion of
    convertible debentures                                             14,138,817               141             --               --

  Issuing shares for consulting services                                3,000,000                30             --               --

  Stock compensation by issuing warrants
    in the first quarter of 2003                                               --                --             --               --

  Issuing shares for service rendered                                   1,100,000                11             --               --

  Issuing shares for service rendered                                   1,000,000                10             --               --

  Issuing shares for lending services
    rendered                                                            3,000,000                30             --               --

  Issuing shares upon conversion of
    convertible debentures                                             10,245,900               102             --               --

  Issuing shares for services rendered                                 15,000,000               150             --               --

  Compensation for warrants granted in the
    second quarter of 2003                                                                                      --               --

  Issuing shares for services rendered                                  2,049,180                20             --               --

  Issuing shares for loan renewals                                      8,000,000                80             --               --

  Issuing common shares for loan renewals                               2,000,000                20             --               --

  Beneficial conversion feature for
    convertible debentures                                                     --                --             --               --

  Preferred stock dividends                                                    --                --             --               --

  Net loss                                                                     --                --             --               --

  Unrealized gain on investment                                                --                --             --               --

  Translation adjustment                                                       --                --             --               --
                                                                      -----------      ------------        -------     ------------
  Balance, December 31, 2003                                          799,272,301      $      7,993        132,200     $    551,300
                                                                      ===========      ============        =======     ============

<CAPTION>
                                                                                                        Accumulated
                                                                     Accumulated                           Other
                                                                       Paid-In        Accumulated      Comprehensive
                                                                       Capital          Deficit            Income         Total
                                                                     ------------     ------------      ------------   ------------
<S>                                                                    <C>            <C>               <C>             <C>
  Balance, December 31, 2002                                           25,687,963     $(28,946,867)     $         --    $(2,700,334)

  Issuing shares upon conversion of
    convertible debentures                                                 49,871               --                --         50,000

  Issuing shares upon conversion of
    convertible debentures                                                 54,859               --                --         55,000

  Issuing shares for consulting services                                   14,663               --                --         14,693

  Stock compensation by issuing warrants
    in the first quarter of 2003                                            5,643               --                --          5,643

  Issuing shares for service rendered                                       4,457               --                --          4,468

  Issuing shares for service rendered                                       5,015               --                --          5,025

  Issuing shares for lending services
    rendered                                                               15,045               --                --         15,075

  Issuing shares upon conversion of
    convertible debentures                                                 39,898               --                --         40,000

  Issuing shares for services rendered                                     60,772               --                --         60,922

  Compensation for warrants granted in the
    second quarter of 2003                                                 33,369               --                --         33,369

  Issuing shares for services rendered                                      9,980               --                --         10,000

  Issuing shares for loan renewals                                         39,920               --                --         40,000

  Issuing common shares for loan renewals                                   8,980               --                --          9,000

  Beneficial conversion feature for
    convertible debentures                                                 45,000               --                --         45,000

  Preferred stock dividends                                                    --         (600,000)                        (600,000)

  Net loss                                                                     --       (6,518,407)                      (6,518,407)

  Unrealized gain on investment                                                --               --             6,316          6,316

  Translation adjustment                                                       --               --           133,700        133,700
                                                                       ----------     ------------      ------------    ----------
  Balance, December 31, 2003                                           26,075,405     $(36,065,274)     $    140,016    $(9,290,560)
                                                                       ==========     ============      ============    ==========
</TABLE>
          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                     YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>

                                                                              Common Stock                     Preferred Stock
                                                                      -----------------------------       ------------------------
                                                                        Shares            Amount           Shares        Amount
                                                                      -----------      ------------       -------     ------------
<S>                                                                   <C>              <C>                <C>         <C>
  Balance, December 31, 2003                                          799,272,301      $      7,993       132,200     $    551,300

 Issuing common shares for :

        consulting services                                             2,000,000                20

        legal services rendered                                        10,000,000               100

        consulting services                                             1,000,000                10

        consulting services                                             2,000,000                20

        services rendered                                                 500,000                 5

        Parnes agreement                                                1,000,000                10

        loan renewals                                                   1,000,000                10

        financing fee on Farias note payable                            5,000,000                50

        Arglen agreement                                               20,000,000               200

        investment in MedData Solution                                  9,000,000                90

        loan renewals                                                   1,000,000                10

        penalty on loan payments                                        5,000,000                50

Issuance of warrants for Farias note payable

Issuance of options for employment contracts

Issuing common shares for consulting services                             250,000                 3

Issuing common shares for debt forgiveness                              1,170,424                12
 Issuing common shares upon  conversion of
convertible debentures                                                  1,076,170                11

Issuing common shares for loan amendment                                2,000,000                20

Compensation for warrants granted  in the second quarter of 2004

Issuance of warrants for WAMCO extension

Issuing common shares for debt forgiveness                              6,500,000                65

Compensation for warrants granted  in the fourth quarter of 2004

 Net loss for the year ended December 31, 2004

 Accrued dividends for preferred stock
 Other comprehensive income

        Translation adjustment
        Unrealized gain on investment
                                                                      -----------      ------------       -------     ------------
 Balance at December 31, 2004                                         867,768,895      $      8,678       132,200     $    551,300
                                                                      ===========      ============       =======     ============

<CAPTION>
                                                                                                        Accumulated
                                                                     Accumulated                           Other
                                                                       Paid-In        Accumulated      Comprehensive
                                                                       Capital          Deficit            Income         Total
                                                                     ------------     ------------      ------------   ------------
<S>                                                                    <C>            <C>               <C>             <C>
  Balance, December 31, 2003                                           26,075,405     $(36,065,274)     $    140,016    $(9,290,560)

 Issuing common shares for :

        consulting services                                                 5,980                                             6,000

        legal services rendered                                            29,900                                            30,000

        consulting services                                                 2,990                                             3,000

        consulting services                                                 5,980                                             6,000

        services rendered                                                   1,495                                             1,500

        Parnes agreement                                                    2,990                                             3,000

        loan renewals                                                       2,990                                             3,000

        financing fee on Farias note payable                               74,950                                            75,000

        Arglen agreement                                                  279,800                                           280,000

        investment in MedData Solution                                    134,910                                           135,000

        loan renewals                                                      13,990                                            14,000

        penalty on loan payments                                          124,950                                           125,000

Issuance of warrants for Farias note payable                              223,083                                           223,083

Issuance of options for employment contracts                               83,494                                            83,494

Issuing common shares for consulting services                               5,187                                             5,190

Issuing common shares for debt forgiveness                                 56,705                                            56,716
 Issuing common shares upon  conversion of
convertible debentures                                                     22,266                                            22,277

Issuing common shares for loan amendment                                   23,980                                            24,000

Compensation for warrants granted  in the second quarter of 2004            6,185                                             6,185

Issuance of warrants for WAMCO extension                                   74,142                                            74,142

Issuing common shares for debt forgiveness                                 84,435                                            84,500

Compensation for warrants granted  in the fourth quarter of 2004           49,385                                            49,385

 Net loss for the year ended December 31, 2004                                          (4,702,210)                      (4,702,210)

 Accrued dividends for preferred stock                                                    (600,000)                        (600,000)
 Other comprehensive income

        Translation adjustment                                                                 422                              422
        Unrealized gain on investment
                                                                     ------------     ------------      ------------   ------------
 Balance at December 31, 2004                                        $ 27,385,191     $(41,367,484)     $    140,438   $(13,281,876)
                                                                     ============     ============      ============   ============
</TABLE>
          See accompanying notes to consolidated financial statements.


                                      F-8
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                                                           ----------------------------
                                                                               2004             2003
                                                                           -----------      -----------
<S>                                                                        <C>              <C>
Cash flows from operating activities:

   Net loss                                                                $(4,702,210)     $(6,518,407)
   Adjustments to reconcile net loss to net cash provided by operating
activities:
     Minority interest in net income (loss) of Subsidiary                           --         (299,283)
     Depreciation and amortization                                           1,267,848        1,289,312
     Goodwill Impairment                                                     1,760,000        2,873,997
     Write-off of MedData Solutions Investment                                 135,000               --
     Non employee stock compensation                                           808,976          243,165
     Employee stock compensation expense                                        83,494               --
     Deferred tax assets                                                            --          436,000
     Allowance for bad debts                                                    16,469           (8,248)
     Changes in operating assets and liabilities:
       Accounts receivable                                                    (359,302)       1,084,273
       Other receivable                                                             (0)          23,420
       Receivable from officers and employees                                   (6,226)         147,352
       Prepaid expenses                                                        187,223         (140,529)
       Accounts payable and accrued liabilities                              1,084,874        1,577,410
       Deferred Revenue                                                        187,799          (77,155)
       Accrued income tax payable                                                   --         (462,000)
       Payable to Officers                                                          --          (50,464)
                                                                           -----------      -----------

Net cash provided by operating activities                                      463,945          118,843

Cash flows from investing activities:
   Acquisition of minority interest in Now Solutions                          (877,000)              --
   Purchase of equipment                                                       (46,112)         (41,625)
                                                                           -----------      -----------

Net cash used in investing activities                                         (923,112)         (41,625)

Cash flows from financing activities:
   Release of pledge of cash deposit for bank Loan                                  --          650,000
   Proceeds from issuance of convertible debentures                                 --          420,000
   Payment of convertible debentures                                           (10,000)         (20,000)
   Payment of note payable                                                    (765,583)      (1,819,052)
   Proceeds from issuance of notes payable                                     500,000          392,851
   Release of restricted cash                                                  102,655          181,702
                                                                           -----------      -----------

Net cash used in financing activities                                         (172,928)        (194,499)

Effect of changes in exchange rates on cash                                        422          133,700

Net increase (decrease) in cash and cash equivalents,                         (631,674)          16,419

Cash and cash equivalents, beginning of period                                 962,454          946,035
                                                                           -----------      -----------

Cash and cash equivalents, end of period                                   $   330,780      $   962,454
                                                                           ===========      ===========

Supplemental disclosures of cash flow information:
   Cash paid during the year for interest
     Interest                                                              $   189,913      $   218,556
                                                                           ===========      ===========

   Non-cash investing and financing activities:
     Common stock and debt issued for acquisitions                         $ 1,018,000               --
                                                                           ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements


                                      F-9
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Organization and Basis of Presentation

Vertical Computer Systems,  Inc. ("the Company") was incorporated under the laws
of State of Delaware in April 1993. The Company is a  multinational  provider of
administrative  software services,  internet core  technologies,  and derivative
software  application  products through its distribution  network. The Company's
business model combines  complementary,  integrated software products,  internet
core technologies, and a multinational distribution system of partners, in order
to create a distribution matrix that is capable of penetrating  multiple sectors
through cross  selling its products and  services.  The Company is operating one
business segment.

The consolidated  financial  statements  include the accounts of the Company and
its wholly subsidiaries,  EnFacet, Inc. ("ENF" inactive),  Globalfare.com,  Inc.
("GFI" inactive),  Pointmail.com,  Inc. ("PMI" inactive),  Scientific Fuel, Inc.
("SFI" inactive),  "Vertical Internet Solutions ("VIS" inactive), Now Solutions,
Inc.  ("Now  Solutions"),  and  its 85%  owned  subsidiary  Government  Internet
Systems, Inc. ("GIS" a newly established entity with minor activities). To date,
the Company has generated revenues  primarily from software license,  consulting
fees and maintenance agreements from Now Solutions, its 100% owned subsidiary.

Going Concern Uncertainty

The accompanying  consolidated financial statements for the years ended December
31, 2004 and 2003, have been prepared assuming that the Company will continue as
a  going  concern  which   contemplates   the  realization  of  assets  and  the
satisfaction of liabilities in the normal course of business.

The  carrying  amounts  of assets and  liabilities  presented  in the  financial
statements  do not purport to represent  realizable or  settlement  values.  The
Company has suffered  significant  recurring  operating losses, used substantial
funds in its operations,  and needs to raise  additional funds to accomplish its
objectives.  Negative  stockholders'  equity  at  December  31,  2004 was  $13.3
million.  Additionally,  at December  31,  2004,  the Company  negative  working
capital of approximately $11.6 million (although it includes deferred revenue of
approximately   $2.7   million)  and  has  defaulted  on  several  of  its  debt
obligations.  These  conditions  raise  substantial  doubt  about the  Company's
ability to continue as a going concern.

Management  of the Company is  continuing  its efforts to secure  funds  through
equity  and/or debt  instruments  for its  operations,  expansion  and  possible
acquisitions,  mergers, joint ventures, and/or other business combinations.  The
Company will require  additional  funds for its  operations  and to pay down its
liabilities,  as well  as  finance  its  expansion  plans  consistent  with  the
Company's anticipated changes in operations and infrastructure.  However,  there
can be no assurance that the Company will be able to secure additional funds and
that if such  funds are  available,  whether  the terms or  conditions  would be
acceptable  to the Company  and whether the Company  will be able to turn into a
profitable  position and generate  positive  operating  cash flow. The financial
statements contain no adjustment for the outcome of this uncertainty.

Furthermore,  the Company is exploring  certain  opportunities  with a number of
companies to  participate  in marketing of its  products.  The exact  results of
these opportunities are unknown at this time.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its  subsidiaries.   All  intercompany   accounts  and  transactions  have  been
eliminated.

Note 2.  Summary of Significant Accounting Policies

Cash and Cash Equivalents

For purposes of the  statement of cash flows,  the Company  considers all highly
liquid  investments  with  maturities  of  three  months  or  less  to  be  cash
equivalents.


                                      F-10
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

Revenue Recognition

Service revenue generated from professional consulting and training services are
recognized  as  the  services  are  performed.  Maintenance  revenue,  including
revenues bundled with original software product license  revenues,  are deferred
and recognized over the related  contract period,  generally twelve months.  The
Company's  revenue  recognition  policies are  designed to comply with  American
Institute of Certified Public Accountants  Statement of Position 97-2, "Software
Revenue  Recognition"  (SOP 97-2) and with Emerging  Issues Task Force Issued No
00-21, "Revenue Arrangement with Multiple Deliverables."

Deferred revenue on maintenance  contracts represent cash received in advance or
accounts   receivable  from  system  and  service  consulting  sales,  which  is
recognized over the life of the contact.

In accordance with SEC Staff Accounting Bulletin No. 104 "Revenue  Recognition",
the Company  recognizes  revenue  from license of computer  software  "up-front"
provided that a non-cancelable  license agreement has been signed,  the software
and related documentation have been shipped, there are no material uncertainties
regarding  customer  acceptance,  collection  of resulting  receivable is deemed
probable, and no significant other vendor obligation exist.

Concentration of Credit Risk

The Company  maintains its cash in bank deposit  accounts,  which, at times, may
exceed federally insured limits. The Company has not experienced any such losses
in these accounts.

Property and Equipment

Property and equipment are stated at cost.  Depreciation  is computed  primarily
utilizing the  straight-line  method over the estimated  economic life of one to
fifteen years.  Maintenance,  repairs and minor renewals are charged directly to
expenses as incurred.  Additions  and  betterment  to property and equipment are
capitalized.  When  assets are  disposed  of, the related  cost and  accumulated
depreciation  thereon are removed from the accounts  and any  resulting  gain or
loss is included in the statement of operations.

Impairment of Long-Lived Assets

Effective  January 1,  2002,  the  Company  began  applying  the  provisions  of
Statement  of  Financial  Accounting  Standard  No.  144,  "Accounting  for  the
Impairment or Disposal of  Long-Lived  Assets"  ("SFAS No.  144").  SFAS No. 144
requires that  long-lived  assets be reviewed for impairment  whenever events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable through the estimated  undiscounted cash flows expected to result
from  the  use  and  eventual  disposition  of the  assets.  Whenever  any  such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.  During 2003, the Company  determined
that there was  approximately  $2,874,000 of  impairment in goodwill,  which was
located in Now Solutions and Vertical.  During 2004, the Company determined that
there was  $1,760,000  impairment  in goodwill,  all of which was located in the
Company.

Capitalized Software Costs

Software costs incurred  internally in creating  computer  software products are
expensed until technological feasibility has been established upon completion of
a detailed  program  design.  Thereafter,  all  software  development  costs are
capitalized  until the point that the product is ready for sale and subsequently
reported at the lower of unamortized  cost or net realizable  value. The Company
considers annual  amortization of capitalized  software costs based on the ratio
of current  year  revenues  by product to the total  estimated  revenues  by the
product,  subject to an annual minimum based on straight-line  amortization over
the product's  estimated  economic  useful life,  not to exceed five years.  The
Company periodically reviews capitalized software costs for impairment where the
fair value is less than the carrying value.  During 2004 and 2003, no costs were
capitalized.


                                      F-11
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

Stock-based Compensation

Effective January 1, 2004, the Company adopted the fair value provisions of SFAS
123 for share  based  payments  to  employees.  In  accordance  with  transition
provisions  under SFAS 148, the Company has adopted the  prospective  method for
transitional recognition.

Investments

Investments in entities in which the Company  exercises  significant  influence,
but does not control, are accounted for using the equity method of accounting in
accordance with Accounting Principles Board Opinion No. 18 "The Equity Method of
Accounting for  Investments in Common Stock".  Investments in securities  with a
readily  determinable  market  value  in which  the  Company  does not  exercise
significant  influence,  does not have control,  and does not plan on selling in
the near term are accounted  for as available for sale  securities in accordance
with Statement of Financial  Accounting Standard No. 115 "Accounting for Certain
Investments in Debt and Equity Securities".

Income Taxes

The Company provides for income taxes in accordance with Statements of Financial
Accounting  Standards No. 109,  "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a company to use the asset and liability  method of accounting  for
income taxes.

Under the asset and liability  method,  deferred income taxes are recognized for
the tax consequences of "temporary  differences" by applying  enacted  statutory
tax rates  applicable  to future  years to  differences  between  the  financial
statement carrying amounts and the tax basis of existing assets and liabilities.
A valuation allowance is provided when management cannot determine whether it is
more likely than not the deferred  tax asset will be  realized.  Under SFAS 109,
the effect on deferred  income taxes of a change in tax rates is  recognized  in
income in the period that includes the enactment date.

Earnings Per Share

Statement of Financial  Accounting Standards FASB No. 128, "Earnings per Share",
which replaces the calculation of primary and fully diluted  earnings (loss) per
share with basic and diluted  earnings  (loss) per share,  is used to  calculate
earnings per share.  Basic earnings (loss) per share includes no dilution and is
computed by dividing  income  (loss)  available  to common  stockholders  by the
weighted  average  number of  shares  outstanding  during  the  period.  Diluted
earnings  (loss) per share  reflect the potential  dilution of  securities  that
could share in the  earnings  of an entity,  similar to fully  diluted  earnings
(loss) per share. As of December 31, 2004 and 2003, all outstanding  convertible
debts and warrants and options  outstanding were not included in the calculation
of diluted loss per share because they were anti-dilutive.

Fair Value of Financial Instruments

For certain of the Company's  instruments,  including cash and cash equivalents,
accounts receivable and accrued expenses,  the carrying amounts approximate fair
value due to the short maturity of these instruments.  The carrying value of the
Company's  long-term debt approximates its fair value based on the quoted market
prices  for the same or  similar  issues or the  current  rates  offered  to the
Company for debt of the same  remaining  maturities.  The fair value of the note
payable to stockholder cannot be estimated due to its related party nature.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
financial statements and the reported amounts of revenue and expenses during the
reporting  period.  Among  the  more  significant  estimates  included  in these
financial   statements  are  the  estimated   allowance  for  doubtful  accounts
receivable,   valuation  allowance  for  deferred  tax  assets,   impairment  of
long-lived assets and intangible,  and the valuation of warrants. Actual results
could materially differ from those estimates.


                                      F-12
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

Advertising and Tradeshow Costs

The Company expenses advertising and tradeshow costs when incurred.  Advertising
and  tradeshow  costs  for the year  ended  December  31,  2004 and  2003,  were
approximately $189,000 and $225,000,  respectively.  Now Solutions accounted for
100% of such costs.

Cash Reimbursements

The Company records  reimbursement by its customers for out-of-pocket expense as
part of consulting  and other services  revenue in accordance  with the Emerging
Issues  Task  Force  Issue  No  01-14  "Income  Statement   Characterization  of
Reimbursements Received for Out of Pocket Expense Incurred."

Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards  No. 142 Goodwill and Other  Intangible  Assets (SFAS No. 142).  Under
SFAS No. 142,  goodwill  and  indefinite  life  intangible  assets are no longer
amortized but are reviewed annually or more frequently if impairment  indicators
arise, for impairment. The Company discontinued the amortization of its goodwill
balances effective January 1, 2002. In accordance with the testing  requirements
provided  under SFAS No.  142,  the Company  determined  that the  goodwill  was
impaired  during the years ended  December  31, 2004 and 2003 and, to date,  all
goodwill was written off.

Adoption of FIN No. 45

In November 2002, FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others."  FIN No. 45 expands on the  accounting
guidance of Statements  No. 5, 57, and 107 and  incorporates  without change the
provisions of FASB Interpretation No. 34, which is being superseded.  FIN No. 45
will affect  leasing  transactions  involving  residual  guarantees,  vendor and
manufacturer  guarantees,  and  tax  and  environmental  indemnities.  All  such
guarantees  will need to be disclosed in the notes to the  financial  statements
starting with the period ending after December 15, 2002.  For guarantees  issued
after December 31, 2002,  the fair value of the  obligation  must be reported on
the balance sheet.  Existing  guarantees will be  grandfathered  and will not be
recognized on the balance sheet. The adoption of this standard had no effect.

Adoption of SFAS No. 150

In May 2003,  FASB issued  Statement  No. 150 (SFAS No.  150),  "Accounting  for
Certain  Instruments with  Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of financial
instruments with  characteristics  of both  liabilities and equity.  The Company
adopted SFAS No. 150 on July 1, 2003.

Adoption of FIN No. 46

In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46  (FIN  46),
"Consolidation of Variable Interest  Entities." FIN 46, as amended by FIN 46(R),
issued in January  2003,  requires an investor  with a majority of the  variable
interests  in a  variable  interest  entity to  consolidate  the entity and also
requires majority and significant variable interest investors to provide certain
disclosures.  A  variable  interest  entity is an  entity  in which  the  equity
investors do not have a controlling  financial interest or the equity investment
at risk is insufficient  to finance the entity's  activities  without  receiving
additional  subordinated financial support from other parties. The provisions of
FIN 46(R) are  applicable  for fiscal years ending after  December 15, 2004. The
Company does not have any variable interest entities that must be consolidated.


                                      F-13
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

New Accounting Announcements Not Adopted Yet

In December 2004, the FASB announced that SFAS No. 123R (revised December 2004),
"Share-Based   Payment,"  sets   accounting   requirements   for   "share-based"
compensation to employees, including  employee-stock-purchase-plans  (ESPPs) and
provides guidance on accounting for awards to non-employees. This Statement will
require the Company to recognize in the income  statement  the  grant-date  fair
value of stock options and other equity-based  compensation issued to employees,
but expresses no preference for a type of valuation  model. For public entities,
this  Statement is effective for the first interim period  beginning  after June
15, 2005.  The Company will adopt this Statement in the beginning of 2006 and is
evaluating this  pronouncement's  effect on the Company's financial position and
net income.

Reclassifications

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

Note 3. Acquisition Transactions - Now Solutions Operations and Default on Notes

On  February  28,  2001,  the  Company  acquired  60% of equity  interest in Now
Solutions,  Inc., a company that develops and maintains human resource software,
in  exchange  for $1  million  in cash,  which  was paid to Now  Solutions,  and
warrants  to  purchase  80,763,943  shares of the  Company's  common  stock at a
purchase  price of $0.08 per share  were  granted  to Arglen  Acquisitions,  LLC
("Arglen").  Arglen  negotiated Now  Solutions'  purchase of Ross Systems assets
related to its Payroll/Human Resources product including all equipment, software
and maintenance agreements. Based on the Black Scholes option pricing model, the
Company  determined  that the fair  value of these  warrants  was  approximately
$798,500 and recorded as goodwill accordingly.  In addition,  Arglen and Stephen
Parnes  received a 40%  interest  in Now  Solutions  as  compensation  for their
services rendered in the process of consummating this transaction. Consequently,
the Company recognized additional goodwill of $666,667 based on the valuation of
$1 million accounting only for 60% equity interest in Now Solutions.  In January
2004, the Company  purchased the remaining 5% minority interest in Now Solutions
held by Stephen Parnes for $77,000 and 1,000,000  unregistered shares of Company
common  stock,  subject to terms and a  "lock-up"  provision.  This  transaction
resulted in the Company recognizing  $80,000 of goodwill,  which was written off
in 2004.  The Company and Arglen  settled their  arbitration  and  litigation in
December 2003. In February 2004, in connection with the settlement,  the Company
purchased  Arglen's 35% interest in Now Solutions for  $1,400,000 and 20,000,000
unregistered  shares  of common  stock of the  Company,  subject  to terms and a
"lock-up" provision. The Company's purchase of Arglen's interest resulted in the
Company recognizing  $1,680,000 of goodwill,  which was written off in 2004. The
$1,400,000 was payable as follows:  (a) $800,000,  which was paid at the closing
and (b) $600,000,  pursuant to a non-interest  bearing  secured  promissory note
providing  for  payments of $200,000 in April 2004,  $100,000 in June 2004,  and
$300,000 in September  2004,  which was issued at closing.  When the Company did
not make the April 2004 payment, the Company began accruing interest on the note
at the rate of 10% from its inception.  The security  interest of Now Solutions'
assets  on the  secured  promissory  note is junior  to Now  Solutions'  present
indebtedness  to WAMCO 32, Ltd. The note is in default.  In August 2004,  Arglen
obtained a default judgment in Los Angeles court for the outstanding  principal,
plus attorney's fees and interest at the rate of 10% per annum.  The Company has
filed a motion in the  Delaware  court to stay the  enforcement  of the judgment
pending resolution of the Delaware action. Pursuant to the settlement agreement,
the Company also cancelled warrants to purchase  80,763,943 common shares of the
Company that were originally  granted to Arglen in connection with the Company's
acquisition of 60% of equity  interest in Now  Solutions.  In December 2004, the
Company recorded the expense of issuing 5,000,000  unregistered shares to Arglen
at a fair  market  value of $82,273,  which was based on an average  share price
during 11 days of August 2004.  These shares were due pursuant to the settlement
agreement  whereby the Company was  obligated  to issue  5,000,000  unregistered
shares of common  stock of the  Company to Arglen,  due to its failure to file a
SB2  registration  statement  within  180  days  from  the  closing  date of the
settlement. In March 2005, the Company issued these 5,000,000 shares to Arglen.

During  2001,  the  goodwill  on  Now   Solutions'   book  was  amortized  on  a
straight-line method over a period of five years. During the year ended December
31, 2003, the Company determined that the goodwill resulting from the 60% equity
interest  was  impaired and all goodwill was written off as of December 31, 2003
resulting in an impairment charge of $2,873,997.


                                      F-14
<PAGE>

Note 3. Acquisition Transactions - Now Solutions Operations and Default on Notes
       (Continued)

The note payable to Ross issued by Now Solutions in the amount of $1,000,000, is
unsecured and non-interest  bearing.  The note was recorded at a discount (which
will be  amortized  over the life of the note),  and  payments of  $250,000  and
$750,000 were due in February 2002 and 2003,  respectively.  Since payments were
not received within three days from the due date, the note now bears interest at
10% per annum.  In 2002,  Now  Solutions  offset  $250,000  payment  through its
receivable  from Ross.  At December 31,  2004,  the past due balance of the note
outstanding was $750,000.

Now Solutions  obtained  proceeds of $5,500,000  through a note payable to Coast
Business Credit ("Coast") to finance the purchase of HRIS from Ross and used the
excess amount for its working capital. The note payable to Coast Business Credit
("Coast"),  issued by Now Solutions, Inc., in the principal amount of $5,500,000
bearing  interest at prime plus 1.5% with a minimum  interest of 8.5% per annum,
monthly payment of $91,500 of principal,  plus interest,  due April 28, 2006 (as
amended  below),  is  secured  with all of the  assets  of Now  Solutions  and a
$1,500,000 security deposit by the Company to guarantee the first 36 payments of
the loan and is subject to various  loan  covenants.  In March  2003,  Coast was
taken over by the FDIC and WAMCO 32, Ltd.,  purchased  the loan.  As of December
31,  2004,  the  outstanding  principal  balance due on the $5.5 million note is
$1,190,601.  In August 2003, WAMCO 32, Ltd. agreed to extend the due date of the
note from February 28, 2004 to August 28, 2004. In June 2004, the parties agreed
to amend the terms of the note and the loan.

Pursuant  to the  amendment,  the  interest  was changed to 9% per annum and the
$1,304,766  outstanding  principal  balance  shall be  payable as  follows:  (a)
$91,667  principal  per month,  plus  interest  commencing  on June 30, 2004 and
continuing  on each  succeeding  month through  September  30, 2004;  (b) $7,500
principal  per  month,  plus  interest,  commencing  on  October  31,  2004  and
continuing on each succeeding month through January 31, 2005; (c) providing that
Now Solutions has achieved  revenues of $7.5 million and EBITDA (Earnings Before
Interest,  Taxes,  Depreciation & Amortization)  of not less than $2,200,000 for
the fiscal year 2004, $7,500 principal per month,  plus interest,  commencing on
February 28, 2005 and continuing on the last day of each succeeding  month until
June 30, 2005; and (d) $91,667 principal per month plus interest,  commencing on
July 31, 2005 and continuing on each succeeding month until the note is paid. In
the event Now Solutions does not qualify for reduced payments,  the note will be
payable in the amount of $91,667 principal per month, plus interest,  commencing
on February 28, 2005 and  continuing  on the last day of each  succeeding  month
until the note is paid.  In  connection  with the  amendment,  Now  Solutions is
required to pay WAMCO 32 5% of Now  Solutions'  revenues in excess of $8 million
up to a maximum of $250,000, beginning in the fiscal year that commences January
1, 2005. Also in connection  with the amendment,  the Company issued warrants to
purchase  3,000,000  shares of the common stock Company at an exercise  price of
$0.03 per share or by cashless exercise, at the holder's election.  The warrants
are subject to "piggy back" registration rights and a "lock-up"  provision.  Now
Solutions has made all interest payments as of March 29, 2005 but it is $408,217
delinquent in principle  payments.  The Company is currently in discussion  with
WAMCO 32 for a forbearance or modification agreement. There is no guarantee that
an agreement will be reached with WAMCO 32.

In order to  facilitate  the financing  process,  the Company had pledged a $1.5
million  deposit  as  collateral  pursuant  to a  deposit  pledge  agreement  to
guarantee  the first 24 payments of the loan to finance the purchase of HRIS. In
February  2003,  the Company was notified that  Southern  Pacific Bank went into
FDIC  receivership.  Coast  Business  Credit  (Coast) is a division  of Southern
Pacific Bank.  The FDIC froze  $750,000,  which was the remaining  amount of the
Company's  deposit account pledged on behalf of Now Solutions on the date of the
notice. Of the remaining $750,000, the Company received $100,000,  which is that
portion which was insured by the FDIC.  The  uninsured  portion of the remaining
balance of the deposit  pledge  account,  which is $650,000,  was applied to the
outstanding debt of the Coast loan to Now Solutions. Consequently, Now Solutions
reduced its loan balance  payable to Coast.  Accordingly,  Now Solutions owed to
the  Company  the same  amount  under  the same  terms of loan  agreements.  The
Company's  remaining  pledge  balance of  $650,000  was offset  against the loan
balance in lieu of a $650,000 promissory note from Now Solutions to the Company.
In September  2003, the $650,000 note was split into two notes in the amounts of
$215,000 and  $435,000.  These notes were due on December 31, 2004 with the same
interest rate and terms as the $5,500,000 note, with monthly  interest  payments
commencing  July 1, 2003.  The $435,000 note has been paid down by Now Solutions
and the  Company  pledged  its  interest  in the  $215,000  note  issued  by Now
Solutions to the Company to secure $190,000 in loans made by Victor Weber to the
Company  in 2003 and  $25,000  in  expenses  paid by Weber on the  behalf of the
Company that were included in Trade  Accounts  Payable.  Weber had the option to
have the Company  assign the $215,000 note to Weber provided that Weber forgives
all of the  Company's  outstanding  debt and  cancels  all  underlying  notes in
connection with the debt. Weber elected to make this assignment in January 2004.
At that time, all other notes and debts due Weber were  cancelled.  The $215,000
note to Weber was outstanding at December 31, 2004.


                                      F-15
<PAGE>

Note 3. Acquisition Transactions - Now Solutions Operations and Default on Notes
        (Continued)

Pursuant  to the  terms of the  operating  agreement  among the  members  of Now
Solutions,  the Company is entitled to receive a  management  fee of $50,000 per
year,  pro-rata  distributions  of 50% of net earnings on a taxable income basis
for  federal  income tax  purpose if cash is  available,  and  repayment  of the
initial capital  contribution of $1 million if certain conditions are met. As of
December 31, 2004, all of the initial capital had been repaid by Now Solutions.

In December 2003, the Company settled its arbitration and litigation with Arglen
Acquisitions,  LLC ("Arglen"),  a minority  partner of Now Solutions,  regarding
issues related to Now Solutions.  The settlement resolved various allegations by
the  Company  and  Arglen  concerning  violations  of Now  Solutions'  Operating
Agreement.  The  arbitration  has been dismissed and any actions with respect to
Arglen and Gary Gyselen and the Company and its related  parties,  including Now
Solutions,  were also dismissed,  except that the California Superior Court, Los
Angeles  County  retained  jurisdiction  regarding  the terms of the  settlement
between the parties. In February 2004, the Company completed the settlement with
Arglen. Pursuant to the terms of the settlement,  the Company purchased Arglen's
interest in Now Solutions for $1.4 million as follows:  (a) $800,000,  which was
paid at the closing and (b) $600,000, pursuant to a non-interest bearing secured
promissory  note  providing for payments of $200,000 in April 2004,  $100,000 in
June 2004,  and $300,000 in  September  2004,  which was issued at closing.  The
Company's  purchase of  Arglen's  interest  resulted in the Company  recognizing
$1,680,000 of goodwill,  which was written off in 2004. When the Company did not
make the April 2004 payment,  the Company began accruing interest on the note at
the rate of 10% from its  inception.  The  security  interest of Now  Solutions'
assets  on the  secured  promissory  note is junior  to Now  Solutions'  present
indebtedness  to WAMCO 32, Ltd. The note is in default.  In August 2004,  Arglen
obtained a default judgment in Los Angeles court for the outstanding  principal,
plus attorney's fees and interest at the rate of 10% per annum.  The Company has
filed a motion in the  Delaware  court to stay the  enforcement  of the judgment
pending  resolution  of  the  Delaware  action.  Also  at  the  closing  of  the
settlement,  the Company cancelled 80,763,943 warrants held by Arglen and issued
to Arglen 20,000,000  unregistered shares of the common stock of the Company (at
a fair market value of $280,000),  which is subject to a "lock up" provision. In
December   2004,  the  Company   recorded  the  expense  of  issuing   5,000,000
unregistered shares to Arglen at a fair market value of $82,273, which was based
on an average  share price during 11 days of August 2004.  These shares were due
pursuant to the settlement  agreement whereby the Company was obligated to issue
5,000,000  unregistered  shares of common stock of the Company to Arglen, due to
its  failure  to file a SB2  registration  statement  within  180 days  from the
closing  date of the  settlement.  In  March  2005,  the  Company  issued  these
5,000,000 shares to Arglen.

For  information  concerning  details of the legal  proceedings  concerning  the
Company,  Now Solutions,  Ross,  Arglen, and Gary Gyselen, a principal of Arglen
and former Chairman of Now Solutions, please see Note 15.

Note 4.  Investments

During 2002, the Company sold 766,733  eResource  Capital Group (RCG) shares for
$81,266 and recorded a realized loss of $91,922. The remaining 33,267 RCG shares
were adjusted into 4,610 shares for the 7-1 reverse stock split by RCG in 2002.

During  2000,  the Company  paid  $250,000 to acquire a 30% interest in TranStar
Systems, Inc. (TranStar), formerly Apollo Industries, Inc., a company that is in
the process of developing smart card technology.  The Company  accounted for the
investment under the equity method of accounting and recognized a $31,453 equity
loss in the  unconsolidated  affiliate for the year ended  December 31, 2000. In
2001,  the Company  paid  $25,000 to receive a royalty of 2% on all Apollo sales
until the original  investment  is recouped.  After the original  investment  is
recouped,  the Company shall receive 1% of all Apollo sales,  up to a maximum of
$30,000 per year. The royalty  agreement  expires  October 2020. At December 31,
2001, due to the uncertainty  regarding the recovery of the royalty, the Company
wrote off the $25,000. In 2001, the Company loaned Apollo $24,000, which was due
on June 30, 2001 and an additional $24,000,  which was due on July 16, 2001. The
loans are secured  pursuant to a stock pledge in the amount of 500,000 shares of
Apollo  for each of the two loans.  In April  2003,  the  Company  and  TranStar
Systems,  Inc.  (TranStar) agreed to amend two $24,000  promissory notes bearing
interest at 10%, dated April 19 and May 8, 2001, and a royalty agreement,  dated
October  14,  2000  whereby  TranStar  had  agreed to pay a royalty of 2% of all
transaction  fees  up to  $275,000  and  1% up to  $3,000,000.  Pursuant  to the
agreement,  the due date for the two $24,000 notes was extended to April 5, 2006
in exchange for  increasing  the royalty rate in the royalty  agreement to 3% of
any  transaction  fees and any  other  revenues  generated  in  perpetuity.  The
collateral to secure the note, consisting of 1,000,000 shares of TranStar common
stock, and the underlying  security  agreements remain in full force and effect.
In connection  with the agreement,  TranStar also released and  indemnified  the
Company from any obligations owed to TranStar or any third party.


                                      F-16
<PAGE>

Note 4.  Investments (Continued)

Also in April 2003,  the Company and Mike  Radlovic  (Radlovic)  entered into an
agreement  whereby  Radlovic would  purchase the Company's  interest in TranStar
Systems,  Inc.  (TranStar),  formerly Apollo  Industries,  Inc.  Pursuant to the
agreement,  the Company transferred all of its ownership  representing 3,000,000
shares of TranStar  common  stock to  Radlovic.  In  consideration  of the sale,
Radlovic  issued a $250,000 note bearing  interest at 10% per annum due in April
2007. The note is secured by 5,000,000  shares of TranStar common stock owned by
Radlovic.  Radlovic is the President,  CEO, and a major stockholder of TranStar.
As of December 31, 2003, the investment in notes  receivable and all advances to
TranStar have been fully reserved.

In February  2004,  the Company  purchased a 21%  ownership  interest in MedData
Solutions,  Inc. from Robert Farias.  In exchange,  the Company issued 9,000,000
unregistered  shares of the common  stock of the Company (at a fair market value
of $135,000),  which are subject to "piggy-back"  registration rights. Since the
Company could not ascertain  the fair market value of MedData  Solutions,  Inc.,
the  investment  was  written  off in 2004.  Robert  Farias is a director of Now
Solutions, a 100% owned subsidiary of the Company.

Note 5.  Related Party Transactions

During the years ended  December  31, 2002 and 2001,  the Company  paid  Parker,
Mills & Patel LLP  ("PMP"),  its former  general  legal  counsel,  approximately
$4,000 and $133,371 in exchange for consideration  for legal services  rendered.
William Mills, a partner at PMP, is also a director of the Company.  The Company
issued  2,621,622  shares of common stock in July 2001 and  1,560,000  shares of
common  stock in November  2001 with an  aggregate  value of $121,000 to William
Mills of PMP for partial  payment of legal  services.  The 2,612,622  shares and
1,560,000  shares  were  pursuant  to an S-8  registration  statement  filed  on
November 8, 2001. Also, during 2001, PMP made advances of approximately  $30,000
to third party vendors on behalf of the Company. In exchange,  PMP received a 6%
promissory  note due January 2002 and  three-year  warrants to purchase  300,000
shares of common stock at a purchase  price of $0.014 per share which expired in
November  2004. At December 31, 2004, the  outstanding  balance under of $23,974
was in default.

On August 7, 2002,  the Company  issued a $25,000 note to a third party  lender,
bearing  interest  at 12% per  annum  and due on August  16,  2002.  The note is
secured by  10,000,000  shares of the  Company's  common stock that are owned by
Mountain  Reservoir,  to cover any  shortfall in the event of default.  Mountain
Reservoir is a  corporation  controlled by the W5 Family  Trust.  Mr. Wade,  the
President  and CEO of the Company,  is the trustee of the W5 Family  Trust.  The
Company  made payment of  approximately  $12,500 on the $25,000 note in 2002 and
was in a delinquent  position at December 31,  2003.  In June 2002,  the Company
issued  another  $50,000  note to the same lender,  bearing  interest at 12% per
annum and due in January 2003. The second note is secured by limited interest in
the Company's  deposit pledge  account on the behalf of Now Solutions.  In March
2003,  the parties  entered  into an amendment  for both notes.  Pursuant to the
amendment,  the Company  agreed to pay accrued  interest in the amount of $1,170
for the  $25,000  note and  $4,200 for the  $50,000  note and  monthly  interest
payments for both notes in April,  May,  and June 2003.  Beginning in July 2003,
the above interest  payments shall be replaced with a monthly payment of $5,000,
which will be applied  first to the $25,000  note and then to the $50,000  note.
The maturity  date for the $50,000 note payable was extended to June 1, 2004 and
the maturity date for the $25,000 note was extended to July 1, 2005. The $50,000
note is now in default.

In July 2001, the Company agreed to pay $4,500 per month to Stephen  Rossetti to
provide government business  consultation services on a month-to-month basis. In
addition,  the  consultant  is entitled to receive  3-year  warrants to purchase
common  stock equal to $5,500 per month based on a strike  price of the previous
average five day market price on the date of issuance.  In May 2003, the Company
issued a $7,500  promissory  note bearing  interest at 12%, due in June 2003, to
Stephen  Rossetti in connection with a loan in the same amount.  Mr. Rossetti is
the CEO and a Director of GIS,  and a director of Now  Solutions.  In  September
2002,  the  Company  amended the  consulting  agreement  of Stephen  Rossetti to
provide  services in the capacity of Executive  V.P.  Governmental  Affairs,  in
consideration  for 3-year  warrants to purchase  1,000,000  shares of its common
stock at a share price of $0.012,  $30,000 for services  rendered through August
31,  2002,  and $5,000  per month for a period of one year.  The  warrants  were
issued  at a fair  market  value  of  $6,191  (valued  using  the  Black-Scholes
valuation  model).  In October 2004, the Company and Stephen  Rossetti agreed to
amend the terms of the $7,500 note payable  issued in May 2003 and the agreement
for consulting services.  In consideration for canceling  outstanding debt under
the note payable and the  consulting  agreement,  the Company  issued  6,500,000
shares of the common stock of the Company at a fair market value of $84,500.  As
of March 29, 2005,  2,900,145 of the 4,150,145  warrants  issued for  consulting
services for the Company and GIS expired. Mr. Rossetti is the CEO and a Director
of GIS and Now Solutions.


                                      F-17
<PAGE>

Note 5.  Related Party Transactions (Continued)

In November 2003, Mountain Reservoir pledged 4,000,000 shares of common stock to
secure a loan of $60,000 to GIS, which issued a $60,000 note payable on November
5, 2003  bearing  interest  at 10% per  annum,  and was due  November  5,  2004.
Mountain Reservoir is a corporation controlled by the W5 Family Trust. Mr. Wade,
the President and CEO of the Company, is the trustee of the W5 Family Trust.

In November 2003, Mountain Reservoir pledged 3,000,000 shares of common stock to
secure a loan of $40,000 to GIS, which issued a $40,000 note payable on November
19, 2003  bearing  interest at 10% per annum,  and was due  November  19,  2004.
Mountain Reservoir is a corporation controlled by the W5 Family Trust. Mr. Wade,
the President and CEO of the Company, is the trustee of the W5 Family Trust.

In January 2004, the Company agreed to issue  1,000,000  unregistered  shares of
the  Company's  common  stock (at a fair  market  value of  $3,000),  subject to
piggy-back  registration  rights,  in connection with a $10,000 loan made by Jim
Salz to the Company in June 2003. In addition,  the Company  issued a promissory
note for $10,000 bearing interest at 10%, which was due April 30, 2004. In April
2004,  the due date on the note was extended to August 1, 2004. In January 2005,
the due  date on the note  was  extended  to April  30,  2005.  Mr.  Salz is the
Company's corporate counsel.

In January  2004,  Victor  Weber  elected to make the  assignment  of a $215,000
promissory note due December 31, 2004, issued by Now Solutions to the Company in
September  2003.  In  connection  with the  assignment,  the notes  payable  for
$100,000,  $50,000  and  $40,000  issued  to Mr.  Weber  as well as the  $25,000
outstanding in accounts  payable owed to Weber were  cancelled.  The interest on
the $215,000 note for each month is the highest Prime Rate in effect during said
month,  but in no event  shall the rate of  interest  charged on the balance due
under the notes in any month be less than 8.5% per annum. In September 2004, the
Company and Victor Weber  agreed to amend the terms of the $215,000  note issued
by Now Solutions to the Company and assigned to Mr. Weber. Pursuant to the terms
of the amendment,  the Company agreed to issue 2,000,000  unregistered shares of
common stock of the Company (at a fair market value of $24,000), in exchange for
amending the note. In connection  with the amendment,  since the Company did not
make full  payment of the note by December  31,  2004,  the Company  issued,  in
January 2005, an additional  2,000,000  unregistered shares of common stock at a
fair market value of $10,000 and the note has been  amended as follows:  (a) the
maturity  date of the note shall be  extended  to  December  31,  2005;  (b) the
payment  terms of the note  shall be  amended so that,  beginning  in 2005,  Now
Solutions  shall make (i) monthly  interest  payments  for all accrued  interest
during the previous month, (ii) $50,000 in principal  payments which will be due
the end of each quarter  beginning  March 31, 2005 and (iii) a final  payment of
all accrued  interest and principal which will be due no later than December 31,
2005.  In  addition,  Mr.  Weber  shall  receive  2.5%  royalty  on sales by Now
Solutions of its software that exceed $8,000,000 per year up to $200,000.  As of
March 29,  2005,  the Company has made all interest  payments.  Mr. Weber is the
President and a Director of Government Internet Systems, Inc.

In February 2004, Robert Farias loaned $500,000 to Now Solutions,  the Company's
wholly-owned  subsidiary  and  received  a  $500,000  promissory  note  from Now
Solutions,  secured by its assets and a 5% royalty on any sales by Now Solutions
of over $8,000,000 up to $500,000.  The note bears interest at 10% per annum and
Now  Solutions  is required to make monthly  interest  payments for all interest
accrued in the previous month on the first day of each month  beginning April 1,
2004 and  beginning on October 1, 2004 and  continuing on the first day of every
month thereafter,  monthly principal payments of $91,500 plus interest until the
note has been paid in full.  In the event Now  Solutions  receives cash proceeds
due to a capital  infusion  or upfront  licensing  fees from a reseller  that is
outside its normal scope of business  (i.e.,  not part of software  sales in the
regular  course of  business),  Now  Solutions  is  required  to pay 50% of such
proceeds  remaining  toward payment of the $500,000 note. In connection with the
loan, the Company issued (i) 5 year warrants to purchase 5,000,000  unregistered
shares of common  stock at $0.01 per share at a fair market value at the date of
issuance of $74,538 (valued using the  Black-Scholes  valuation  model);  (ii) 5
year warrants to purchase 5,000,000  unregistered  shares of common stock of the
Company at $0.02 per share at a fair  market  value at the date of  issuance  of
$74,344 (valued using the Black-Scholes  valuation model); (iii) 5 year warrants
to  purchase  5,000,000  unregistered  shares of common  stock of the Company at
$0.03  per  share at a fair  market  value at the date of  issuance  of  $74,200
(valued using the Black-Scholes  valuation model);  (iv) 5,000,000  unregistered
shares of common stock of the Company (at a fair market  value of $75,000);  and
(v) an additional  5,000,000  unregistered shares of common stock of the Company
in the event that  $250,000  was not paid toward the loan on or before March 15,
2004,  which  were  issued  (at a fair  market  value of  $125,000).  All of the
foregoing warrants and stock are subject to "piggy-back" registration rights. In
connection with the loan, Now Solutions  entered into a security  agreement with
the lender to guarantee the note. The security interest of Now Solutions' assets
on the secured promissory note is junior to Now Solutions' present  indebtedness
to WAMCO 32, Ltd and Arglen  Acquisitions.  Robert  Farias is a director  of Now
Solutions,


                                      F-18
<PAGE>

Note 5.  Related Party Transactions (Continued)

a 100% owned subsidiary of the Company.  The note is currently in default. As of
March 29, 2005, Now Solutions had made principal  payments  totaling $183,000 to
Robert Farias. In January 2005, WAMCO 32, Ltd. notified Mr. Farias that pursuant
to the subordination  agreement  executed between WAMCO 32, Ltd. and Mr. Farias,
Mr.  Farias  was no  longer to accept  payments  from or to take any  collection
actions against Now Solutions for the repayment of junior debt.

In February 2004, the note payable in the amount of $84,000 issued by EnFacet to
Robert Farias, dated June 1, 2001, bearing interest at 12% per annum, unsecured,
with  principal  and  interest  due on June 1, 2002 was amended by the  parties.
Pursuant to the amendment  Robert Farias waived any defaults on the note and the
note was amended as follows: once Vertical's subsidiary, Now Solutions, has paid
off the entire  balance due under the $500,000  note issued by Now  Solutions to
Mr. Farias on February 13, 2004,  sixteen percent (16%) of any remaining amounts
from the final $91,500 installment payment on the $500,000 note shall be applied
to the  $84,000  note.  Thereafter,  Vertical  or,  at  Vertical's  option,  Now
Solutions,  shall  continue  to  make  monthly  principal  payments  of  $14,640
beginning on the first day of the following month until all monies due under the
$84,000 note have been paid. In  connection  with the  amendment,  Now Solutions
entered into a security  agreement  with the lender to guarantee  the note.  The
security  interest of Now Solutions'  assets on the secured  promissory  note is
junior  to  Now  Solutions'  present  indebtedness  to  WAMCO  32,  Ltd,  Arglen
Acquisitions,  and Robert  Farias in  connection  with the $500,000  note. In an
amendment  between the parties in March 2003,  the interest  rate was  increased
from 8% to 12% and  accrued  from the date the note was issued in  exchange  for
extending the note.  Robert Farias is a director of Now Solutions,  a 100% owned
subsidiary of the Company. This note is in default.

In February 2004, the note payable in the amount of $280,000,  bearing  interest
at 4% per annum and issued to Robert Farias on October 31, 2001,  was amended by
the parties.  In connection  with the  amendment,  the Company and Robert Farias
also  amended  the  $181,583  note  issued to Mr.  Farias on October  17,  2002.
Pursuant  to the  amendment,  any  default on these  notes was  waived,  and the
Company agreed to make the following payments on these notes: (i) $20,000, which
was paid toward the $181,583 note on February 20, 2004; (ii) fifty percent (50%)
of the remaining past-due amounts by March 20, 2004; and (iii) the all remaining
past-due  amounts to bring the notes current by April 20, 2004. In the event the
Company  does not pay the amounts in a timely  manner,  all amounts  still owing
under these notes will be considered  in default and the following  shall apply:
(i) all such  remaining  amounts  will be added to the secured  loan amounts and
subject  to the  security  interest  and  pledge  agreements  under the  $84,000
promissory note issued by the Company's  subsidiary,  EnFacet,  to Mr. Farias on
June 1, 2001;  (ii) the  $14,640  monthly  payments to be made under the $84,000
note will be applied to the $280,000  and  $181,583  notes until these notes are
paid in full; and (iii) with respect to cash proceeds Now Solutions receives due
to a capital infusion or upfront  licensing fees from a reseller that is outside
its normal scope of business  (i.e.,  not part of software  sales in the regular
course of  business),  Now  Solutions  is required  to pay 50% of such  proceeds
remaining  after the $500,000 note payable issued by Now Solutions to Mr. Farias
on  February  13, 2004 has been paid in full toward the  $280,000  and  $181,583
notes if the  Company  is not  current in its  payments.  The  $280,000  note is
secured  by  SiteFlash  technology  owned by the  Company.  Robert  Farias  is a
director of Now Solutions,  a 100% owned subsidiary of the Company.  The note is
in default.

In February  2004,  the note payable in the amount of $181,583  issued to Robert
Farias in  October  2003,  bearing  interest  at 12% per annum was  amended.  In
connection  with the  amendment,  the  Company and Mr.  Farias also  amended the
$280,000  note  issued to Mr.  Farias  on  October  31,  2001.  Pursuant  to the
amendment, any default on these notes was waived, and the Company agreed to make
the following  payments on these notes:  (i) $20,000,  which was paid toward the
$181,583  note on February 20, 2004;  (ii) fifty  percent (50%) of the remaining
past-due amounts by March 20, 2004; and (iii) the all remaining past-due amounts
to bring the notes  current by April 20, 2004. In the event the Company does not
pay the amounts in a timely  manner,  all amounts  still owing under these notes
will be  considered  in default  and the  following  shall  apply:  (i) all such
remaining  amounts will be added to the secured loan amounts and will be subject
to the security interest and pledge agreements under the $84,000 promissory note
issued by the Company's subsidiary, EnFacet, to Mr. Farias on June 1, 2001; (ii)
the $14,640  monthly  payments to be made under the $84,000 note will be applied
to the $280,000 and $181,583 notes until these notes are paid in full; and (iii)
with respect to cash proceeds Now Solutions  receives due to a capital  infusion
or upfront  licensing  fees from a reseller  that is outside its normal scope of
business  (i.e.,  not part of software sales in the regular course of business),
Now  Solutions  is  required  to pay 50% of such  proceeds  remaining  after the
$500,000 note payable issued by Now Solutions to Mr. Farias on February 13, 2004
has been paid in full toward the $280,000  and $181,583  notes if the Company is
not current in its  payments.  Robert Farias is a director of Now  Solutions,  a
100% owned subsidiary of the Company.  The note is secured by 10,450,000  shares
of the Company's common stock that are owned by Mountain  Reservoir to cover any
shortfall. Mountain Reservoir is a corporation controlled by the


                                      F-19
<PAGE>

Note 5.  Related Party Transactions (Continued).

W5 Family Trust. Mr. Wade, the President and CEO of the Company,  is the trustee
of the W5 Family Trust. The note is in default.

In February  2004,  the Company  purchased a 21%  ownership  interest in MedData
Solutions,  Inc. from Robert Farias.  In exchange,  the Company issued 9,000,000
unregistered  shares of the common  stock of the Company (at a fair market value
of $135,000),  which are subject to "piggy-back"  registration rights. Since the
Company could not ascertain  the fair market value of MedData  Solutions,  Inc.,
the  investment  was  written  off in 2004.  Robert  Farias is a director of Now
Solutions, a 100% owned subsidiary of the Company.

In  August  2004,  the  Company  licensed  the use of the  Forums  and  calendar
applications of the Company's  SiteFlash  technology to Basix1,  Inc. ("Basix1")
for use in Basix1's Enterprise Knowledge Gateway (EKG) software. Pursuant to the
terms of the  license,  Basix1  shall pay the Company  10% of all  license  fees
generated from the exploitation Basix1's EKG software.  Also in August 2004, the
Company  and  its   subsidiaries   have  entered  into  various   marketing  and
co-marketing  agreements  with Basix1.  Mr. Kensicki is a Director of GIS and of
Now Solutions, Inc. and the President of Basix1, Inc.

In  January  2005,  the  Company  entered  into a  marketing  agreement  with CW
International, LLC. Mr. Weber is a Director and President of Government Internet
Systems, Inc. and a member of CW International, LLC.

Note 6.  Other Intangible Assets

Other intangible assets are as follows:

                                                    2004                2003
                                                 -----------        -----------

Purchased software source code                   $ 4,753,972        $ 4,753,972
Other amortizable intangible assets                  305,337            305,337
Accumulated amortization                          (4,115,011)        (3,007,974)
                                                 -----------        -----------

Net other intangible assets                      $   944,298        $ 2,051,355
                                                 ===========        ===========

At December 31, 2003, due to the deteriorated operating and financial situations
in Now Solutions the Company determined that the remaining  outstanding balances
of goodwill in Now Solution ($1,610,524) and Vertical ($1,263,473) were impaired
in accordance  with SFAS No 144,  "Accounting  for the Impairment or Disposal of
Long-Lived  Assets."  In 2004,  goodwill  associated  with the  purchase  of the
minority interests in Now Solutions of $1,760,000 was considered fully impaired.

In accordance with SFAS No 142, the Company  amortized  intangible  assets other
than goodwill on a straight-line basis over their estimated useful lives of five
years.   For  the  years  ended  December  31,  2004  and  2003,   respectively,
amortization expense consists of the following:

                                                       2004              2003
                                                    ----------        ----------

Software sources code                               $1,012,274        $1,043,607
Other purchased intangible assets                       94,763            33,724
                                                    ----------        ----------

Total                                               $1,107,037        $1,077,331
                                                    ==========        ==========

The estimated  amortization  expense for each of the  succeeding two years is as
follows:

Years ending December 31

      2005                                                              $790,582
      2006                                                               153,716
                                                                        --------

Total                                                                   $944,298
                                                                        ========


                                      F-20
<PAGE>

Note 7.  Property and Equipment

Property and equipment consist of the following:

                                                     2004                2003
                                                  ---------           ---------

Equipment                                         $ 749,173           $ 724,408
Leasehold improvements                               87,712              73,880
Furniture and fixtures                               40,803              33,287
                                                  ---------           ---------

Total                                               877,688             831,575

Accumulated depreciation                           (794,864)           (634,073)
                                                  ---------           ---------
                                                  $  82,824           $ 197,502
                                                  =========           =========

Depreciation expense for the years ended December 31, 2004 and 2003 was $160,811
and $211,981, respectively.

Note 8. Accounts Payable and Accrued Expenses

Accounts payable and accrued liabilities consist of the following:

                                                       2004              2003
                                                    ----------        ----------

Accounts payable                                    $2,304,960        $1,498,766
Accrued payroll                                      1,536,840         1,353,457
Accrued payroll tax and penalties                      698,172           503,923
Accrued liabilities                                  1,538,338         1,637,291
                                                    ----------        ----------

                                                    $6,078,310        $4,993,437
                                                    ==========        ==========

Note 9.  Other Receivable

Other  receivable  of  $75,085  and  $75,085  at  December  31,  2004  and  2003
represented the amounts due from Ross Systems,  Inc.  ("Ross") for Now Solutions
customer  prepayments on maintenance  contracts for the period subsequent to the
acquisition.  Now  Solutions  and Ross  reached a mutual  agreement  to offset a
$250,000  note  payable  due to Ross in 2002  against  the other  receivable  of
$419,489 due from Ross at the end of 2001. Now Solutions withheld its payment to
Ross on the remaining  $750,000 that was due in February 2003 and gave notice to
Ross of Now  Solutions'  claim of  offset  against  unpaid  maintenance  fees in
February 2003. The parties are currently  involved in litigation  concerning the
withholding of the $750,000 by Now Solutions and Now Solutions'  claim of offset
against unpaid  maintenance fees, plus additional damages in connection with Now
Solutions' claims of Ross' breach of the asset purchase  agreement.  For further
information  concerning details of the legal proceedings concerning the Company,
Now Solutions, and Ross, please see Note 15.


                                      F-21
<PAGE>

Note 10.  Notes Payable and Convertible Debts

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
The $5.5 million note payable, issued by Now Solutions to Coast and purchased by
WAMCO 32,  Ltd.,  was  amended  in June 2004.  Pursuant  to the  amendment,  the
interest was changed to 9% per annum and the  $1,304,766  outstanding  principal
balance  shall be payable as follows:  (a)  $91,667  principal  per month,  plus
interest  commencing on June 30, 2004 and  continuing on each  succeeding  month
through  September  30, 2004;  (b) $7,500  principal per month,  plus  interest,
commencing on October 31, 2004 and continuing on each  succeeding  month through
January 31, 2005; (c) providing that Now Solutions has achieved revenues of $7.5
million  and  EBITDA   (Earnings   Before   Interest,   Taxes,   Depreciation  &
Amortization)  of not less than  $2,200,000  for the fiscal  year  2004,  $7,500
principal  per  month,  plus  interest,  commencing  on  February  28,  2005 and
continuing on the last day of each succeeding month until June 30, 2005; and (d)
$91,667  principal  per month plus  interest,  commencing  on July 31,  2005 and
continuing  on each  succeeding  month until the note is paid.  In the event Now
Solutions does not qualify for reduced payments, the note will be payable in the
amount of $91,667 principal per month, plus interest, commencing on February 28,
2005 and continuing on the last day of each  succeeding  month until the note is
paid.  Now Solutions has made all interest  payments as of March 29, 2005. As of
March 29, 2005, Now Solutions  owed  $1,140,483 of which $408,217 is delinquent.
The note is in default.  The Company is currently in  discussions  with WAMCO 32
for a  forbearance  or  modification  agreement.  There is no guarantee  that an
agreement will be reached with WAMCO 32.                                                      $1,190,601      $ 1,829,183

Note payable to Ross issued by Now  Solutions in the amount of  $1,000,000.  The
note is unsecured and non-interest  bearing. The note was recorded at a discount
(which will be  amortized  over the life of the note),  payments of $250,000 and
$750,000 to be due in February 2002 and 2003, respectively.  If a payment is not
received  within  three  days  from the due date,  the note  will  begin to bear
interest at 10% per annum. In 2002 Now Solutions offset $250,000 payment through
its receivable  from Ross (See Notes 3 and 9) in terms of the agreement  between
Now Solutions and Ross. See also Note 15, litigation, for information concerning
the legal proceedings between the Company, Now Solutions and Ross.                               750,000          750,000

Note  payable in the amount of $27,558 to a law firm, a related  party,  bearing
interest at 6% per annum, unsecured, principal and interest due at January 2002.
The note is in  default.  In January  2005,  Parker,  Mills,  and Patel  filed a
lawsuit in Los  Angeles  Superior  Court to collect the  outstanding  balance of
$23,974  due under the  promissory  note  issued to them by the  Company and for
failure to pay fees for professional  services in the amount of $89,930 rendered
to the Company, plus interest. In March 2005, the Company filed a demurrer.                       23,974           23,974

Note payable in the amount of $31,859 to a third party lender,  bearing interest
at an amount to be negotiated, principal and interest due on demand.                              31,859           31,859

Note payable in the amount of $27,000 to a third party, payable upon demand.                      27,000           27,000

Note  payable  to a third  party  lender  in the  amount of a  $239,004  bearing
interest at 13% per annum and unsecured, with a $65,000 payment made in December
2002,  commencing with monthly  payment of $7,500  beginning in March 2003. This
note was issued in 2002 to replace the note of $211,137 issued in August 2001 to
a third party lender, bearing interest at 12% per annum. In March 2003, the note
was amended that the Company agreed to pay the interest and expenses responsible
by the lender for a third party loan secured on the lender's  behalf  instead of
paying to the lender and the Company agreed to begin making  monthly  payment of
$7,500,  beginning on June 1, 2003.  Pursuant to the extension in December 2003,
the  Company  is  required  to make  monthly  installment  payments  of  $7,500,
beginning on February 1, 2004,  until the balance  under the note has been paid.
The note is in default subsequent to February 1, 2004.                                           167,141          167,141
</TABLE>


                                      F-22
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
Note  payable  in the  amount of $50,000  to a third  party  lender,  bearing no
interest.  In March 2003,  the parties  entered into an  amendment,  whereby the
parties  agreed to accrue  interest  beginning in October 2002 at 12% per annum.
The parties also agreed that the Company would make monthly  payments of accrued
interests  beginning  in April  2003 and  monthly  principal  payment  of $5,000
beginning  in July  2003.  In  connection  with the  note,  the  Company  issued
three-year  warrants to purchase 1,200,000 shares of its common stock at a price
of $0.003 per share. The Company is in default subsequent to April 1, 2003.                       47,180           47,180

Note payable in the amount of $50,000 to a third party lender,  bearing interest
at the rate of 12% per  annum.  In  March  2003,  the  parties  entered  into an
amendment,  whereby the parties agreed to pay accrued  interest in the amount of
$4,200 for this note and to extend the maturity date to June 1, 2004.  Beginning
in July 2003,  the above  interest  payments  shall be  replaced  with a monthly
installment  payment of $5,000,  with the initial  payments applied first to the
$25,000 note (issued below) and then to the $50,000 note. In connection with the
amendment,  the Company issued three-year  warrants to purchase 1,500,000 shares
of its common  stock at a price of $0.004 per share.  The  Company is in default
subsequent to April 1, 2003.                                                                      50,000           50,000

Note payable in the amount of $25,000 to a third party lender,  bearing interest
at 12% per annum,  secured by 10,000,000  shares of the  Company's  common stock
that are owned by Mountain Reservoir Corporation, controlled by W5 Family Trust,
of which Richard Wade (CEO of the Company) is trustee,  due in December 2002. In
March 2003,  the parties  entered into an amendment.  Pursuant to the amendment,
the  Company  agreed to pay  accrued  interest  in the amount of $1,170 for this
$25,000 note and amend the due date to July 1, 2005. Beginning in July 2003, the
above interest  payments shall be replaced with monthly  payments of $5,000 with
the initial  payments  applied first to the $25,000 note and then to the $50,000
(the above) note issued. The Company is in default subsequent to April 1, 2003.                   12,583           12,583

Note  payable in the amount of  $280,000,  bearing  interest at 4% per annum and
issued to Robert Farias on October 31, 2001, was amended by the parties in March
2003.  Pursuant  to the  amendment,  the payment of  principal  would be paid in
monthly  installments  in the amount of $5,000,  which were to be replaced  with
monthly payments of $10,000 beginning in January 2004. All interest would be due
on the day the  principal is paid in full. In exchange for the  extensions,  the
interest  rate will accrue at the rate of 12% from the date the note was issued.
In February 2004, the Company and Mr. Farias amended the $280,000 note issued to
Mr.  Farias on October 31, 2001 and the  $181,583  note issued to Mr.  Farias on
October 17, 2002. Any default on these notes was waived,  and the Company agreed
to make the  following  payments on these  notes:  (i)  $20,000,  which was paid
toward the $181,583  note on February 20, 2004;  (ii) fifty percent (50%) of the
remaining  past-due  amounts  by March 20,  2004;  and  (iii) the all  remaining
past-due  amounts to bring the notes current by April 20, 2004. In the event the
Company  does not pay the amounts in a timely  manner,  then all  amounts  still
owing under these notes will be considered  in default and the  following  shall
apply: (i) all such remaining  amounts will be added to the secured loan amounts
and will be subject to the  security  interest and pledge  agreements  under the
$84,000  promissory  note issued by the Company's  subsidiary,  EnFacet,  to Mr.
Farias on June 1, 2001; (ii) the $14,640  monthly  payments to be made under the
$84,000  note will be applied to the  $280,000  and  $181,583  notes until these
notes are paid in full;  and (iii) with respect to cash  proceeds Now  Solutions
receives  due to a capital  infusion or upfront  licensing  fees from a reseller
that is outside its normal scope of business  (i.e.,  not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds  remaining  after the $500,000 note payable  issued by Now Solutions to
Mr.  Farias on February  13, 2004 has been paid in full toward the  $280,000 and
$181,583 notes if the Company is not current in its payments.  The $280,000 note
is secured by  SiteFlash  technology  owned by the Company.  Robert  Farias is a
director of Now Solutions,  a 100% owned subsidiary of the Company.  The note is
in default.                                                                                      237,626          237,626
</TABLE>


                                      F-23
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
Note payable in the amount of $181,583 issued to Robert Farias, bearing interest
at 12% per annum,  payable as  follows:  (i) an initial  installment  of $10,000
payable upon  execution;  (ii) monthly payment of $5,000  beginning  November 5,
2002 and (iii) monthly $10,000 payment  beginning May 15, 2003 until all amounts
under the note have been paid in full. The note is secured by 10,450,000  shares
of the  Company's  common stock that are owned by Mountain  Reservoir  Corp.  to
cover any shortfall.  Mountain Reservoir Corporation is a corporation controlled
by the W5 Family Trust.  Mr. Wade, the President and CEO of the Company,  is the
trustee of the W5 Family Trust.  This note was issued to replace two notes being
previously  issued;  each had  outstanding  balance of $100,000 at December  31,
2001. In February  2004,  the Company and Mr.  Farias  amended the $280,000 note
issued to Mr.  Farias on October  31, 2001 and the  $181,583  note issued to Mr.
Farias on October 17,  2002.  Any  default on these  notes was  waived,  and the
Company agreed to make the following payments on these notes: (i) $20,000, which
was paid toward the $181,583 note on February 20, 2004; (ii) fifty percent (50%)
of the remaining past-due amounts by March 20, 2004; and (iii) the all remaining
past-due  amounts to bring the notes current by April 20, 2004. In the event the
Company  does not pay the amounts in a timely  manner,  then all  amounts  still
owing under these notes will be considered  in default and the  following  shall
apply: (i) all such remaining  amounts will be added to the secured loan amounts
and will be subject to the  security  interest and pledge  agreements  under the
$84,000  promissory  note issued by the Company's  subsidiary,  EnFacet,  to Mr.
Farias on June 1, 2001; (ii) the $14,640  monthly  payments to be made under the
$84,000  note will be applied to the  $280,000  and  $181,583  notes until these
notes are paid in full;  and (iii) with respect to cash  proceeds Now  Solutions
receives  due to a capital  infusion or upfront  licensing  fees from a reseller
that is outside its normal scope of business  (i.e.,  not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds  remaining  after the $500,000 note payable  issued by Now Solutions to
Mr.  Farias on February  13, 2004 has been paid in full toward the  $280,000 and
$181,583 notes if the Company is not current in its payments.  The $280,000 note
is secured by  SiteFlash  technology  owned by the Company.  Robert  Farias is a
director of Now Solutions,  a 100% owned subsidiary of the Company.  The note is
in default.                                                                                      108,034          133,034

Note  payable in the amount of  $100,000 to Victor  Weber,  13% per annum and is
payable in monthly accrued  interest  payments  beginning  August 1, 2003, and a
final payment of all principal and remaining  interest by March 31, 2004.  Weber
is a Director,  President  and  Treasurer  of the  Company's  newly  established
subsidiary: Government Internet Systems, Inc., a Nevada corporation. The Company
pledged its interest in a $215,000  note issued by Now  Solutions to the Company
to secure  this  note and the  $40,000  and  $50,000  notes  issued to Weber and
$25,000  in  expenses  paid by Weber on the  behalf  of the  Company  that  were
included  in Trade  Accounts  Payable,  who had the  option to have the  Company
assign the $215,000  note to Weber  provided  that Weber cancels all three notes
and the  outstanding  $25,000 in accounts  payable.  Weber  elected to make this
assignment in January 2004. At that time, all other notes and debt owed to Weber
were cancelled.                                                                                       --          100,000
</TABLE>


                                      F-24
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
Note payable in the amount of $40,000 to Victor Weber,  bearing interest 13% per
annum and is payable  in monthly  installment  payments  beginning  on August 1,
2003, consisting of an $8,000 principal payment plus the interest accrued in the
previous  month.  Weber is a Director,  President and Treasurer of the Company's
newly  established  subsidiary:  Government  Internet  Systems,  Inc.,  a Nevada
corporation.  The Company  pledged its interest in a $215,000 note issued by Now
Solutions to the Company to secure this note and the $100,000 and $50,000  notes
issued to Weber  and  $25,000  in  expenses  paid by Weber on the  behalf of the
Company that were included in Trade Accounts Payable, who had the option to have
the Company  assign the $215,000  note to Weber  provided that Weber cancels all
three notes and the outstanding  $25,000 in accounts  payable.  Weber elected to
make this  assignment in January  2004.  At that time,  all other notes and debt
owed to Weber were cancelled.                                                                         --           40,000

Note payable in the amount of $50,000 to Victor Weber,  bearing interest 13% per
annum and is payable and due March 31, 2004. Weber is a Director,  President and
Treasurer of the Company's newly  established  subsidiary:  Government  Internet
Systems, Inc., a Nevada corporation. In September 2003, Weber agreed to loan the
Company  $50,000.  The Company pledged its interest in a $215,000 note issued by
Now  Solutions  to the Company to secure this note and the  $100,000 and $40,000
notes issued to Weber and $25,000 in expenses paid by Weber on the behalf of the
Company that were included in Trade Accounts Payable, who had the option to have
the Company  assign the $215,000  note to Weber  provided that Weber cancels all
three notes and the outstanding  $25,000 in accounts  payable.  Weber elected to
make this  assignment in January  2004.  At that time,  all other notes and debt
owed to Weber were cancelled.                                                                         --           50,000

The Company  pledged its interest in a $215,000  note issued by Now Solutions to
the Company to secure this note and the  $100,000,  $40,000,  and $50,000  notes
issued to Weber and  $25,000 in expense  paid by Weber on behalf of the  Company
that were  include  in Trade  Account  Payable,  who had the  option to have the
Company  assign the $215,000 note to Weber provided that Weber cancels all three
notes and the  outstanding  $25,000 in accounts  payable.  Weber elected to make
this  assignment in January 2004. At that time, all other notes and debt owed to
Weber were cancelled.                                                                            215,000               --

Note  payable in the  amount of  $350,000  issued by  EnFacet  to a third  party
lender,  bearing  interest at 8% per annum,  unsecured,  and due on February 28,
2003.  EnFacet is in default  subsequent to December 31, 2002. In February 2004,
the parties  amended  the terms of the notes.  Pursuant  to the  amendment,  the
parties  waived  any  defaults  on the notes and  agreed  that the notes will be
payable as follows: Once Vertical's subsidiary,  Now Solutions, has paid off the
entire  balance due under the $500,000 Note issued by Now Solutions to Farias on
February  13,  2004,  84%  of any  remaining  amounts  from  the  final  $91,500
installment  payment on the  $500,000  note  issued by Now  Solutions  to Robert
Farias on February 13, 2004,  shall be applied to the $350,000 and $90,000 notes
on a pro-rata  basis.  Thereafter,  the Company  shall  continue to make monthly
principal  payments of $76,860  applied on a pro-rata  basis to the $350,000 and
$90,000  notes  until all  monies  due under  these  notes  have been  paid.  In
connection with the amendment,  Now Solutions entered into a security  agreement
with the lender to guarantee the note.  The security  interest of Now Solutions'
assets on the secured  promissory note will be junior to Now Solutions'  present
indebtedness  to WAMCO  32,  Ltd,  Arglen  Acquisitions,  and  Robert  Farias in
connection with the $500,000 note. This note is in default.                                      350,000          350,000

Note payable in the amount $25,000  promissory note, bearing interest at 10% per
annum,  was issued in April 2003 to a consultant  of the  Company's  subsidiary,
EnFacet, Inc., for past services rendered. The note is payable in monthly $1,000
installments beginning in May 2003 to be replaced by $2,000 monthly installments
beginning in October 2003.  The note is currently in default.                                     25,000           25,000

Note payable in the amount of $17,500,  bearing no interest to a party lender in
consideration  of a loan in the  amount of  $15,000,  was due in June  2003.  In
connection with the note, the Company paid a commitment fee of $2,500 and issued
five-year  warrants to purchase 250,000 shares of common stock of the Company at
an exercise  price of $0.0075 per share to the lender.  In connection  with this
and another  loan for $15,000 (see  below),  the Company  also issued  five-year
warrants  to  purchase  250,000  shares of  common  stock of the  Company  at an
exercise  price of $0.0075  per share to a third party  consultant.  In February
2004,  the parties  amended the terms of the loan. The lender waived any default
on the note and in exchange the Company  issued 500,000  unregistered  shares of
the  Company  common  stock to each  lender  (at a total  fair  market  value of
$7,000),  and to pay  $8,750  by March  31,  2004 and  $8,750  plus all  accrued
interest by April 30, 2004 under the note. This note is currently in default.                     11,000           17,500

Note payable in the amount of $17,500,  bearing no interest to a party lender in
consideration  of a loan in the  amount of  $15,000,  was due in June  2003.  In
connection with the note, the Company paid a commitment fee of $2,500 and issued
five-year  warrants to purchase 250,000 shares of common stock of the Company at
an exercise  price of $0.0075 per share to the lender.  In connection  with this
and another  loan for $15,000 (see  above),  the Company  also issued  five-year
warrants  to  purchase  250,000  shares of  common  stock of the  Company  at an
exercise  price of $0.0075  per share to a third party  consultant.  In February
2004,  the parties  amended the terms of the loan. The lender waived any default
on the note and in exchange the Company  issued 500,000  unregistered  shares of
the  Company  common  stock to each  lender  (at a total  fair  market  value of
$7,000),  and to pay  $8,750  by March  31,  2004 and  $8,750  plus all  accrued
interest by April 30, 2004 under the note. This note is currently in default.                     11,000           17,500

Note payable issued in May 2003 in the amount of $7,500 bearing  interest at 12%
per annum,  due in June 2003, to Stephen  Rossetti in connection  with a loan in
the same amount.  Mr. Rossetti is the CEO and a Director of Government  Internet
Systems,  Inc., a subsidiary of the Company.  This note was cancelled in October
2004 pursuant to an agreement. Please see Related Party Transactions Note 5.                          --            7,500

Note payable in the amount of $10,000 issued by EnFacet to a third party lender,
bearing interest at 8% per annum, unsecured, with principal and interest due on
June 1, 2002.  EnFacet is in default subsequent to December 31, 2002.                             10,000           10,000
</TABLE>


                                      F-25
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
Note payable in the amount of $84,000 issued by EnFacet to Robert Farias,  dated
June 1, 2001,  bearing interest at 8% per annum,  unsecured,  with principal and
interest due on June 1, 2002.  EnFacet was in default at December  31, 2002.  In
March 2003, both parties  entered into an amendment.  Pursuant to the amendment,
the due date was  extended  to March 17,  2004 in exchange  for  increasing  the
interest rate from 8% to 12% at which interest will be accrued from the date the
note was issued.  In addition,  EnFacet  shall make  monthly  payments of $1,000
commencing in April 2003. In February 2004, the Company and Robert Farias waived
any  defaults  on the note and agreed  that the note will be payable as follows:
once Vertical's subsidiary,  Now Solutions,  has paid off the entire balance due
under the $500,000  note issued by Now Solutions to Farias on February 13, 2004,
sixteen  percent  (16%)  of  any  remaining   amounts  from  the  final  $91,500
installment  payment on the $500,000  note shall be applied to the $84,000 note.
Thereafter,  Vertical or, at Vertical's option, Now Solutions, shall continue to
make  monthly  principal  payments of $14,640  beginning on the first day of the
following  month until all monies due under the $84,000  note has been paid.  In
connection with the amendment,  Now Solutions entered into a security  agreement
with the lender to guarantee the note.  The security  interest of Now Solutions'
assets on the secured  promissory note will be junior to Now Solutions'  present
indebtedness  to WAMCO  32,  Ltd,  Arglen  Acquisitions,  and  Robert  Farias in
connection with the $500,000 note. Robert Farias is a director of Now Solutions,
a 100% owned subsidiary of the Company. The note is in default.                                   84,000           84,000

Note payable in the amount of $10,365 dated January 17, 2003 bearing an interest
of 10% per annum, with principal and interest due on December 5, 2003. $3,000 in
payments was made on this note in 2003.  This note is in default.                                  7,365            7,365

Note  payable in the amount of $23,030  dated March 21, 2003 bearing an interest
of 12% per annum,  with principal and interest due on April 21, 2004.  This note
is in default.                                                                                    23,030           23,030
</TABLE>


                                      F-26
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
Note  payable  in the amount of $90,000  dated  June 26,  2003 to a third  party
bearing an interest of 10% annum,  with  principal and interest due on March 28,
2004.  This note is in default.  In February 2004, the parties amended the terms
of the notes. Pursuant to the amendment,  the parties waived any defaults on the
notes and agreed  that the notes will be payable  as  follows:  Once  Vertical's
subsidiary,  Now  Solutions,  has paid off the  entire  balance  due  under  the
$500,000 Note issued by Now Solutions to Farias on February 13, 2004, 84% of any
remaining  amounts from the final  $91,500  installment  payment on the $500,000
note issued by Now  Solutions to Robert  Farias on February  13, 2004,  shall be
applied to the $350,000 and $90,000 notes on a pro-rata basis.  Thereafter,  the
Company shall continue to make monthly principal  payments of $76,860 applied on
a pro-rata  basis to the $350,000  and $90,000  notes until all monies due under
these notes have been paid.  In  connection  with the  amendment,  Now Solutions
entered into a security  agreement  with the lender to guarantee  the note.  The
security interest of Now Solutions'  assets on the secured  promissory note will
be junior to Now  Solutions'  present  indebtedness  to WAMCO  32,  Ltd,  Arglen
Acquisitions,  and Robert Farias in connection with the $500,000 note. This note
is in default.                                                                                    90,000           90,000

Note payable in the amount of $60,000  issued by  Government  Internet  Systems,
Inc.  to a third party  dated  November 5, 2003,  bearing an interest of 10% per
annum,  with  principal and interest due on November 5, 2004. The Company agreed
to issue a 2% ownership interest of its subsidiary, Government Internet Systems,
Inc. to the third party in connection  with this note.  In addition,  the lender
will be  entitled to receive a 2% royalty on net sales of products by GIS in the
United  States up to $300,000  and the  Company  issued  1,000,000  unregistered
shares of Company's common stock (with a fair market value of $5,000).  The Note
is secured by 4,000,000 shares of common stock of the Company that were owned by
Mountain  Reservoir  Corporation.  Mountain  Reservoir  Corp.  is a  corporation
controlled  by the W5 Family  Trust.  Mr.  Wade,  the  President  and CEO of the
Company,  is the trustee of the W5 Family Trust. The Company  currently owns 85%
of Government  Internet  Systems,  Inc., and will issue a 2% ownership  interest
from its share of stock in GIS. This note is in default.                                          60,006           60,006

Note Payable in the amount of $40,000  issued by  Government  Internet  Systems,
Inc. to a third party dated  November 19,  2003,  bearing an interest of 10% per
annum,  with principal and interest due on November 19, 2004. The Company agreed
to  issue a 1.5%  ownership  interest  of its  subsidiary,  Government  Internet
Systems, Inc. to the third party in connection with this note. In addition,  the
lender will be  entitled  to receive a 1.5%  royalty on net sales of products by
GIS in the  United  States  up to  $200,000  and the  Company  issued  1,000,000
unregistered  shares of  Company's  common  stock (with a fair  market  value of
$4,000).  The Note is secured by 3,000,000 shares of common stock of the Company
that were owned by Mountain Reservoir Corporation. Mountain Reservoir Corp. is a
corporation  controlled by the W5 Family Trust.  Mr. Wade, the President and CEO
of the Company,  is the trustee of the W5 Family  Trust.  The Company  currently
owns 85% of Government  Internet Systems,  Inc., and will issue a 1.5% ownership
interest  from share of stock in GIS.  $5,000 of this note was not funded  until
January 2004. This note is in default.                                                            40,000           35,000
</TABLE>


                                      F-27
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
Note Payable in the amount of $500,000  issued by Now  Solutions,  the Company's
wholly-owned subsidiary to Robert Farias. This note is secured by Now Solutions'
assets.  In  addition  Farias is  entitled  to a 5%  royalty on any sales by Now
Solution of over  $8,000,000 up to $500,000.  The note bears interest at 10% per
annum and Now  Solutions is required to make monthly  interest  payments for all
interest  accrued in the previous month on the first day of each month beginning
April 1, 2004 and  beginning on October 1, 2004 and  continuing on the first day
of every month thereafter,  monthly principal  payments of $91,500 plus interest
until the note has been paid in full. In the event Now  Solutions  receives cash
proceeds  due to a capital  infusion or upfront  licensing  fees from a reseller
that is outside its normal scope of business  (i.e.,  not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds  remaining  toward payment of the $500,000 note. In connection with the
loan, the Company issued (i) 5 year warrants to purchase 5,000,000  unregistered
shares of common  stock at $0.01 per share at a fair market value at the date of
issuance of $74,538 (valued using the  Black-Scholes  valuation  model);  (ii) 5
year warrants to purchase 5,000,000  unregistered  shares of common stock of the
Company at $0.02 per share at a fair  market  value at the date of  issuance  of
$74,344 (valued using the Black-Scholes  valuation model); (iii) 5 year warrants
to  purchase  5,000,000  unregistered  shares of common  stock of the Company at
$0.03  per  share at a fair  market  value at the date of  issuance  of  $74,200
(valued using the Black-Scholes  valuation model);  (iv) 5,000,000  unregistered
shares of common stock of the Company (at a fair market  value of $75,000);  and
(v) an additional  5,000,000  unregistered shares of common stock of the Company
in the event that  $250,000  was not paid toward the loan on or before March 15,
2004,  which  were  issued  (at a fair  market  value of  $125,000).  All of the
foregoing warrants and stock are subject to "piggy-back" registration rights. In
connection with the loan, Now Solutions  entered into a security  agreement with
the lender to guarantee the note. The security interest of Now Solutions' assets
on the secured promissory note is junior to Now Solutions' present  indebtedness
to WAMCO 32, Ltd and Arglen  Acquisitions.  The note is currently in default. As
of March 29, 2005, Now Solutions had made principal  payments  totaling $183,000
to Robert  Farias.  In January  2005,  WAMCO 32, Ltd.  notified Mr.  Farias that
pursuant to the subordination  agreement executed between WAMCO 32, Ltd. and Mr.
Farias,  Mr.  Farias  was no  longer  to  accept  payments  from or to take  any
collection  actions  against Now  Solutions  for the  repayment  of junior debt.
Robert  Farias is a director of Now  Solutions,  a 100% owned  subsidiary of the
Company.                                                                                         408,500               --

Note Payable in the amount of $600,000 issued to Arglen by the Company  pursuant
to the  Company's  acquisition  of Arglen's 35% interest in Now  Solutions.  The
Company's  purchase of  Arglen's  interest  resulted in the Company  recognizing
$1,680,000 of goodwill, which was written off in 2004. The note is a no-interest
bearing  secured  promissory  note  providing  for payments of $200,000 in April
2004, $100,000 in June 2004, and $300,000 in September 2004, which was issued at
closing. When the Company did not make the April 2004 payment, the Company began
accruing interest at the rate of 10% from the inception of the note. The note is
in default.  In August 2004,  Arglen obtained a default  judgment in Los Angeles
court for the  outstanding  principal,  plus attorney's fees and interest at the
rate of 10% per annum.  The Company has filed a motion in the Delaware  court to
stay the enforcement of the judgment pending  resolution of the Delaware action.
The security interest of Now Solutions' assets on the secured promissory note is
junior to Now Solutions' present indebtedness to WAMCO 32, Ltd. In addition,  at
closing,  the Company cancelled 80,763,943 warrants held by Arglen and issued to
Arglen 20,000,000  unregistered  shares of the common stock of the Company (at a
fair  market  value of  $280,000),  which is subject  to a "lock up"  provision.
Pursuant to the settlement  agreement,  the Company also  cancelled  warrants to
purchase 80,763,943 common shares of the Company that were originally granted to
Arglen in connection  with the Company's  acquisition  60% of equity interest in
Now Solutions.  In December  2004,  the Company  recorded the expense of issuing
5,000,000 unregistered shares to Arglen at a fair market value of $82,273, which
was based on an average share price during 11 days of August 2004.  These shares
were due pursuant to the settlement  agreement whereby the Company was obligated
to issue 5,000,000 unregistered shares of common stock of the Company to Arglen,
due to its failure to file a SB2 registration statement within 180 days from the
closing  date of the  settlement.  In  March  2005,  the  Company  issued  these
5,000,000 shares to Arglen.
                                                                                                 600,000               --
                                                                                              ----------        ---------

                                                                  Total notes payable          4,580,899        4,226,482
                                                                   Current maturities         (4,580,899)      (4,226,482)
                                                                                              ----------      -----------

                                                   Long-Term portion of notes payable         $       --      $       --
                                                                                              ==========      ===========
</TABLE>


                                      F-28
<PAGE>

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                           ------------------------------
                                                                                               2004             2003
                                                                                           -------------     ------------
<S>                                                                                           <C>             <C>
Convertible debentures dated March 29, 2002, bearing interest at 5%, convertible
into  shares of the  Company's  common  stock at either  120% of the closing bid
price on the date of  agreement  or 80% of the lowest  closing  bid price 5 days
prior to the  conversion.  The  debenture  is  convertible  at the option of the
holder at any time after  purchase.  Principal and interest were due at maturity
on March  28,  2004.  In April  2003,  $40,000  principal  were  converted  into
10,245,900  shares of the Company's  common stock. In December 2003,  $20,000 of
principal  of $100,000 in  debentures  and $1,726 in interest was redeemed for a
total of $25,726,  which includes a 20% premium or $4,000 on the  principal.  In
February  2004,  $10,000 of  principal  of  $100,000 in  debentures  and $925 in
interest was redeemed for a total of $10,925. In July 2004, $20,000 of remaining
principal and $2,277 in interest was converted into  1,076,170  shares of common
stock of the Company. As of March 29, 2005, the remaining $10,000
debenture principal is still outstanding.                                                         10,000           40,000

Convertible  debentures dated April 14, 2003,  bearing no interest,  convertible
into shares of common stock at 100% of the lowest closing bid price 3 days prior
to conversion.  The debenture may be redeemed for 100% of the any portion of the
principal that has not been converted by the holder as of the date of the notice
of  redemption.  Principal and interest are due at maturity on April 2006. As of
March
29, 2005, no debentures have been converted.                                                     190,000          190,000

Convertible  debentures dated April 14, 2003,  bearing interest at 5% per annum,
convertible  into shares of common  stock at either  $0.03 or 80 % of the lowest
closing bid price for the 5 trading days prior to the conversion.  Principal and
interest are due at maturity on April 2006.  As of March 29, 2005, no debentures
have been
converted.                                                                                       200,000          200,000

In December  2003,  the Company issued a debenture in the amount of $30,000 to a
third party. The Company received net proceeds of $26,000 for the debenture. The
debt accrues  interest at 5% per annum and is due December  2005. The holder may
convert the  debenture  into shares of common stock at 100% of the closing price
for the preceding  trading day after the Company  receives notice of conversion.
As of March 29, 2005, no conversions have taken place.                                            30,000           30,000
                                                                                              ----------        ---------

                                                          Total convertible debentures           430,000          460,000
                                                                    Current maturities            40,000           40,000
                                                                                              ----------        ---------
                                           Long-term portion of convertible debentures        $  390,000        $ 420,000
                                                                                              ==========        =========
</TABLE>

Note 11.  Income Taxes

From  inception to September  30, 2001,  Now  Solutions was treated as a limited
liability  company and was not subject to federal or state income taxes. The tax
attributes  for federal and state income tax purposes are passed  through to the
members of Now  Solutions.  Consequently,  Now Solutions is subject to a minimum
franchise  tax and fees,  which are not  material.  As of October  1, 2001,  Now
Solutions  made an election  to be treated as a  corporation  for tax  purposes.
Accordingly,  for the year ended December 31, 2002,  Now Solutions  accounts for
income  taxes in  accordance  with  Statement of  Financial  Standards  No. 109,
"Accounting  for Income Taxes" ("SFAS No. 109"), as if it files as a corporation
for tax purposes. SFAS No. 109 requires a company to use the asset and liability
method of  accounting  for income taxes.  Under the asset and liability  method,
deferred  income taxes are  recognized  for the tax  consequences  of "temporary
differences" by applying  enacted  statutory tax rate applicable to future years
to  differences  between the financial  statement  carrying  amounts and the tax
basis of existing assets and liabilities and result  primarily form  differences
in methods used to amortize intangible assets. A valuation allowance is provided
when management cannot determine whether it is more likely


                                      F-29
<PAGE>

Note 11.  Income Taxes (Continued)

than not that the deferred  tax asset will be realized.  Under SFAS No. 109, the
effect on  deferred  income  taxes of the change in tax rates is  recognized  in
income in the period that includes the enactment date. After additional research
in 2003, Now Solutions  reversed its election to be treated as a corporation for
tax  purposes  and filed its 2001,  2002 and 2003 tax returns as a  pass-through
entity.

As a result of this  election  reversal,  Now  Solutions  will not be subject to
federal  income  taxes and its  taxable  income  (loss)  will be included in the
federal income tax returns of its members.  Accordingly, the deferred tax assets
and income taxes payable established at December 31, 2002 were reversed in 2003.

The following table presents the income (loss) before income taxes for the years
ended December 31, 2004 and 2003.

                                                      Years ended December 31,
                                                    ----------------------------
                                                        2004            2003
                                                    -----------     -----------

Loss before income taxes in Vertical                $(4,392,543)    $(4,554,281)
Loss before income taxes in Now Solutions              (309,667)     (2,289,409)
                                                    -----------     -----------

                                                    $(4,702,210)    $(6,843,690)
                                                    ===========     ===========

The  following  table  presents  the income tax  provision  for the years  ended
December 31, 2004 and 2003.

                                                       Years ended December 31,
                                                      -------------------------
                                                       2004              2003
                                                      --------         --------

Current

Federal:
   Vertical                                           $     --         $     --
   Now Solutions                                            --               --
State:
   Vertical                                                 --               --
   Now Solutions                                            --           18,000
                                                      --------         --------

                                                            --           18,000
                                                      --------         --------
Deferred expense (benefit)
   Vertical                                                 --               --

   Now Solutions                                            --          (44,000)
                                                      --------         --------

                                                            --          (44,000)
                                                      --------         --------

Total income tax provision                            $     --         $(26,000)
                                                      ========         ========

The following table presents the rate reconciliation  between the statutory rate
and the effective rate.

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                ---------------------------------------
                                                                                      2004                   2003
                                                                                -----------------       ---------------
<S>                                                                                        <C>                   <C>
Expected statutory rate                                                                    (34.0)%               (34.0)%
Change in valuation allowance                                                               40.1                  21.4
Income tax from a subsidiary which filed a separate return                                   0.0                   0.3
Change in valuation allowance in a subsidiary which filed a separate return                  0.0                  13.3
State                                                                                       (6.0)
                                                                                           -----                 -----
Other                                                                                       (0.1)                 (1.4)
                                                                                           -----                 -----
                                                                                               0 %                (0.4)%
                                                                                           =====                 =====
</TABLE>


                                      F-30
<PAGE>

Note 11.  Income Taxes (Continued)

Temporary  difference  between the financial  statement  carrying amount and tax
bases of assets and liabilities  that give rise to deferred tax assets relate to
the following:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                              ----------------------------
                                                                 2004               2003
                                                              ----------       -----------
<S>                                                           <C>              <C>
Net operating loss carryforward                               $6,953,000       $ 5,281,000
                                                              ----------       -----------
Accrued vacation and allowance for doubtful accounts              48,000             7,000
Deferred revenue                                                 752,000           729,000
Deferred salary                                                  612,000           515,000
Other                                                            375,000           321,000
                                                              ----------       -----------

                                                               8,740,000         6,853,000

Valuation allowance                                           (8,740,000)       (6,853,000)
                                                              ----------       -----------

                                                              $       --       $        --
                                                              ==========       ===========
</TABLE>

At December 31, 2004, the Company  (Vertical only up through  December 31, 2003)
had available net operating loss  carryforwards of  approximately  $17.7 million
for federal tax purposes and $11.6 million for state tax purposes,  which expire
in varying  amounts through 2024 and 2009,  respectively.  At December 31, 2003,
the Company  (Vertical only) had available net operating loss  carryforwards  of
approximately  $13.2 million for federal tax purposes and $7.2 million for state
tax  purposes,   which  expire  in  varying   amounts  through  2023  and  2008,
respectively.  However,  the utilization of net operating loss carryforwards may
be subject to certain  limitations  as prescribed by Section 382 of the Internal
Revenue Code.

Without considering Now Solutions' operation,  the Company's operations generate
permanent  and  temporary  differences  arising  from  non  deductible  expense,
depreciation, amortization, accrued liabilities and reserves for certain assets.
The Company  has  deferred  tax assets of  approximately  $8.8  million and $6.9
million at December 31, 2004 and 2003, respectively, relating principally to tax
effects of net operating loss carryforwards.  In assessing the recoverability of
deferred  tax assets,  management  considers  whether it is more likely than not
that the assets will be  realized.  The  ultimate  realization  of deferred  tax
assets is dependent  upon the  generation  of future  taxable  income during the
periods in which those temporary differences become deductible.

Management  considers  the  projected  future  taxable  income and tax  planning
strategies in making this assessment. Based upon the level of historical taxable
loss and  projections  for future  taxable  income over the periods in which the
deferred  tax items are  recognizable  for tax  reporting  purposes,  it is more
likely  than  not that  the  Company  will not  realize  the  benefits  of these
differences  at December 31, 2004 and 2003. As such,  management  has recorded a
valuation allowance for deferred tax assets at December 31, 2004 and 2003.


                                      F-31
<PAGE>

Note 12.  Stockholders' Equity

2004

Common Stock

In January 2004,  the Company  issued  1,500,000  unregistered  shares of common
stock of the  Company to two  consultants  of the  Company  for  services  (at a
fair-market value of $4,500).

In January 2004,  the Company  issued  1,000,000  unregistered  shares of common
stock of the Company (at a fair market value of $3,000) in  connection  with the
purchase of a 5% membership interest in Now Solutions.

In January 2004, the Company  issued  10,000,000  unregistered  shares of common
stock of the  Company  (at a fair market  value of  $30,000)  with  "piggy-back"
registration rights and subject to a "lock-up" provision to Wolman,  Babbit, and
King in connection with legal services provided to the Company.

In January 2004, the Company  retained two individuals for consulting  services.
In exchange for these services, the Company agreed to issue a total of 4,000,000
unregistered  shares of common  stock of the Company (at a fair market  value of
$12,000) with "piggy-back"  registration rights stock and subject to a "lock up"
provision.

In January 2004, the Company agreed to issue  1,000,000  unregistered  shares of
the Company's common stock (at a fair market value of $3,000), with "piggy back"
registration  rights,  in connection with a $10,000 loan made by Jim Salz to the
Company in June 2003. Mr. Salz is the Company's corporate counsel.

In February  2004, the Company issued  5,000,000  unregistered  shares of common
stock of the  Company (at a fair  market  value of $75,000) to Robert  Farias in
connection  with a $500,000 loan made by Robert Farias to Now Solutions.  Robert
Farias is a director of Now Solutions.

In March 2004, the Company issued an additional 5,000,000 unregistered shares of
common  stock of the  Company  (at a fair market  value of  $125,000)  to Robert
Farias  pursuant to the terms of the $500,000 loan.  Robert Farias is a director
of Now Solutions.

In February 2004, the Company the Company issued 9,000,000  unregistered  shares
of the common stock of the Company (at a fair market value of $135,000)  for the
purchase of a 21%  ownership  interest in MedData  Solutions,  Inc.  from Robert
Farias.  Robert Farias is a director of Now  Solutions.  Since the Company could
not ascertain the fair market value of MedData  Solutions,  Inc., the investment
was written off in 2004.

In  February  2004,  the  Company  issued  to  Arglen  Acquisitions   ("Arglen")
20,000,000  unregistered  shares of the common  stock of the  Company (at a fair
market value of  $280,000),  which are subject to a "lock-up"  provision.  These
shares were issued in connection  with the closing of the  Company's  settlement
with Arglen.

In February 2004, the Company issued a total of 1,000,000 unregistered shares of
the  Company  common  stock (at a total fair  market  value of  $14,000)  to two
lenders in  connection  with the amendment of two  promissory  notes (each for a
principal amount of $17,500).

In September  2004,  the Company issued  250,000  unregistered  shares of common
stock of the  Company  (at a fair  market  value of $5,190) to a third  party in
connection  with a June 2004  consulting  agreement  between Now Solutions,  the
Company and the third party.

In June 2004, the Company issued 1,170,424 shares of common stock of the Company
to a third party consultant at an exercise price of $0.037 per share pursuant to
the warrant.  The  purchase of shares under the warrant was made  pursuant to an
agreement  whereby the Company  offset the total purchase price of the shares as
full payment for outstanding  debt of $43,306 and other  obligations owed by the
Company to the consultant.

In July 2004,  $20,000 of remaining  principal from a convertible  debenture and
$2,277 in interest was converted  into  1,076,170  shares of common stock of the
Company.  This conversion was in connection with a $100,000  debenture issued in
March  2002.  As of March  29,  2005,  $10,000  of  remaining  principal  of the
debenture is outstanding to a third party.


                                      F-32
<PAGE>

Note 12.  Stockholders' Equity (Continued)

In September  2004,  the Company  issued an  additional  2,000,000  unregistered
shares of common  stock at a fair  market  value of $24,000  to Victor  Weber in
connection  with an amendment  to the terms of the  $215,000  note issued by Now
Solutions to the Company and assigned to Mr.  Weber.  Mr. Weber is the President
and a Director of GIS.

In October 2004,  the Company  issued  6,500,000  unregistered  shares of common
stock of the  Company (at a fair  market  value of $84,500) to Stephen  Rossetti
pursuant to an amendment in which full payment for services  rendered  under the
consulting  agreement was made and a $7,500 note payable was cancelled.  Stephen
Rossetti is the CEO and a Director of GIS and a Director of Now Solutions.

Preferred Stock

In February  2004,  7,500  shares of Series C preferred  stock,  reserved for an
employee under his employment agreement,  were cancelled after he terminated his
agreement with the Company.  The remaining  15,000  preferred C shares were also
cancelled  since the  Company  determined  not to utilize  these  shares for any
future funding activities for EnFacet.  These shares of Series C preferred stock
were part of the stock purchase agreement of EnFacet, Inc., as amended. Pursuant
to the amendment,  the Company had the right to substitute 400 common shares for
each share of Series C preferred stock (up to 12,000,000 shares of the Company's
common stock) in connection with the purchase of EnFacet,  Inc. The Company also
had the right to cancel any Series C preferred  stock for which  common stock is
substituted or as otherwise specified in the amended agreement.

During the year 2004, Now Solutions issued 4.5% ownership  interest of "phantom"
stock to three  employees.  In September  2004,  one of the employees  resigned.
Consequently,  Now  Solutions  cancelled  1.5%  ownership  interest of "phantom"
stock.

2003

Common Stock

During January 2003, a total of 26,992,287  shares of the Company's common stock
were issued upon conversion of convertible  loans of $50,000 and $55,000.  Those
loans were a part of $265,000  debentures  with 6% interest per annum and issued
in 2001. At December 31, 2003,  all of  outstanding  balances had been converted
into the Company's common stock.

During February 2003, a total of 3,000,000  shares of the Company's common stock
were issued to replace  7,500 shares of Preferred  "C" Stock that were issued to
the  Company's  subsidiary,  but held by the  Company  and  these  shares of the
Company's  common  stock were  immediately  issued to  consultants  for services
rendered and valued at $14,693 or approximately $0.0049 per share (fair value at
issuance).

During  April 2003,  the Company  issued  1,100,000  shares of common stock to a
third party consultant for consulting  services rendered and valued at $4,468 or
approximately $0.0041 per share (fair value at issuance).

During April 2003,  the Company issued  1,000,000  shares of common stock of the
Company to a third party in lieu of issuing  2,500 shares of Preferred "C" Stock
in  connection  with a put and call  agreement  between  the Company and a third
party  and  valued at $5,025 or  approximately  $.005 per share  (fair  value at
issuance).

In April 2003,  the Company  issued,  but did not deliver,  3,000,000  shares of
common  stock  of the  Company  to a  third  party  lender  in  anticipation  of
finalizing  the  terms of the loan made by the  lender,  valued  at  $15,075  or
approximately $.005 per share (fair value at issuance).

During April 2003, a total of 10,245,900  shares of the  Company's  common stock
were issued upon  conversion  of $40,000  outstanding  balance of a  convertible
debenture  issued in 2002 with 5% interest  per annum.  As of December 31, 2003,
the original principal of $100,000 still had $40,000 outstanding.

During June 2003, the Company issued  15,000,000  shares of its common stock for
investor  relation  services  rendered by  Equilink,  LLC,  valued at $60,922 or
approximately  $0.0041 per share, which is equal to the fair market value of the
shares on the dates of issuance.


                                      F-33
<PAGE>

Note 12.  Stockholders' Equity (Continued)

During July 2003, the Company issued 2,049,180 shares of common stock to a third
party in lieu of cash payment of $10,000 as placement fee in connection with the
Equity Line of Credit with Cornell Capital. These shares of the Company's common
stock were value at approximately  $0.0049 per share, which is equal to the fair
market value of the shares on the dates of issuance.

During July 2003, the Company issued 8,000,000 shares of its common stock valued
at $40,000  or a fair  market  value of $0.005 per share  (which is equal to the
fair market  value of the shares on the dates of issuance)  to Victor  Weber,  a
director  and  executive  of  Government  Internet  Systems,  Inc,  an 85% owned
subsidiary  of the  Company  for loans  provided  and  services  rendered to the
Company.

During October and November 2003, the Company issued a total of 2,000,000 shares
common stock to a third party lender, at a fair market value of $9,000 or a fair
market value of $0.0045 per share,  in  connection  with loans in the  aggregate
amount of $100,000 to the Company's 85% owned  subsidiary,  Government  Internet
Systems, Inc.

Preferred Stock

During 2003, the Company paid no cash dividends to the  stockholders of Series A
and Series C preferred  stock.  During  2003,  the Company  accrued  $600,000 of
dividends payable to the stockholders of Series A and Series C preferred stock.

The Company recorded  approximately  $45,000 of beneficial conversion feature as
deemed  interest as a result of issuing  convertible  debentures  of $420,000 in
2003.

Note 13.  Stock Options and Warrants

In  December  1999,  the Company  established  a stock  option plan  whereby the
Company may grant both  Incentive  Stock Options  (within the meaning of Section
422 and the Internal Revenue Code of 1986) and non-statutory  Options. Under the
stock option plan,  the Company  could issue up to 50,000,000  shares  (adjusted
post stock split).  Most options  issued are  non-assignable,  non-transferable,
vested on the date of grant,  and  usually  expire  three years from the date of
grant.

2004

There were no non-statutory stock options granted in 2004.

In February 2004,  the Company issued (i) 5 year warrants to purchase  5,000,000
unregistered shares of common stock at $0.01 per share at a fair market value at
the date of  issuance  of  $74,538  (valued  using the  Black-Scholes  valuation
model); (ii) 5 year warrants to purchase 5,000,000 unregistered shares of common
stock of the  Company at $0.02 per share at a fair  market  value at the date of
issuance of $74,344 (valued using the Black-Scholes  valuation model); and (iii)
5 year warrants to purchase 5,000,000 unregistered shares of common stock of the
Company at $0.03 per share at a fair  market  value at the date of  issuance  of
$74,200 (valued using the Black-Scholes  valuation model). All of these warrants
were issued in connection with in connection with a $500,000 loan made by Robert
Farias to Now Solutions.  Robert Farias is a Director of Now  Solutions,  a 100%
owned subsidiary of the Company.

In February  2004,  the Company  cancelled  80,763,943  warrants  held by Arglen
Acquisitions,  LLC  ("Arglen") in  connection  with the closing of the Company's
settlement with Arglen.

During the three  months  ended March 31, 2004,  the Company  granted  five-year
incentive stock options to two employees of Now Solutions to purchase a total of
3,000,000  shares of common  stock of the Company at an exercise  price of $0.01
per share,  which are  subject  to a  "lock-up"  provision  in  connection  with
employment  agreements  executed in January 2004. The fair market value of these
warrants  at the date of issuance  was $8,878  (valued  using the  Black-Scholes
valuation   model).   In  September   2004,  one  of  the  employees   resigned.
Consequently,  the Company  cancelled  options to purchase  1,500,000  shares of
common stock of the Company.


                                      F-34
<PAGE>

Note 13.  Stock Options and Warrants (Continued)

In March 2004,  the Company  issued 5-year  incentive  stock options to purchase
2,500,000  shares of common stock of the Company at an exercise  price of $0.014
per share to Sheri Pantermuehl in connection with Ms.  Pantermuehl's  employment
agreement  to serve as CFO of the  Company  and Now  Solutions.  The fair market
value of these  warrants at the date of issuance was $74,616  (valued  using the
Black-Scholes valuation model).

In June 2004, the Company issued  warrants to purchase  3,000,000  shares of the
common  stock at an exercise  price of $0.03 per share at a fair market value of
$74,142  (valued using the  Black-Scholes  valuation  model) to WAMCO 32, Ltd in
connection with the amendment of the note payable to the successor lender, WAMCO
32, Ltd.

In October 2004, the Company  issued  warrants to purchase  3,000,000  shares of
common stock at an exercise price of $0.0165 per share at a fair market value at
the date of issuance of $49,385 (valued using the Black-Scholes valuation model)
in connection  with an agreement  between GIS and Grant  Consultants  of America
("GCA") to provide services concerning  government grants. In the event that the
GCA did not  procure a  government  contract  for the state of Nevada  within 90
days, the warrant would automatically be cancelled.  Accordingly, these warrants
were  automatically  cancelled  in  January  2005  pursuant  to the terms of the
agreement.

During 2004,  incentive  stock options to purchase  12,590,000  shares of common
stock of the  Company at a price of $0.010 to $0.086  per share  expired or were
cancelled

During 2004,  non-incentive stock options to purchase 1,500,000 shares of common
stock of the Company at a price of $0.041 to $0.086 per share expired.

During  2004,  warrants to purchase  101,092,952  shares of common  stock of the
Company at a price of $0.012 to $0.35 per share expired or were cancelled.

2003

There were no incentive stock options granted in 2003.

There were no non-statutory stock options granted in 2003.

During  2003,  the  Company  extended  the life of 750,000  options  and 750,000
warrants,  which were issued to a third party at an exercise price of $0.025 per
share in connection with consulting  services,  for a further year. The warrants
and options  will  expire in November  2005.  The  extension  of the options and
warrants  had an  estimated  fair  market  value of  $6,396  (valued  using  the
Black-Scholes valuation model).

During 2003, the Company granted five-year warrants to purchase 1,000,000 shares
of the  Company's  common  stock with an  exercise  price of $0.010 per share to
executives  and  officers  at the  Company's  85% owned  subsidiary,  Government
Internet Systems,  Inc. These warrants are non-assignable and  non-transferable,
are  exercisable  over a  five-year  period  from  the date of  grant,  and vest
immediately.  The Company recorded stock compensation expense of $5,643 based on
the Black-Scholes option-pricing model.

During 2003, the Company granted  five-year  warrants to purchase 750,000 shares
of the  Company's  common  stock with an  exercise  price of $0.075 per share to
third party lenders in connection with securing funds of an aggregated amount of
$30,000  through  issuing notes payable to these lenders.  These warrants vested
upon  issuance.   The  Company  recorded  $4,239  based  on  the   Black-Scholes
option-pricing model.

During 2003, the Company granted five-year warrants to purchase 5,000,000 shares
of the  Company's  common stock with an exercise  price of $0.010 per share to a
third party in connection  with legal services  rendered.  These warrants vested
upon  issuance.   The  Company  recorded  $22,704  based  on  the  Black-Scholes
option-pricing model.

During 2003 incentive stock options to purchase 2,500,000 shares of common stock
of the Company at share prices ranging from $0.025 to $0.48 per share expired.


                                      F-35
<PAGE>

Note 13.  Stock Options and Warrants (Continued)

During 2003 non-statutory  stock options to purchase 13,300,000 shares of common
stock of the  Company at share  prices  ranging  from  $0.001 to $1.25 per share
expired.

During 2003 warrants to purchase 3,778,788 shares of common stock of the Company
at a share price of $0.11 per share expired.

Option and warrant activities in 2003 and 2004 were summarized as follows:

<TABLE>
<CAPTION>
                                            Incentive Stock  Non-Statutory                 Weighted Average
                                                Options      Stock Options      Warrants   Exercise Price
                                                -------      -------------      --------   --------------
<S>                                            <C>            <C>              <C>               <C>
Outstanding at 12/31/02                        13,590,000     14,800,000       161,804,498       0.103

Options/Warrants granted with an
exercise price of $0.0075 to $0.01                     --             --         6,750,000       0.010

Options/Warrants exercised                             --             --                --          --

Options/Warrants expired/cancelled             (2,500,000)   (13,300,000)       (3,778,788)      0.098
                                               ----------     ----------       -----------       -----

Outstanding at 12/31/03                        11,090,000      1,500,000       164,775,710       0.1
                                               ----------     ----------       -----------       -----

Options/Warrants granted with an
exercise price of $0.01 to $0.03                5,500,000             --        21,250,000       0.019

Options/Warrants exercised                             --             --                --          --

Options/Warrants expired/cancelled            (12,590,000)    (1,500,000)(2)  (101,092,952)      0.073
                                               ----------     ----------       -----------       -----

Outstanding at 12/31/04                         4,000,000             --        84,932,758       0.092
                                               ==========     ==========       ===========       =====
</TABLE>

(1)   The Company  cancelled  warrants to purchase  80,763,943  shares of common
      stock issued to Arglen as part of its settlement with Arglen, which closed
      in February 2004.

(2)   The Company cancelled incentive stock options to purchase 1,500,000 shares
      of common stock issued to an employee of Now Solutions due to the employee
      terminating in September 2004.


                                      F-36
<PAGE>

Note 13.  Stock Options and Warrants (Continued)

Information relating to stock  options/warrants at December 31, 2004, summarized
by exercise price, is as follows:

<TABLE>
<CAPTION>
                                                 Warrants/Options Outstanding                               Exercisable
                                  -------------------------------------------------------------------------------------------------
                                                            Weighted
                                                             Average            Weighted                                Weighted
                                                            Remaining           Average                                 Average
                                        Number             Contractual          Exercise            Number              Exercise
Exercise Price Per Share              Outstanding         Life (Months)          Price           Exercisable             Price
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                   <C>          <C>                 <C>                 <C>
Incentive Stock Options
$0.01 - $0.09                               4,000,000            52.98        $    0.013                  --            $       --

                                  -------------------------------------------------------------------------------------------------
                                            4,000,000            52.98        $    0.013                  --            $       --
                                  =================================================================================================
Non-statutory Stock Options
$0.01 - $0.09                                      --               --        $       --                  --            $       --

                                  -------------------------------------------------------------------------------------------------
                                                   --               --        $       --                  --            $       --
                                  =================================================================================================
Warrants
$0.003 - $0.100                            79,970,635            27.62        $    0.079          79,970,635          $      0.079
$0.100 - $0.350                             4,962,123             4.75             0.338           4,962,123                 0.338

                                  -------------------------------------------------------------------------------------------------
                                           84,932,758            26.29        $    0.094          84,932,758          $      0.094
                                  =================================================================================================

                                  -------------------------------------------------------------------------------------------------
Grant total                                88,932,758            27.49        $   0.0902          84,932,758          $      0.094
                                  =================================================================================================
</TABLE>

The range of assumptions  used in the Black Scholes option pricing model in 2004
and 2003 were as follows:

                                                  December 31,
                                    -----------------------------------------
                                          2004                   2003
                                    ------------------     ------------------

Discount rate - bond yield rate          2.98 - 3.90%  %        2.61 - 3.01%  %
Volatility                               226 - 270.1%  %          160 - 186%  %
Expected life                                 5 years                5 years

Expected dividend yield                           --                      --


                                      F-37
<PAGE>

Note 14.  Supplemental Disclosure of Cash Flow Information

Supplemental  cash flow  information  for the years ended  December 31, 2004 and
2003 are as follows:

Non-cash  activities  for the years  ended  December  31,  2004 and 2003 were as
follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                             ------------------------
                                                                                2004          2003
                                                                             ----------    ----------
<S>                                                                          <C>           <C>
Cash paid for interest                                                       $  189,913    $  218,556
                                                                             ==========    ==========
</TABLE>

Non-cash  activities  for the years  ended  December  31,  2004 and 2003 were as
follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                             ------------------------
                                                                                2004          2003
                                                                             ----------    ----------
<S>                                                                          <C>           <C>
Series A cumulative stock dividends                                          $  400,000    $  400,000

Series C cumulative stock dividends                                             200,000       200,000

Conversion of debentures to 1,076,170 shares of common stock                     22,277

Conversion of debentures to 37,238,187 shares of common stock                        --       145,000

Issuance of warrants to officers and directors of GIS                                --        12,039

Issuance of warrants for consulting services                                     55,570

Issuance of warrants for legal services                                              --        22,704

Issuance of warrants with notes payable                                         297,225         4,239

Issuance of 9,000,000 shares in 2004 and 6,000,000 shares in 2003 of
   common stock for fees on notes payable                                       116,000        26,100

Issuance of 15,750,000 shares in 2004 and 29,149,180 shares in 2003 of
   the Company's common stock for professional services                          51,690       130,090

Beneficial Conversion on convertible debentures issued                               --        45,000

Issuance of 30,000,000 shares of common stock in 2004 for acquisitions          418,000            --

Issuance of 5,000,000  shares of common stock in 2004 for penalty on loan
   payment                                                                      125,000            --

Issuance of stock options upon execution of employment agreements                83,494            --

Issuance of 7,670,424 shares of common stock in 2004 for debt forgiveness       141,216            --
Shares of common stock to be issued for failure to file SB-2
   Registration statement                                                        82,273            --
Shares of common stock to be issued for failure to make loan payment             10,000            --
                                                                             ----------    ----------
                                                                             $2,002,745    $  985,172
                                                                             ==========    ==========
</TABLE>


                                      F-38
<PAGE>

Note 15.  Commitments and Contingencies

Commitments

The Company  leases  various  office  spaces which leases run from February 2004
through  September  2009. The Company had future minimum rental  payments are as
follows:

Years ending December 31,                          Amount
----------------------------                    ------------

         2005                                       $140,615
         2006                                        147,994
         2007                                         61,477
         2008                                         53,556
         2009                                         40,167
                                                    --------

         Total                                      $443,809
                                                    ========

Rental  expense for the years ended  December 31, 2004 and 2003 was $185,489 and
$252,730, respectively.

Commitments Related to Now Solutions

The  Company  has an  operation  agreement  with Now  Solutions  under which Now
Solutions  agreed to pay the Company an annual  management  fee of $50,000.  The
management fees are payable on a monthly basis.  Now Solutions shall  distribute
50% of the taxable income on a quarterly basis to its members according to their
ownership.  Additionally,  once Now  Solutions'  initial bank financing is fully
paid down,  Now  Solutions  shall pay back the  initial  capital  infusion of $1
million to the  Company by paying  $50,000  per month for twenty  months.  As of
December 31, 2004,  all of the initial  capital had been paid by Now  Solutions.
These payments are eliminated in consolidation.

Royalties

On December 16, 1999, the Company  acquired the software rights to Emily, an XML
computer language,  for $5,000. As part of the agreement,  the Company agreed to
pay royalties every 6 months,  based on the net sales of products sold that were
developed  using the Emily computer  language.  Royalties range from 1% to 5% of
net sales.  There were no sales for the years ended  December 31, 2004 and 2003,
respectively.

Employment Contracts

In December 2001, the Company executed an employment agreement with Richard Wade
pursuant to which Mr. Wade serves as Chief  Executive  Officer and  President of
the  Company,  under  which Mr.  Wade will  receive  an  annual  base  salary of
$300,000,  and the issuance of five-year warrants to purchase  20,000,000 shares
of the  Company's  common  stock at an  exercise  price of $0.10  per  share and
five-year  warrants to purchase  600,000 shares of the Company's common stock at
an exercise  price of $0.10 share.  The warrants  vest over a 36 month period in
equal amounts on a monthly  basis from the date of issuance.  Of the warrants to
purchase  20,600,000  shares  of common  stock of the  Company,  1,716,667  have
expired as of March 29, 2005.  Mr. Wade is also entitled to an annual bonus from
a bonus pool for executives equal to 5% of the Company's taxable income (without
deduction for depreciation).  Mr. Wade's share of the bonus pool is equal to the
percentage of his annual base  compensation  to the total of the combined annual
base  compensation  of all executives in the pool. In the event the agreement is
terminated  by Mr. Wade's  death,  his estate shall be entitled to  compensation
accrued to the time of death plus the lesser of one year's base  compensation or
the  compensation due through the remainder of the employment term. In the event
of  termination  by the  Company  without  cause,  Mr. Wade would  receive  base
compensation  for the remainder of the  employment  term and all of his warrants
would automatically  vest. Mr. Wade did not have a written employment  agreement
with the  Company  during the years 1999 and 2000.  Mr. Wade  deferred  $47,218,
$155,270 and $300,000 of his salary in 2004, 2003 and 2002, respectively.


                                      F-39
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

In July 2002,  the Company  entered into a two-year  employment  agreement  with
Aubrey  McAuley,  whereby  McAuley  would  provide  services in the  capacity of
Executive VP, Product  Development  and Sales  Support.  McAuley will be paid an
annual  salary of $120,000  and a bonus as  determined  in  accordance  with the
agreement.  In addition,  the agreement contains certain  performing  incentives
whereby McAuley can earn 7,500 shares of Series C preferred stock of the pool of
30,000  shares of Series C preferred  stock,  which were  reserved in connection
with the purchase of Company's subsidiary,  EnFacet, Inc. These shares of Series
C preferred  stock may be converted  into 3,000,000  shares of Company's  common
stock. Mr. McAuley's services terminated in January 2004 and the 7,500 shares of
Series "C" preferred stock have been cancelled.

In March 2004, the Company and Sheri Pantermuehl agreed to the terms of a 2-year
employment agreement,  whereby Ms. Pantermuehl agreed to provide services as the
Chief Financial Officer for the Company and its subsidiary Now Solutions,  Inc..
Pursuant to the employment  agreement,  the Company shall pay Ms.  Pantermuehl a
base salary of $125,000 per annum. In connection with the agreement, the Company
issued 5-year  incentive  stock options to purchase  2,500,000  shares of common
stock  of  the  Company  at an  exercise  price  of  $0.014  per  share  to  Ms.
Pantermuehl. The fair market value of these warrants at the date of issuance was
$74,616  (valued using the  Black-Scholes  valuation  model).  In addition,  Now
Solutions  issued 1.5% of  so-called  "phantom  stock" of Now  Solutions  to Ms.
Pantermuehl.

Payroll Taxes

The  Company  has not  remitted  all  required  payroll  tax returns or made the
related payroll tax payments since 2001. The Company has accrued the payroll tax
payments and approximately  $125,000 for any related penalties and interest that
may be assessed by the Internal  Revenue Service.  Management  believes that the
$125,000 is sufficient to cover the penalties and interest that may be assessed.
Now  Solution  has  filed all  payroll  tax  returns  and made all  payroll  tax
payments.

Litigation

The Company is, from time to time, involved in various lawsuits.  In the opinion
of  management,  the ultimate  resolution of these  matters,  if any, may have a
significant  effect on the financial  position,  operations or cash flows of the
Company.

In  addition,  the  Company is  involved  in the  following  additional  ongoing
matters:

In February  2003,  the Company  filed a lawsuit and a derivative  action in New
York Supreme Court Case against defendants Ross Systems,  Inc. ("Ross"),  Arglen
Acquisitions, LLC ("Arglen"), James Patrick Tinley ("Tinley"), and Garry Gyselen
("Gyselen").  The Company filed a derivative  action on behalf of its subsidiary
Now Solutions when Arglen refused to authorize a lawsuit against any parties who
were  alleged to have acted  against  the best  interest  of Now  Solutions.  In
conjunction with the Company's claim, Now Solutions was withholding its payments
on the remaining  $750,000 note that was due in February 2003 against the unpaid
maintenance  fees and gave  notice in  February  2003 to Ross of Now  Solutions'
claim of offset.  Now  Solutions  has  claimed a total  amount of  approximately
$3,562,000 to offset against the note, plus other damages.  Plaintiff's original
claims  sought  damages  and  equitable  relief  arising  out of  actions of the
defendants  constituting  breach of contract,  fraud,  conspiracy  and breach of
fiduciary duty in connection with certain transactions entered into between Ross
and Now Solutions;  Ross and Arglen;  Arglen and Now Solutions;  Gyselen and Now
Solutions; and the Company and Arglen. The action concerns offsets of payment on
note payable to Ross by the  maintenance fee charged by Now Solutions to Ross to
which Now Solutions was entitled per the asset  purchase  agreement  between Now
Solutions and Ross  regarding the HRIS assets Now Solutions  purchased from Ross
in 2001, an undisclosed  transaction between Ross and Gyselen around the time of
the purchase of these  assets,  and the failure of Gyselen to enforce the offset
provisions  which  caused  Coast to declare Now  Solutions  in default of a loan
covenant in 2001 (which has since been cured).  In November  2003,  the New York
Supreme  Court  dismissed  all  claims  against  Ross and  Tinley and stayed the
Derivative  Action  against  Arglen  and  Gyselen  pending   conclusion  of  the
Arbitration. The portion of the lawsuit involving Arglen and Gyselen was settled
in December 2003 and,  pursuant to the  settlement,  dismissed in February 2004.
The court  dismissed  the entire  action  against  Ross and Tinley.  The Company
appealed the decision  with regard to its claim for breach of contract for Ross'
failure to give the proper  maintenance  fee  adjustment.  On June 1, 2004,  the
appeal of the  dismissal of the action  against Ross was  submitted to the court
for decision. On appeal, the claims against Ross were reinstated pursuant to the
order of the Appellate Division, dated October 26, 2004. Thereafter, in November
2004,  Ross filed an answer  containing  affirmative  defenses in the Derivative
Action.


                                      F-40
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

In March 2003,  Ross  commenced an action in New York Supreme  Court by filing a
motion for  summary  judgment in lieu of  complaint  against  Now  Solutions  to
collect the note payable in the amount of $750,000 plus 10% interest.  In August
2003,  the New York Supreme Court denied the motion and dismissed  Ross's action
without  prejudice.  In  October  2003,  the motion of Ross for  reargument  was
denied.  Ross appealed the August 2003 court order, but  subsequently  abandoned
its appeal.

In December 2003, the Company settled its arbitration and litigation with Arglen
Acquisitions,  LLC ("Arglen"),  a minority  partner of Now Solutions,  regarding
issues related to Now Solutions.  The settlement resolved various allegations by
the  Company  and  Arglen  concerning  violations  of Now  Solutions'  Operating
Agreement.  The  arbitration  has been dismissed and any actions with respect to
Arglen and Gary Gyselen and the Company and its related  parties,  including Now
Solutions,  were also dismissed,  except that the California Superior Court, Los
Angeles  County  retained  jurisdiction  regarding  the terms of the  settlement
between the parties. In February 2004, the Company completed the settlement with
Arglen. Pursuant to the terms of the settlement,  the Company purchased Arglen's
interest in Now Solutions for $1.4 million as follows:  (a) $800,000,  which was
paid at the closing and (b) $600,000, pursuant to a non-interest bearing secured
promissory  note  providing for payments of $200,000 in April 2004,  $100,000 in
June 2004, and $300,000 in September 2004, which was issued at closing. When the
Company did not make the April 2004 payment, the Company began accruing interest
at the rate of 10% from the inception of the note. The security  interest of Now
Solutions'  assets on the secured  promissory  note is junior to Now  Solutions'
present  indebtedness  to WAMCO 32, Ltd. In  addition,  at closing,  the Company
cancelled  80,763,943  warrants  held by Arglen and issued to Arglen  20,000,000
unregistered  shares of the common  stock of the Company (at a fair market value
of $280,000),  which is subject to a "lock up" provision. The Company's purchase
of Arglen's interest resulted in the Company recognizing $1,680,000 of goodwill,
which was  written off in 2004.  In December  2004,  the  Company  recorded  the
expense  of issuing  5,000,000  unregistered  shares to Arglen at a fair  market
value of $82,273,  which was based on an average  share price  during 11 days of
August 2004. These shares were issued pursuant to the settlement  agreement with
Arglen whereby the Company was obligated to issue 5,000,000  unregistered shares
of common  stock of the  Company  to Arglen,  due to its  failure to file a SB-2
registration  statement  within 180 days from the closing date of the settlement
in February 2004. In March 2005, the Company  issued these  5,000,000  shares to
Arglen.  The note is in  default.  In August  2004,  Arglen  obtained  a default
judgment in Los Angeles court for the  outstanding  principal,  plus  attorney's
fees and  interest at the rate of 10% per annum.  The Company has filed a motion
in the Delaware court to stay the enforcement of the judgment pending resolution
of the Delaware action.

In March 2004,  Ross commenced an action in the New York Supreme Court by filing
a motion for summary  judgment in lieu of  complaint  against Now  Solutions  to
collect  the note  payable  in the  amount of  $750,000  plus 10%  interest  and
attorneys  fees. Now Solutions  filed its opposition to Ross' motion,  which was
submitted to the court for decision on May 20, 2004.  Now Solutions  opposed the
Ross motion and, on October 7, 2004,  the Court ruled in favor of Now  Solutions
and denied the motion for summary  judgment.  Pursuant to New York State law, in
the event a motion for summary  judgment  in lieu of  complaint  is denied,  the
action  continues  and  the  pleadings  supporting  the  motion  are  deemed  to
constitute the complaint.  Accordingly, Now Solutions filed an answer containing
affirmative  defenses and nine (9)  counterclaims  against Ross. The affirmative
defenses  asserted by Now Solutions  include the same grounds which comprise the
causes of action against Ross in the Derivative  Action,  namely Ross' breach of
the Asset Purchase  Agreement as a result of its failure to credit Now Solutions
with  adjustments at closing in an amount not less than  $3,562,201.  All of the
counterclaims  asserted  by Now  Solutions  against  Ross  relate  to the  Asset
Purchase Agreement and Ross' breaches thereof.  The counterclaims  include:  (i)
breach of the covenant not to compete,  whereby Now  Solutions  seeks damages in
excess of $10,000,000;  (ii) breach of the covenant to deliver all assets to Now
Solutions at closing,  whereby Now Solutions seeks damages in an amount not less
than  $300,000;  (iii)  breach  of a  certain  Transitional  Services  Agreement
(executed  in  conjunction  with the  Asset  Purchase  Agreement),  whereby  Now
Solutions seeks damages in an amount not less than $73,129;  and (iv) reasonable
attorney's  fees.  In December  2004,  Ross filed a motion to dismiss two of Now
Solutions' nine counterclaims:  one which alleges that Ross and Chinadotcom used
Ross to breach a covenant  not to compete and the second  which  requested  that
Ross be enjoined from further competition with Now Solutions in violation of the
covenant.  In February  2005,  Ross' motion was granted  based upon a procedural
default.  Thereafter,  Now Solutions filed a motion to vacate the default, which
motion was granted thereby  reinstating the two counterclaims.  However,  at the
same  hearing,  Ross'  motion to dismiss  was  granted  on the  merits  over the
objection of Now Solutions.  Now Solutions intends to appeal this decision.  Now
Solutions' remaining seven counterclaims remain unaffected.


                                      F-41
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

In March  2004,  Ross  commenced  an action in the Court of  Chancery,  State of
Delaware by filing a summons and  complaint  against the Company,  Now Solutions
and Arglen  alleging a  fraudulent  transfer in  connection  with the  Company's
payment of monies to Arglen pursuant to the settlement  dated December 2003. The
Company  and Now  Solutions  have  filed a motion  to stay the  Delaware  action
pending the resolution of the parties' rights in Supreme Court,  New York County
and Appellate Division. Specifically, Ross seeks a judgment against the Company:
(i)  attaching  the assets  transferred  to Arglen  pursuant  to the  Settlement
Agreement;  (ii)  enjoining  the Company and Now Solutions  from making  further
transfers to Arglen pursuant to the Arglen Note; (iii) avoiding the transfers to
the Company and Arglen or for judgment in the amount  equivalent to the value of
the asserts transferred to them pursuant to the Settlement  Agreement;  and (iv)
appointing  a  receiver  to take  possession  of the assets  transferred  to the
Company  and Arglen  pursuant to the  Settlement  Agreement.  In July 2004,  the
Company and Now Solutions filed a motion to stay the Delaware Action pending the
resolution of the parties' rights in the Derivative  Action and Ross Action.  In
October 2004, the motion was granted and the Delaware action has been stayed.

In  December  2004,  the Company was  notified by the United  States  Securities
Exchanges  Commission  ("SEC") that the SEC had suspended trading of VCSY common
stock for the period of December 1, 2004 through  December 14, 2004  pursuant to
an Order  Filed by the SEC  because  the  Company  had  been  delinquent  in its
periodic filing  obligations under Section 13(a) of the Securities  Exchange Act
of 1934,  as  amended,  since the period  ending  September  30,  2003.  Also in
December  2004,  the  Company  was  notified  by the  SEC  of an  administrative
proceeding  pursuant  to the  filing  of an  "Order  Instituting  Administrative
Proceedings  and Notice of Hearing  Pursuant to Section 12(j) of the  Securities
Exchange  Act of 1934" due to the  delinquency  of filing of the Form 10-KSB for
the year ended 2003 and the Form  10-QSB for the first  three  quarters of 2004.
The Company  filed its Form 10-KSB for the year ended 2003 on January 19,  2005.
The Company  filed its Form 10-QSB for the three months ended March 31, 2004 and
its Form 10-QSB for the three months  ended June 30, 2004 on March 7, 2005.  The
Company  filed its Form 10-QSB for the three months ended  September 30, 2004 on
March 8, 2005.

Note 16.  Subsequent Events

In  January  2005,  Parker,  Mills,  and Patel  filed a lawsuit  in Los  Angeles
Superior  Court to collect  the  outstanding  balance  of $23,974  due under the
promissory  note  issued to them by the  Company and for failure to pay fees for
professional  services in the amount of $89,930  rendered to the  Company,  plus
interest. In March 2005, the Company filed a demurrer.

In January  2005,  warrants to purchase  3,000,000  shares of common stock at an
exercise  price  of  $0.0165  per  share at a fair  market  value at the date of
issuance of $49,385 (valued using the  Black-Scholes  valuation model) that were
issued to Grant  Consultants  of America  ("GCA") were  automatically  cancelled
pursuant to the terms of the warrants.  These warrants were issued in connection
with an October 2004 consulting agreement between the Company's subsidiary,  GIS
and GCA.

In January 2005, the Company issued an additional 2,000,000  unregistered shares
of common stock at a fair market  value of $10,000 to Victor  Weber  pursuant to
the  September  2004  amendment of the terms of the $215,000  note issued by Now
Solutions to the Company and assigned to Mr.  Weber.  Mr. Weber is the President
and a Director of Government Internet Systems, Inc.

In  January  2005,  the  Company  entered  into a  marketing  agreement  with CW
International, LLC. Mr. Weber is a Director and President of Government Internet
Systems, Inc. and a member of CW International, LLC.

In March 2005, the Company issued 5,000,000 shares to Arglen.  In December 2004,
the Company  recorded the expense of issuing  5,000,000  unregistered  shares to
Arglen at a fair market  value of $82,273,  which was based on an average  share
price  during 11 days of August 2004.  These shares were issued  pursuant to the
settlement  agreement  with Arglen  whereby the Company was  obligated  to issue
5,000,000  unregistered  shares of common stock of the Company to Arglen, due to
its  failure  to file a SB-2  registration  statement  within  180 days from the
closing date of the settlement in February 2004.

During the period of January 1 to March 29, 2005, warrants to purchase 4,971,644
shares of common  stock of the  Company  at a price of $0.011 to $0.35 per share
expired.


                                      F-42