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, 2005.

[_]   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)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Exchange  Act of 1934 during
the preceding 12 months,  (or for such shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X|  No |_|

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure  will be contained,
to  the  best  of  the  registrant's  knowledge,  in  the  definitive  proxy  or
information statement  incorporated by reference in Part III of this Form 10-KSB
or amendment to Form 10-KSB. Yes |X| No |_|

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Issuer's revenues for fiscal year ended December 31, 2005: $6,600,219.

Aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant:  $33,584,485  based on the closing price for the common stock
of $0.04  per share on April 12,  2006,  as  reported  on the  Over-the  Counter
Bulletin Board.

As of April 12, 2006,  the issuer had  999,376,859  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, 2005

                                TABLE OF CONTENTS


PART I.........................................................................2
  ITEM 1.  DESCRIPTION OF BUSINESS.............................................2
  ITEM 2.  DESCRIPTION OF PROPERTY............................................10
  ITEM 3.  LEGAL PROCEEDINGS..................................................10
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................13
PART II.......................................................................14
  ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........14
  ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.........21
  OFF-BALANCE SHEET ARRANGEMENTS..............................................25
  ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS...................................28
  PLEASE REFER TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE
  COMPANY AND ITS SUBSIDIARIES FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005,
  WHICH ARE ATTACHED TO THIS REPORT...........................................28
  ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE........................................................28
  ITEM 8A.  CONTROLS AND PROCEDURES...........................................28
  ITEM 8B.  OTHER INFORMATION.................................................28
PART III......................................................................29
  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...........................29
  ITEM 10.  EXECUTIVE COMPENSATION............................................31
  ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....34
  ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................35
  ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K..................................37
  ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES............................43
SIGNATURES....................................................................44

    CONSOLIDATED FINANCIAL STATEMENTS

  Exhibit 31.1    Section 302 Certification by Chief Executive Officer
  Exhibit 31.2    Section 302 Certification by Principal Accounting Officer
  Exhibit 32.1    Section 906 Certification by Chief Executive Officer
  Exhibit 32.2    Section 906 Certification by Principal Accounting Officer

                                       1
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Forward-Looking   Statements  and  Associated   Risks.   This  Report   contains
forward-looking  statements.  Such forward-looking statements include statements
regarding,  among other things, (a) our projected sales and  profitability,  (b)
our growth strategies,  (c) anticipated  trends in our industry,  (d) our future
financing plans, (e) our anticipated needs for working capital,  (f) our lack of
operational experience,  and (g) the benefits related to ownership of our common
stock.  Forward-looking  statements,  which involve assumptions and describe our
future plans, strategies, and expectations, are generally identifiable by use of
the  words  "may,"  "will,"  "should,"   "expect,"   "anticipate,"   "estimate,"
"believe,"  "intend,"  or  "project"  or the  negative  of these  words or other
variations  on these  words or  comparable  terminology.  This  information  may
involve known and unknown risks, uncertainties, and other factors that may cause
our actual results, performance, or achievements to be materially different from
the future results,  performance,  or  achievements  expressed or implied by any
forward-looking  statements.  These statements may be found under  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
"Business,"  as well as in this Report  generally.  Actual events or results may
differ materially from those discussed in forward-looking statements as a result
of various  factors,  including,  without  limitation,  the risks outlined under
"Risk Factors" and matters described in this Report generally. In light of these
risks and  uncertainties,  there can be no  assurance  that the  forward-looking
statements contained in this report will in fact occur as projected.

      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(R)  Solutions.  The  Emily(R)
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 "Exchange
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
iNet transactions for 20 years.

      In June 2000,  the Company  acquired  Pointmail.com,  Inc.  ("Pointmail").

      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 Systems, Inc. In
April  2003,  the Company and  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. The second $24,000 promissory note
is in  default.  In  connection  with April  2003  transactions,  TranStar  also
released and indemnified  the Company from any  obligations  owed to TranStar or
any third party.

                                       2
<PAGE>

      On February  28, 2001,  the Company  invested  $1,000,000  to obtain a 60%
majority  interest  in Now  Solutions,  LLC.  ("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 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  agreement,  and 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. 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
brought  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.  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 agreement. 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 U.S.  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(TM)  technology.  EnFacet sold two products,
NewsFlash(TM),  which  catered to the  publishing  industry  and  newspapers  in
particular,  and SiteFlash(TM),  an  affiliation/syndication  Web product).  The
Company continues to develop and market its other SiteFlash(TM) based products -
ResponseFlash(TM),  AffiliateFlash(TM), and UniversityFlash(TM).  In April 2003,
the Company  entered  into a software  reseller  agreement  with  Infotec,  Inc.
(`Infotec"), 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(R)  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(R)
Solutions,  Inc., a Nevada corporation,  changed its name to Government Internet
Systems,  Inc.  ("GIS").  The Company is licensing  its  proprietary  technology
ResponseFlash(TM)   for  use  by   GIS.   GIS   will   market   and   distribute
ResponseFlash(TM)  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.  MedData  is a provider  of  Internet  and  Palm(R)-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(TM)   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  of Basix1's EKG software.
However,  as of April 5, 2006, EKG has not been launched yet. Charles  Kensicki,
the President of Basix1, is currently a Director of GIS and of Now Solutions and
the President of Taladin, Inc. ("Taladin").

                                       3
<PAGE>

      During 2004,  the Company and its  subsidiaries  have entered into various
marketing and  co-marketing  agreements with Total Care Solutions,  InfraHealth,
Inc. and Basix1.  During 2005,  the Company's  subsidiary,  NOW  Solutions,  has
entered a second  level  partnership  with IBM.  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(TM) and other products particularly those in the homeland security
sector to the United States government.

       In  November  2005,  Taladin  and Now  Solutions  entered  into a license
agreement whereby Taladin received the exclusive rights to commercially  exploit
emPath(R) for use by the United States federal,  state and local governments and
agencies in exchange for a license fee and royalties.

      In 2006, the Company,  in conjunction  with NOW Solutions opened an office
in Brazil to provide software  development and to market the Company's  software
to distributors in Brazil.

      The Company's  software  products  that are presently  being sold are HRIS
emPath(R) 6.3, ResponseFlash(TM),  SiteFlash(TM),  NewsFlash(TM),  and Emily(R).
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  intends 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  multi-national  provider of Internet core  technologies,
administrative  software,  and derivative software  application products through
its  distribution  network.  The Company's  primary  Internet core  technologies
include  SiteFlash(TM),   ResponseFlash(TM),  and  the  Emily(R)  XML  Scripting
Language,  which  can  be  used  to  build  Web  services.  The  Company's  main
administrative  software  product is emPath(R),  which is designed to handle the
most complex Payroll and Human Resources challenges.

      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(R) 6.3       Now Solutions       Now Solutions
Large Corporations and Universities     SiteFlash(TM)       Vertical Computer   Vertical Computer
Government Sector- Emergency Response   ResponseFlash(TM)   Vertical Computer   GIS
Publishing Content                      NewsFlash(TM)       Vertical Computer   EnFacet
Emily(R) XML Scripting Language         Emily(R)            Vertical Computer   VIS
</TABLE>

      Administrative Software

      The Company's primary administrative software technology is emPath(R) 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 is in the final
stage of being developed as an application service provider ("ASP") application.
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.

                                       4
<PAGE>

      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(TM).  The
SiteFlash(TM) 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(TM)   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 Website created using  SiteFlash(TM) is
interchangeable  with any  other  similar  element,  and these  elements  may be
grouped  together in almost any  combination  to create complex  Websites.  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.  The Company intends to
license this patent.

      The Company offers  SiteFlash(TM)  as a stand-alone  product and also as a
technology  platform for products  targeted at specific  vertical  markets.  The
SiteFlash(TM) technology focuses on content management, e-commerce, and workflow
and has led to the development of two additional software application  products:
ResponseFlash(TM)  and NewsFlash(TM).  ResponseFlash(TM)  has been installed and
approved  and is  currently  being  implemented  by the  Metropolitan  Emergency
Communications  Agency in Marion County, which includes  Indianapolis,  Indiana.
NewsFlash(TM)  is used by  newspapers  (e.g.  La  Opinion  and  Japan's  Hochi),
UniversityFlash(TM)  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(TM)  architectural  concepts enable
integration with existing  technological  components within many  organizations.
Additional key features that differentiate SiteFlash(TM) 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 ("GIS"), a majority-owned  subsidiary of
the Company,  will focus in marketing  ResponseFlash(TM),  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(R) XML scripting language, which is Java compatible. XML 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(TM) directly. SiteFlash is a technology that
provides dynamic Web content management,  e-commerce and workflow. SiteFlash(TM)
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,  BlackberryTM devices, 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(TM)  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(TM)  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(TM) based products: ResponseFlash(TM), NewsFlash(TM),
AffiliateFlash(TM),  and  UniversityFlash(TM).  The  Company  intends  to market
ResponseFlash(TM)  through  its  subsidiary  GIS and  NewsFlash(TM)  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.

                                       5
<PAGE>

      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  from  Ross 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 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(R)  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(R)  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,
multi-lingual (i.e., English, Canadian French, Spanish and Chinese) and flexible
software solution,  without the multi-million dollar  implementation  budgets of
the major competitors.

      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 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 12 months ended December 31, 2005, Now Solutions had approximately
$3,230,000 of total assets, revenues of approximately  $6,490,000 and a net loss
of approximately $291,000.

      Government Internet Systems, Inc.

      The  Company's  81.5%  owned  subsidiary,  GIS, a Nevada  corporation  was
formerly  Emily(R)  Solutions,  Inc. The Company  will  license its  proprietary
technology,  ResponseFlash(TM),  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(TM) for the Metropolitan
Emergency Communications Agency, Indiana. The Company has submitted proposals to
various city, county and state governments.

      For the 12 months  ended  December  31,  2005,  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(R)
Solutions  Web  technology  in  December  1999.  The  Emily(R)  Solutions'  work
platform,  "the Emily(R)  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(R)  Framework was  developed to be an  engineering  package  comparable to
other Web  development  tools,  such as  Allaire  Cold  Fusion(R)  or  Microsoft
FrontPage(R). The primary component of the Emily(R) Framework is Markup Language
Executive  ("MLE"),  a programming  language that runs on Windows(R),  Linux and
several UNIX platforms. The Emily(R) scripting language has been enabled to work
on Java.  In  addition,  the  Company  has also  filed two  patents  related  to
Emily(R):  (a)  one  patent  application  related  to the  Emily(R)  programming
language;  (b) one patent application  related to the Emily(R) XML Enabler Agent
and Emily(R) XML Broker.  The patent  application for the Emily(R) XML Scripting
Language was published in February 2003. Both patents are still pending.  For an
update of this discussion since fiscal year-end,  please see "Subsequent Events"
under  Note 16 of the Notes to  Consolidated  Financial  Statements.  Emily(R)'s
marketing is currently on hold.

      For the 12 months ended December 31, 2005, VIS had assets of approximately
$326,000 and no material revenue or expenses.

                                       6
<PAGE>

      EnFacet, Inc.

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

      For the 12 months ended December 31, 2005, EnFacet had no material assets,
revenue of $18,000, and a net loss of approximately $79,000.

      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
to provide the fulfillment  requirement for the Zegato agreement.  The interface
between Picasso and Zegato became operational in November 2004.

      For the 12 months ended December 31, 2005,  Globalfare.com  had no assets,
no revenue and no expenses.

      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 12 months ended December 31, 2005, Pointmail.com had no assets, no
revenues and no expenses.

      Taladin, Inc.

       In  November  2005,  Taladin  and Now  Solutions  entered  into a license
agreement whereby Taladin received the exclusive rights to commercially  exploit
emPath(R) for use by the United States federal,  state and local governments and
agencies in exchange for a license fee and royalties.

      For an update of transaction  concerning  Taladin fiscal year-end,  please
see  "Subsequent  Events" under Note 16 of the Notes to  Consolidated  Financial
Statements.

      For the 12 months  ended  December  31,  2005,  Taladin had no assets,  no
revenue 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(TM)  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.  However,  as of April 5, 2006, EKG has not been launched
yet.  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. and President of Taladin.

                                       7
<PAGE>

      iNet Purchasing, Inc.

      In April 2000, the Company  acquired a 2.5% minority  interest in iNet and
is entitled to a royalty on all iNet  transactions for up to 40 years. iNet 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(R)  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.  In  April  2005,  iNet
Purchasing  was  acquired  by  SicommNet.  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 April 5, 2006.

      As of December 31, 2005, 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, 2005.

      TranStar Systems, 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.  The  Company is entitled  to receive 3% of any  transaction  fees and any
other revenues generated by TranStar in perpetuity.

      As of December 31, 2005, 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 April 5, 2006.

      Software Distributors and Strategic Marketing Alliances

      Infotec,  Inc.  In  April  2003,  the  Company  and  Infotec,  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.

      During 2004,  the Company,  GIS and Now Solutions  entered into  marketing
agreements with Total Care Technologies,  Basix1,  and InfraHealth,  Inc. During
2005,  the  Company's  subsidiary,  Now  Solutions.,  has entered a second level
partnership  with IBM. The Company has also retained  consultants  to advise the
Company regarding the government sector.

      Competition

      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 and regional marketers 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(TM) 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(TM),   namely   NewsFlash(TM),
UniversityFlash(TM),  and AffiliateFlash(TM).  In this way, the Company hopes to
define the best  potential  markets  for its  SiteFlash(TM)  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(R) software and international bridge
network on hold while it concentrates on these  immediate  opportunities  within
its existing business units.

                                       8
<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, GIS and the Company.  Additionally,  the business
units will enter into agreements with each other where the opportunity exists 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 patent for SiteFlash(TM). 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 federal,  state and
local  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(TM); 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(TM).

      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(R) 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 two patents related to Emily(R):  (a) one patent  application
related to the Emily(R) programming language; (b) one patent application related
to  the  Emily(R)  XML  Enabler  Agent  and  Emily(R)  XML  Broker.  The  patent
application  for the Emily(R) XML  Scripting  Language was published in February
2003.  Both patents are still pending.  For an update of this  discussion  since
fiscal  year-end,  please see "Subsequent  Events" under Note 16 of the Notes to
Consolidated Financial Statements.

      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.

                                       9
<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 April  5,  2006,  the  Company  has 30  full-time  employees  and 21
consultants,  of which 29 full-time  employees are employed at Now Solutions (21
are employed in the United States and 8 are employed in Canada).  The Company is
not a party to any collective bargaining agreements.

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 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

      In February 2003,  the Company filed a lawsuit and a derivative  action in
New York  Supreme  Court Case  against  defendants  Ross,  Arglen,  Tinley,  and
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 certain assets 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  claims of breach of contract and  indemnification
for failure to pay  adjustments  at the closing on the sale of assets of Ross to
Now Solutions for prepaid  maintenance fees and for related relief.  In November
2003,  the New York Supreme Court  dismissed the claims against Ross and Tinley.
The portion of the lawsuit  involving Arglen and Gyselen was settled in December
2003 and,  pursuant to the  settlement,  dismissed in February 2004. The Company
appealed the decision  with regard to its claim for breach of contract for Ross'
failure to give the proper  maintenance  fee  adjustment  and related claims for
offset and attorney's  fees. 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,
Westchester County, 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  re-argument  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,  pursuant to the 2003  Settlement
which pertains to issues related to Now Solutions.  The 2003 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. 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  agreement.  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 registration
statement on Form SB-2 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.  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. In April 2005, Arglen filed a Notice of Filing a Foreign Judgment
in Tarrant  County,  Texas.  In August 2005,  the Company  entered into a Payout
Agreement with Arglen allowing payout terms to the Company and pursuant to which
the Company agreed to enter into the Agreed  Judgment.  The Agreed  Judgment and
Payout Agreement were entered into concerning a California judgment and Arglen's
notice of Filing a Foreign  Judgment  in Tarrant  County,  Texas,  which were in
connection  with the  2003  Settlement.  Pursuant  to the  terms  of the  Agreed
Judgment and the Payout  Agreement,  the Company agreed to pay Arglen a total of
$713,489, which includes the following amounts: (a) $600,000 in principal on the
promissory note issued by the Company pursuant to the 2003  Settlement,  (b) the
accrued post-judgment interest on the California judgment from September 4, 2004
through September 15, 2005, at the rate of 10% per annum,  which equals $61,989,
and (c) attorney's  fees incurred for the California and Texas judgment  actions
which were approximately $51,500. Pursuant to the terms of the Payout Agreement,
the Company  began making  monthly  interest  payments on the amounts  specified
above of $5,945,  beginning  on September  15,  2005,  which will be replaced by
monthly  payments of $25,000 or 10% of the  Company's  new sales,  whichever  is
greater,  beginning on February 15, 2006 until the  remainder of the $713,489 is
paid.  In  accordance  with the Payout  Agreement,  Arglen shall not execute the
Agreed Judgment so long as the Company continues to make its payments as agreed.

      In March 2004, Ross commenced an action in the New York Supreme Court, New
York  County,  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 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 denied over the objections of Now
Solutions.  Now  Solutions  has filed a notice of appeal of this  decision.  Now
Solutions' remaining seven counterclaims remain unaffected.

                                       11
<PAGE>

      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 assets  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 ("PMP") 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 April 2005,  the
Company  answered the complaint,  asserting  various legal defenses.  In October
2005, the parties entered into a settlement agreement.  Pursuant to the terms of
the  settlement,  the Company  issued a promissory  note to PMP in the amount of
$75,000 with a maturity date of January 31, 2008,  bearing interest at a rate of
6% per  annum,  which  shall be paid in equal  monthly  installments  of $3,125,
beginning  February 1, 2006 for a period of 24 months.  In  connection  with the
settlement, the lawsuit was dismissed. As of April 5, 2006, the Company has made
all payments required under the terms of the agreement.

      In the  opinion of  management,  the  ultimate  resolution  of any pending
matters may have a significant effect on the financial  position,  operations or
cash flows of the Company.

      Matters Involving the United States Securities and Exchange Commission

      In December  2004,  the  Company was  notified by the SEC that the SEC had
suspended  trading of the  Company's  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 Exchange Act since the period ending September 30, 2003.

      Also  in  December  2004,  the  Company  was  notified  by the  SEC of the
Administrative  Proceeding,  pursuant  to the  filing of an  "Order  Instituting
Administrative  Proceedings  and Notice of Hearing  Pursuant to Section 12(j) of
the Exchange Act" that alleged that the Company was  delinquent  with respect to
the 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.  Thus,  since  commencement of
the  Administrative  Proceeding,  the Company  has filed each of the  delinquent
reports.

      On April 1, 2005, the SEC entered two orders in connection  with accepting
the terms of an Offer of Settlement of Vertical Computer Systems, Inc. to settle
the  Administrative  Proceeding.  As part of the  terms of  settlement,  the SEC
entered in the Administrative Proceeding its Order Accepting Settlement Offer of
Vertical Computer Systems, Inc., Implementing Settlement and Staying Proceedings
to Implement  Settlement (the "Settlement Order"). The Settlement Order provided
that the Company  must file its Form  10-KSB for the fiscal year ended  December
31,  2004 (the "2004 Form  10-KSB")  no later than March 31,  2005.  The Company
filed its 2004 Form 10-KSB on March 31, 2005.

      Pursuant to the  Company's  Offer of  Settlement,  the SEC also entered on
April  1,  2005,  an  Order  Instituting  Cease-and-Desist  Proceedings,  Making
Findings and Imposing a  Cease-and-Desist  Order  Pursuant to Section 21C of the
Exchange Act  ("Cease-and-Desist  Order" in the case  captioned In the Matter of
Vertical  Computer  Systems,   Inc.,   Admin.   Proc.  File  No.  3-11879.   The
Cease-and-Desist Order ordered that the Company cease and desist from committing
or causing any violations or future  violations of Section 13(a) of the Exchange
Act and SEC Rules  13a-1 and 13a-13  thereunder.  The Company  consented  to the
entry of the Cease-and-Desist Order without admitting or denying the findings in
that Order.

      On April 15, 2005,  the SEC dismissed  without  prejudice  the  previously
disclosed  Administrative  Proceeding as to the Company. The SEC's dismissal was
entered by its Order Dismissing Proceedings Without Prejudice as to the Company.
The SEC Order provided that it was entered  pursuant to the  previously  entered
Order  Accepting  Settlement and Staying  Proceedings  to Implement  Settlement,
dated April 1, 2005, and for good cause shown. Consequently,  the Administrative
Proceeding has concluded with respect to the Company and is no longer pending as
to the Company.

                                       12
<PAGE>

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

         None

                                       13
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The  Company's  common equity is quoted on the  Over-The-Counter  Bulletin
Board (the "OTCBB")  under the symbol  "VCSY.  As described  below,  the Company
returned to the OTCBB on December  12, 2005 and shares of the  Company's  common
stock began trading on January 9, 2006.  From May 25, 2005 to December 12, 2005,
the Company's common equity was quoted on the Pink Sheets. From December 1, 2004
to May 24, 2005,  the  Company's  common equity was 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 OTCBB.  From May 30,  2003 to  November  30,
2004,  the  Company's  common stock was quoted on the Pink Sheets.  From October
1999 to May 29, 2003,  the Company's  common stock was quoted on the OTCBB.  The
Company's common equity commenced trading under the OTCBB in October 1999.

      In December 2004, the Company was notified by the United States Securities
Exchanges  Commission (the "SEC" or the "Commission") 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
Exchange Act 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.

      On April 15, 2005,  the SEC dismissed  without  prejudice  the  previously
disclosed  Administrative  Proceeding as to the Company. The SEC's dismissal was
entered by its Order Dismissing Proceedings Without Prejudice as to the Company.
The SEC Order provided that it was entered  pursuant to the  previously  entered
Order  Accepting  Settlement and Staying  Proceedings  to Implement  Settlement,
dated April 1, 2005, and for good cause shown. Consequently,  the Administrative
Proceeding has concluded with respect to the Company and is no longer pending as
to the Company.

      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, 2005      $  0.0089   $0.0030
            Quarter Ended September 30, 2005     $  0.0110   $0.0030
            Quarter Ended June 30, 2005          $  0.0160   $0.0020
            Quarter Ended March 31, 2005         $  0.0150   $0.0001

            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

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

            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 April 5, 2006, there were  approximately  1,691 holders of record of
our common stock.

                                       14
<PAGE>

      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  Cumulative  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, 2005 and 2004,  respectively.  The Company did
not pay any dividends on its  outstanding  shares of Series A Preferred Stock or
Series C  Preferred  Stock  during 2005 or 2004.  The Company  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.

      Unregistered Sales of Securities

      During the last three years, the Company issued the following unregistered
securities:

      In January  2003,  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.

       Also,  in  January  2003,  the  remaining  $50,000 of  principal  under a
$125,000  convertible  debenture issued on September 11, 2001 was converted into
12,853,470 shares of the Company's common stock.

       Also in January 2003, the remaining $55,000 of principal under a $140,000
convertible  debenture  issued on October 5, 2001 was converted into  14,138,817
shares of the Company's common stock.

      Also in January 2003, the Company,  acting as the majority  shareholder of
GIS, 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 term of the directorship expired in 2005.

      In  February  2003,  the  Company  and  EnFacet  agreed to amend the stock
purchase agreement of EnFacet concerning 30,000 shares of Series C 4% Cumulative
Convertible  preferred stock issued to EnFacet.  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  unregistered  shares of the Company's  common stock (at a fair market
value of  $14,693)  to former  employees  and  consultants  of  EnFacet  per the
amendment to the stock purchase agreement. The Company cancelled 7,500 shares of
Series C preferred  stock  reserved  for the former  employees.  Pursuant to the
amendment,  the Company also cancelled the remaining  15,000 preferred C shares,
since the Company  determined not to utilize these shares for any future funding
activities for EnFacet.

      In March 2003,  the Company,  acting as the majority  shareholder  of GIS,
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 term of the directorship expired in 2005.

      In April 2003, the Company and the third party seller of the SiteFlash(TM)
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  unregistered
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.

      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.

      Also in April 2003, the Company issued  1,100,000  unregistered  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 one year in connection with
consulting services. These options and warrants expired in November 2005.

                                       15
<PAGE>

      Also in April  2003,  $40,000 of  principal  under a $100,000  convertible
debenture  issued in March  2002 was  converted  into  10,245,900  shares of the
Company's common stock.

      Also in April  2003,  the Equity  Line of Credit  Agreement  (the  "ELOC")
entered into in August 2001 was  cancelled  and a new ELOC was executed  between
the  Company  and  Cornell  Capital  Partners,  LP  (`Cornell")  whereby  up  to
$10,000,000  worth of the Company's common stock could have been purchased.  The
ELOC 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. At December 31, 2005,
none of the $190,000 convertible debenture had been converted.  During the three
months ended March 31, 2006,  $190,000 of principal under the debenture has been
converted into 24,298,094  shares of the Company's  common stock. In March 2006,
$40,800 in liquidated  damages  claimed by Cornell in connection with the Equity
Line of Credit agreement were converted into 4,387,095 shares of common stock.

      Also in April 2003, the Company issued $200,000 of convertible  debentures
to Cornell. 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 five  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.  During the year ended  December  31, 2005,  $200,000 of principal  and
$34,681 of interest  were  converted  into  69,322,775  shares of the  Company's
common stock.

      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  Option
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.  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" agreement. 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 GIS and a member of CW  International.  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,  GIS 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 81.5% of GIS.

      In November 2003, the Company agreed to issue a 1.5% ownership interest of
its  subsidiary,  GIS, 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 81.5% of GIS.

                                       16
<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 April
5, 2006, 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.

      Also in December 2003, $20,000 of principal and $1,726 in interest under a
$100,000 convertible  debenture issued in March 2002 was redeemed for a total of
$25,726, which included a 20% premium on the principal.

      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).  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 agreement.

      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 agreement 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 agreement.

      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.  The note is in
default. 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 Option 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  Option  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  Option  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.

                                       17
<PAGE>

      Also, in February 2004, the Company  cancelled 7,500 shares of Series C 4%
Cumulative  Convertible  preferred  stock,  reserved  for an employee  under his
employment  agreement,  after the employee  terminated  his  agreement  with the
Company. These shares had been reserved for EnFacet employees in connection with
the stock  purchase  agreement,  dated August 21,  2001,  as amended in February
2003, between the Company and EnFacet.

      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. Robert Farias is a director of Now Solutions.

      Also  in  February  2004,   the  Company   issued  to  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.

      Also in February 2004,  $10,000 of principal under a $100,000  convertible
debenture  issued in March 2002 of debentures  and $925 in interest was redeemed
for a total of $10,925.  The debt  accrued  interest at 5% per annum and was due
April 2004.

      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  Option Valuation  Model).  In addition,  Now Solutions issued
1.5% of "phantom" stock of Now Solutions to Ms. Pantermuehl.  In September 2005,
Ms. Pantermuehl resigned and the Company cancelled the "phantom" stock.

      During the three months ended March 31, 2004,  the Company  granted 5-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  Option 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 the "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  Option 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 "WAMCO")
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  agreement.  The fair  market  value of the  warrants  was
$74,142 (valued using the Black-Scholes  Option Valuation Model). These warrants
were  issued  in  connection  with  the  amendment  of the note  payable  to the
successor  lender,  WAMCO. In February 2006,  these warrants were transferred to
Taladin in connection with an assignment from WAMCO 32 to Taladin and cancelled.
For an update of this discussion since fiscal  year-end,  please see "Subsequent
Events" under Note 16 of the Notes to Consolidated Financial Statements.

      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.

                                       18
<PAGE>

      In July 2004, $20,000 of principal and $2,277 in interest under a $100,000
convertible  debenture  issued in March 2002 was converted into 1,076,170 shares
of common stock of the Company.

      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 and a Member of CW International.

      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  Option
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.

      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.
Mr. Rossetti is Executive  Vice-President of Government Affairs,  Chairman,  CEO
and Director of GIS, Director of Now Solutions and an officer of Markquest, Inc.

      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  registration  statement  on Form SB-2
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.

      In May 2005,  the Company  issued  5-year  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 $45,000 (valued using the  Black-Scholes
Option  Valuation  Model) to GSA in connection with an agreement in October 2004
between GIS and GCA to provide services  concerning  government  grants.  In the
event  that the GCA does not  procure a  government  contract  for a  government
contract in excess of $2,000,000  within 180 days of the date of the  agreement,
the warrant  would  automatically  be cancelled.  In October  2005,  the Company
entered into an agreement with GCA whereby these warrants were cancelled and the
Company  agreed to issue  five-year  warrants  to purchase  4,000,000  shares of
common  stock at an  exercise  price of  $0.0165  per  share  provided  that GCA
procures two government contracts acceptable to the Company.

      In May 2005,  the Company  issued  5-year  warrants to purchase  1,500,000
shares of common stock at an exercise price of $0.015 per share at a fair market
value at the date of issuance of $22,500 (valued using the Black-Scholes  Option
Valuation  Model) to L&R  Consultants  ("L&R") in  connection  with a consulting
agreement between the Company and L&R to provide services in securing a loan for
Now  Solutions.  In the event that L&R does not secure a loan for Now  Solutions
for $3,200,000  within 90 days of the date of the  agreement,  the warrant would
automatically  be cancelled.  On August 14, 2005,  these warrants were cancelled
pursuant to the terms of the agreement.

                                       19
<PAGE>

      In May 2005,  the Company  issued  600,000  shares of common  stock of the
Company  (at a fair market  value of $9,000) to a third  party  lender and three
year  warrants to purchase  1,200,000  shares of the Company  common stock at an
exercise  price  of  $0.003  per  share  were  cancelled  by the  lender.  These
transactions  were made in  connection  with an  agreement  between  the parties
amending the terms of a $50,000 note issued to the lender in June 2002.

      In May 2005,  the Company agreed to issue 600,000  unregistered  shares of
common stock of the Company (at a fair market value of $6,000) to an employee of
Now Solutions  pursuant to a restricted stock agreement  between the Company and
the Now Solutions' employee that provides for the stock to vest over three years
in equal installments at the anniversary date of the agreement.

      In August  2005,  an employee  purchased  1,000,000  common  shares of the
Company  pursuant to a warrant to purchase up to 1,000,000  shares at a price of
$0.005 per share.  The purchase  price of the shares was offset  against  unpaid
monies owed to the employee.  The fair market value of the shares on the date of
issuance was $7,000.

      In October 2005,  the Company  entered into an agreement  with an inventor
whereby  the  inventor   agreed  to  exclusively   assist  the  Company  in  the
contemplated licensing and enforcement of United States Patent No. 6,826,744. In
exchange,  the Company issued 1,500,000  unregistered  shares of common stock of
the Company and agreed to pay a royalty fee of two percent to the inventor, less
any legal fees and direct costs. The fair market value of the shares on the date
of issuance was $4,950.

      In October  2005,  the Company  issued  4,500,000  unregistered  shares of
common  stock of the Company (at a fair market value of $18,000) to employees of
Now  Solutions  pursuant to restricted  stock  agreements  executed  between the
Company and Now  Solutions'  employees  that  provide for the stock to vest over
three years in equal installments at the anniversary date of the agreement.

      In November 2005, the Company  issued 100,000  unregistered  shares of the
Company's common stock to a third party lender pursuant to an agreement to waive
the  current  default and extend the  payment  terms under a $50,000  promissory
note. The fair market value of the shares on the date of issuance was $500.

      During  the year ended  December  31,  2005,  incentive  stock  options to
purchase  750,000 shares of common stock of the Company at a price of $0.025 per
share expired.

      During the year ended December 31, 2005,  warrants to purchase  36,321,647
shares of common  stock of the  Company  at a price of $0.003 to $0.35 per share
expired or were cancelled, which includes 4,500,000 warrants that were issued in
2005 to third parties but were also cancelled in 2005.

      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
(the "Securities  Act"), 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.

                                       20
<PAGE>

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

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.

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,
2005 and 2004, 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 2004,  in  accordance  with
Financial  Accounting Standards No. 142 ("SFAS No. 142"), the Company determined
that there was  $1,760,000  impairment in goodwill,  all of which was located in
the Company. During 2005, there was no impairment of goodwill since all goodwill
had been written off in 2004.

      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
("EITF") issued No 00-21, "Revenue Arrangement with Multiple Deliverables."

      Deferred  revenue on  maintenance  contracts  represent  cash  received in
advance which is recognized over the life of the contact.

                                       21
<PAGE>

      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 exists.

      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, 2005 Compared To Year Ended December 31, 2004

      Total  Revenues.   The  Company  had  total  revenues  of  $6,600,219  and
$6,412,007  for the years ended  December 31, 2005 and 2004,  respectively.  The
increase in total  revenue was  $188,211  for the year ended  December  31, 2005
representing approximately a 2.9% increase compared to the total revenue for the
year ended  December 31, 2004. Of the $6,600,219 for the year ended December 31,
2005 and the  $6,412,007  for the year ended  December 31, 2004,  $6,559,391 and
$6,305,212,  respectively,  was  related  to  the  business  operations  of  Now
Solutions,  a  wholly-owned  subsidiary of the Company 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, 2005
decreased  by  $330,987  from the same  period in the prior  year,  representing
approximately  6%  decrease,  due  to  selling  less  new or  upgraded  software
licenses. These sale decreases were partially offset by contractual increases in
maintenance  fees.  Consulting  revenue for the year ended  December  31,  2005,
increased by $409,273, from the same period in the prior year, which represented
approximately a 50% increase, due to more implementation  consulting services as
a result of  software  licenses  sold in 2004.  Consulting  revenues  lag behind
software  license  revenues.  The  higher  software  licenses  revenues  in 2004
resulted in greater  consulting  revenue in 2005. Other revenue,  which consists
primarily of reimbursable travel expenses and user conference fees, for the year
ended  December 31, 2005,  increased by  approximately  $109,926  from the prior
year, which represented approximately a 80% increase. This increase was a direct
result of higher consulting revenue and the user conference held in 2005.

        Selling,  General and Administrative  Expenses. The Company had selling,
general and  administrative  expenses of $7,605,874 and $8,877,495 for the years
ended December 31, 2005 and 2004,  respectively.  The total selling, general and
administrative  expenses  for the year ended  December  31,  2005  decreased  by
$1,271,621 compared to the selling,  general and administrative expenses for the
year ended December 31, 2004 representing  approximately a 14% decrease.  Of the
$7,605,874  for the year ended December 31, 2005 and the $8,877,495 for the year
ended December 31, 2004, Now Solutions accounted for $6,576,330, and $6,247,516,
respectively. The decrease of $1,271,621 was primarily attributed to the Company
paying no fees for loans in 2005. In the first quarter of 2004, the Company paid
fees to Robert Farias for the $500,000 note payable  issued to Now Solutions and
paid for various loan extensions.  These fees totaled $440,000 and were all paid
in the form of common  stock or  warrants.  In  addition,  the Company  acquired
Robert Farias'  interest in MedData  Solutions for nine million shares of common
stock in the first quarter of 2004. At the time of the  transaction,  the common
stock had a value of $135,000.  The Company  wrote-off its investment in MedData
Solutions in the first quarter of 2004.  Also,  the Company  reduced its payroll
and related benefits, rent, insurance, depreciation and amortization costs.

                                       22
<PAGE>

        Goodwill  Impairment.  In the first quarter of 2004 the Company acquired
Stephen  Parnes' 5% interest and Arglen's 30% interest in Now  Solutions.  These
transactions resulted in the recognition of $1,760,000 of goodwill.  The Company
assessed the carrying value of this goodwill for impairment as of March 31, 2004
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 goodwill in the first quarter
of 2004. After this write-off, the Company has no goodwill.

      Operating  Loss.  The  Company had an  operating  loss of  $1,005,655  and
$4,225,488  for the years ended  December 31, 2005 and 2004,  respectively.  The
operating  loss  decreased by $3,219,833  compared to the operating loss for the
year ended December 31, 2004,  representing a decrease of approximately 76%. The
decrease was primarily attributable to the combination of a decrease in selling,
general and  administrative  expenses  $1,271,621,  a decrease in  impairment of
goodwill of $1,760,000 and an increase in revenue of $188,211.

      Interest  Expense.  The  Company  had  interest  expense of  $505,059  and
$478,732 for the years ended December 31, 2005 and 2004, respectively.  Interest
expense increased for the year ended December 31, 2005 by $26,327,  representing
an increase of  approximately  5%,  compared to the same type of expense for the
year ended  December 31, 2004.  The increase  was  primarily  related  increased
interest expense recognized on loans in default.

      Net Loss.  The Company had a net loss of $1,506,764 and $4,702,210 for the
years  ended  December  31, 2005 and 2004,  respectively.  Net loss for the year
ended  December 31, 2005  decreased  by  $3,195,446  representing  a decrease of
approximately  68%. The  decrease in the net loss of  $3,195,446  was  primarily
attributable  to  the  combination  of  a  decrease  in  selling,   general  and
administrative  expenses  $1,271,621,  a decrease in  impairment  of goodwill of
$1,760,000 and an increase in revenue of $188,211.

      Dividend 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 Cumulative 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, 2005
and 2004, respectively. The Company did not pay any dividends in 2004 or 2005.

      Net Loss  Applicable  to Common  Stockholders.  The Company had a net loss
attributed to common  stockholders  of $2,106,764  and  $5,302,210 for the years
ended December 31, 2005 and 2004,  respectively.  Net loss  applicable to common
stockholders  for the year ended  December  31,  2005  decreased  by  $3,195,446
representing  a  decrease  of  approximately  60%,  compared  to  the  net  loss
applicable  to common  stockholders  for the year ended  December 31, 2004.  The
decrease in the net loss  applicable to common  stockholders  of $3,195,446  was
primarily attributable to the combination of a decrease in selling,  general and
administrative  expenses of $1,271,621,  a decrease in impairment of goodwill of
$1,760,000 and an increase in revenue of $188,211

      Net Loss Per  Share.  The  Company  had a net loss per  share of $0.00 and
$0.01 for the years ended December 31, 2005 and 2004, respectively.

Financial Condition, Liquidity, Capital Resources And Recent Developments

      At December  31,  2005,  the Company had  non-restricted  cash-on-hand  of
$285,366.

      Net cash provided by operating  activities for the year ended December 31,
2005 was $452,053.  This positive cash flow was primarily  related to a net loss
of $1,506,764  adjusted by non-cash  operating  items of  $1,958,817  (including
depreciation  and  amortization  of $850,490,  stock  compensation  of $138,725,
allowance for bad debt of $23,007),  a decrease in all  receivables of $259,891,
prepaid expenses of $59,257, and deferred revenue of $119,952 and in increase in
accounts payable and accrued  liabilities of $865,913.  The increase in accounts
payable and accrued liabilities was offset by converting  $1,148,161 of accounts
payable  and  accrued  liabilities  into notes  payable  and  $24,681 of accrued
interest was converted into capital.  With these  conversions,  accounts payable
and accrued expenses decreased by $306,929.

      Net cash used in investing activities for the year ended December 31, 2005
was $73,787, which consisted of the purchase of equipment and software.

      Net cash used in financing activities for the year ended December 31, 2005
was $422,436, consisting of repayment of notes payable.

                                       23
<PAGE>

      The total change in cash and cash  equivalents for the year ended December
31,  2005 when  compared  to year ended  December  31,  2004 was a  decrease  of
$45,414.

      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 the filing of this  Report,  the Company does not have
sufficient  funds  available  to  fund  its  operations,  invest  in  additional
resources  for growth and repay its debt  obligations.  Therefore,  the  Company
needs to raise additional funds through selling  securities,  obtaining loans or
increase sales.  The Company's  inability to raise such funds or renegotiate the
terms of its  existing  will  significantly  jeopardize  its ability to continue
operations.

Contractual Obligations and Commercial Commitments

      As of  December  31,  2005,  the  following  contractual  obligations  and
commercial commitments were outstanding:

<TABLE>
<CAPTION>
                            Balance                            at Due in Next Five Years

Contractual Obligations    12/31/05       2006         2007         2008         2009         2010
-----------------------------------------------------------------------------------------------------
<S>                       <C>          <C>          <C>          <C>          <C>          <C>
Notes payable              5,331,305    4,140,571      668,238      475,932       46,564           --
Convertible debts            230,000      230,000           --           --           --           --
Operating lease              306,609      151,145       61,741       53,556       40,167           --
                          ---------------------------------------------------------------------------
Total                      5,867,914    4,521,716      729,979      529,488       86,731           --
                          ===========================================================================
</TABLE>

      Of the above notes  payable of  $5,331,305,  the default  situation  is as
follows:

                Notes Payable                        2005                2004
                                                  ----------          ----------
In default                                        $3,540,093          $4,338,899
Current                                            1,791,212             242,000
                                                  ----------          ----------
Total Notes Payable                               $5,331,305          $4,580,899
                                                  ==========          ==========

      For an  update  on the  refinancing  of the  notes  payable  since  fiscal
year-end,  please  refer to  "Subsequent  Events"  under note 16 of the Notes to
Consolidated Financials Statements.

New Accounting Pronouncements

      In January 2003,  the  Financial  Accounting  Standard  Board (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 ("ESOPs") 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  as of the  beginning  of the first annual  period
beginning  after December 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.

                                       24
<PAGE>

Going Concern Uncertainty

      The Company has incurred  significant  losses from operations for the year
ended December 31, 2005. In addition,  the Company had a working capital deficit
of  approximately  $11.2  million at December 31,  2005.  The  foregoing  raises
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans include  seeking  additional  capital and/or debt financing.
There is no guarantee  that  additional  capital  and/or debt  financing will be
available when and to the extent required,  or that if available,  it will be on
terms acceptable to the Company.  The accompanying  financial  statements do not
include any adjustments that might result from the outcome of this  uncertainty.
Our auditors have included a going- concern paragraph to their audit report.

Off-Balance Sheet Arrangements.

      None.

      Risk Factors  Related to 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,
2005 and  2004,  the  Company  had net  losses  of  $1,506,764  and  $4,702,210,
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, 2005 and 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 12 months ended
December  31, 2005 and 2004 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,  2005 was  $15.1
million.  Additionally,  at December 31, 2005, the Company had negative  working
capital of approximately $11.2 million (although it includes deferred revenue of
approximately   $2.6   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.

                                       25
<PAGE>

      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  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  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(TM) and Emily(R)  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.

      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, 2005 Were Not  Sufficient to Satisfy Our Current  Liabilities
      on That Date

      We had a  working  capital  deficit  of  approximately  $11.2  million  at
December 31, 2005, which means that our current liabilities exceeded our current
assets by approximately  $11.2 million (although it includes deferred revenue of
approximately  $2.6 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, 2005 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, the following:

      o     the demand for our SiteFlash(TM) and Emily(R) technology;
      o     the demands for Now Solutions' emPath(R) product;
      o     the level of usage of the Internet;
      o     the level of user traffic on our Websites;
      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.

                                       26
<PAGE>

      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 the following:

      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.

      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(TM)  and  Emily(R)  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  Shareholders to Resell Shares When They Choose To At Prices
      They 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 Exchange Act. Penny stocks are stocks:

      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

                                       27
<PAGE>

      o     In issuers  with net  tangible  assets  less than $2 million (if the
            issuer has been in continuous operation for at least three years) or
            $5 million (if in  continuous  operation for less than three years),
            or with average  revenues of less than $6 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.

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

      Please  refer to the  Audited  Consolidated  Financial  Statements  of the
Company and its  subsidiaries for the fiscal year ended December 31, 2005, 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

      The  Company's  Principal  Executive  Officer  and  Principal   Accounting
Officer, after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the Exchange
Act) as of the end of the period covered by this Report,  have concluded that as
of such date, the Company's disclosure controls and procedures were adequate and
effective to ensure that  material  information  relating to the Company that is
required  to be  disclosed  by the  Company in reports  that it files or submits
under the Exchange Act, is recorded,  processed,  summarized and reported within
the time periods  specified in SEC rules and accumulated and communicated to the
Company's  management,  including its Principal  Executive Officer and Principal
Accounting Officer, to allow timely decisions regarding required disclosure.

      b.    Changes In Internal Controls Over Financial Reporting

      In  connection  with the  evaluation of the  Company's  internal  controls
during the Company's  last fiscal  quarter,  the Company's  Principal  Executive
Officer and  Principal  Accounting  Officer  have  determined  that there are no
changes to the Company's  internal  controls over financial  reporting that have
materially  affected,  or  are  reasonably  likely  to  materially  effect,  the
Company's internal controls over financial reporting.

ITEM 8B.  OTHER INFORMATION

       None.

                                       28
<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        62     President, Chief Executive Officer and Director    6 years
William K. Mills       47     Secretary and Director                             6 years
</TABLE>

      Richard S. Wade, President, Chief Executive Officer and Director, Chairman
      and Director of Now Solutions

      Richard  S.  Wade is  President  and  CEO 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  positions of president of their  Mid-Pacific
Division and then president of their U.S. Division.  Prior to that, Mr. Wade was
a CPA and staff  auditor with Peat,  Marwick & Mitchell.  Over the course of his
career, Mr. Wade has accumulated experience in retail operations,  distribution,
and financial matters.  Mr. Wade earned his Bachelor of Science in Accounting at
Brigham Young  University,  a Master of Science in Business Policy from Columbia
University  Business  School and received a certificate of recognition  from the
government of Guam.

      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.

      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

       Section  16(a) of the Exchange Act  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 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.

                                       29
<PAGE>

       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 2005.

Code of Ethics

      We have adopted a Code of Ethics that applies to our  Principal  Executive
Officer,  Principal  Accounting  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 of the Company

      Luiz Valdetaro, Chief Technology Officer, Director of Now Solutions

      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,  Executive  Vice-President  of  Government  Affairs,
      Chairman, CEO and Director of GIS, Director of Now Solutions

      As a former senior staff member of the House Armed Services  Committee and
as  director  of the  Readiness  Subcommittee  staff,  Mr.  Rossetti  brings his
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.

      David Braun, Controller & Principal Accounting Officer,  Controller of Now
      Solutions

      Mr. Braun is an accountant  with over 23 years  experience in a variety of
accounting and finance  roles.  His career  includes  public  accounting,  large
company  internal  audit,  financial  analysis,  mergers and  acquisitions,  SEC
reporting,   general   accounting  and   consolidations  of  both  domestic  and
international companies. Most recently he worked for a healthcare provider where
he was responsible for managing 24 employees with accounting  responsibility for
over 200 clinics.  Prior to that, he worked for a large chemicals  manufacturing
company  where he assisted  in  implementing  a worldwide  version of SAP(R) and
created a finance shared  services  group for the US and Canada.  Mr. Braun is a
CPA and a graduate of the University of Texas at Austin.


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 Sales.  Ms.  Franklin's  background also includes
two years with ADP and 13 years in the banking  industry,  working  with payroll
products.

                                       30
<PAGE>

      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 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.

      Laurent Tetard, Vice President of Operations

      Mr.  Tetard  joined  the  Company  in  1999,  where  he  oversaw  business
development,  managed software design projects and handled daily operations. His
responsibilities included working with clients and strategic partners to develop
business  plans,  implement  strategies and  methodologies  to support  software
development.  Combining his education and experience, Mr. Tetard has specialized
in managing design,  implementation,  documentation and installation of Internet
compatible  applications.  From 1994 to 1996, Mr. Tetard was a Public  Relations
Officer with the French Air Force, in Toulouse,  France.  Earlier in his career,
he completed a thesis in  collaboration  with the French  Aeronautics  and Space
Research  Center  ("ONERA") and served  engineering  internships at Aerospatiale
Matra S.A. Mr. Tetard is an honor's graduate of the noted French Ecole Nationale
Superieure  D'arts et Metiers  ("ENSAM"),  with a BS in Engineering  and a MS in
Multidisciplinary Engineering.


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, 2005,  2004 and 2003 to the Company's  highest paid executive
officers  and  employees,  who were  employed by the  Company  during  2005.  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.

                                       31
<PAGE>

                                             Annual Compensation
                            -------------------------------------------------


                                                                    Other
Name and                                                            Annual
Principal Position          Year     Salary           Bonus      Compensation
--------------------------  ----  ------------     ------------  ------------
                                       ($)             ($)           ($)
                                  ------------     ------------  ------------
Richard Wade,(1)            2005  $    300,000(1)            --            --
President and               2004  $    300,000               --            --
Chief Executive             2003  $    300,000               --            --
Officer

Luiz Valdetaro,(2)          2005  $    150,000               --            --
Chief Technology            2004  $    150,000               --            --
Officer                     2003  $    150,000               --            --

Sheri Pantermuehl,(3)       2005  $     89,440               --            --
Chief Financial             2004  $    104,167               --            --
Officer                     2003            --               --            --

James Salz (4)              2005  $    100,000               --            --
Corporate Counsel           2004  $    100,000               --            --
                            2003  $    100,000               --            --

<TABLE>
<CAPTION>

                                               Long-Term Compensation
                            ---------------------------------------------------------
                                      Awards                 Payouts
                            --------------------------     ------------
                             Restricted
Name and                       Stock        Options/          LTIP         All Other
Principal Position            Award(s)        SARs           Payouts     Compensation
--------------------------  ------------  ------------     ------------  ------------
                                ($)           (#)               ($)           ($)
                            ------------  ------------     ------------  ------------
<S>                         <C>           <C>              <C>           <C>
Richard Wade,(1)                      --    20,600,000(1)            --            --
President and                         --            --               --
Chief Executive                       --            --               --            --
Officer

Luiz Valdetaro,(2)                    --            --               --            --
Chief Technology                      --            --               --            --
Officer                               --            --               --            --

Sheri Pantermuehl,(3)                 --            --               --            --
Chief Financial                       --     2,500,000               --            --
Officer                               --            --               --            --

James Salz (4)                        --            --               --            --
Corporate Counsel                     --            --               --            --
                                      --            --               --            --
</TABLE>

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

      Except for the warrants exercised by Mr. Valdetaro in Footnote 2, no stock
options were exercised by the named  executive  officers  during the fiscal year
ended December 31, 2003, 2004 or 2005.


(1)   Mr. Wade deferred $154,097,  $47,218,  and $155,270 of his salary in 2005,
      2004,  and 2003,  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,  9,155,556
      expired as of April 5, 2006.  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  $50,269,  $86,766 and  $150,000 of his salary in
      2005, 2004 and 2003,  respectively.  During 2005, Mr. Valdetaro  exercised
      3-year warrants and purchased  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.  In  January  2006,  Mr.  Valdetaro  was  issued
      1,500,000 unregistered shares of common stock of the Company pursuant to a
      restricted  stock  agreement with the Company which provides for the stock
      to vest over one year in three equal installments at 4 month intervals.


(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  Option Valuation  Model). In
      addition, Now Solutions issued 1.5% of "phantom" stock of Now Solutions to
      Ms.  Pantermuehl,   which  was  cancelled  upon  the  termination  of  Ms.
      Pantermuehl's employment in September 2005.


(4)   Mr.  Salz  deferred  $48,345  and  $55,000 of his salary in 2004 and 2003,
      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 a price of $0.01
      per share, which are subject to "piggy-back" registration rights. Of these
      5,000,000 warrants, 2,500,000 expired during 2005. The remaining 2,500,000
      warrants are vested and are  exercisable for a period of three years after
      vesting. In March 2004, options to purchase 200,000 shares of common stock
      of the Company,  which were issued in 2001,  expired. In January 2006, Mr.
      Salz was  issued  1,500,000  unregistered  shares of  common  stock of the
      Company  pursuant to a restricted  stock  agreement with the Company which
      provides  for the stock to vest over one year in three equal  installments
      at four month intervals.

                                       32
<PAGE>


The   below table  shows  information  of  aggregate  options  held by the named
      officers at the end of 2005.

<TABLE>
<CAPTION>
                            YEAR-END OPTION VALUES (2004-2005)
--------------------------------------------------------------------------------------------
<S>                   <C>               <C>               <C>               <C>
                          No. of Securities Underlying            Value of Unexercised
                              Options/SARs Granted              in-the-Money Options at
                          As Of Fiscal Year End 2005            Fiscal Year End 2005 (1)
                      ----------------------------------  ----------------------------------
Name                     Exercisable      Unexercisable      Exercisable      Unexercisable
                      ----------------  ----------------  ----------------  ----------------

Richard Wade(2)             13,733,332                --                --                --

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

Jim Salz (4)                 2,500,000                --                --                --

----------------
</TABLE>

(1)   Based on Share Price of $0.006 on December 30, 2005.


(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,  9,155,556 have expired
      as of April 5, 2006.


(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 Option Valuation Model).


(4)   During 2002, the Company issued warrants to Mr. Salz to purchase 5,000,000
      unregistered shares of the common stock of the Company at a price of $0.01
      per share, which are subject to "piggy-back" registration rights. Of these
      5,000,000 warrants, 2,500,000 expired during 2005. The remaining 2,500,000
      warrants are vested and are  exercisable for a period of three years after
      vesting.

Stock Option Plan.

      In December 1999, the Company established a stock option plan (the "Plan")
whereby the Company may grant both Incentive  Stock Options  (within the meaning
of  Section  422  and the  Internal  Revenue  Code  of  1986,  as  amended)  and
non-statutory  options.  Under the Plan,  the Company may issue up to 50,000,000
shares  (adjusted  post stock split).  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.

Director Compensation

      No options or warrants  were granted as director  compensation  during the
fiscal years ended 2003, 2004 or 2005 (excluding  warrants granted to executives
and  directors  of the  Company's  81.5% owned  subsidiary,  GIS).  Non-employee
directors are entitled to receive $3,500 per meeting.

Employment Agreements

      In December 2001, the Company executed a 3-year 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,  9,155,556  have
expired as of April 5, 2006. 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  $154,097,
$47,218 and $155,270 of his salary in 2005, 2004 and 2003, respectively.

                                       33
<PAGE>

      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.
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 Option Valuation Model). In addition, on
March 1, 2004, Now Solutions  issued 1.5% of "phantom" stock of Now Solutions to
Ms.  Pantermuehl.  Ms.  Pantermuehl's  employment with the Company terminated in
September  2005.  Accordingly,  the 1.5%  "phantom"  stock of Now  Solutions was
cancelled.

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 April 12, 2006, 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  999,376,859  shares  of  common  stock
outstanding  as of April 12,  2006,  together  with  options,  warrants or other
securities  convertible or exchangeable by the beneficial  owners into shares of
common stock within 60 days of April 12, 2006.

                                                      Shares
Title of    Name and Address of Beneficial        of Common Stock       Percent
Class       Owner(1)                            Beneficially Owned     of Class
-----       ------------------------------      ------------------     --------
Common      Richard Wade                             127,669,944(2)       12.77%
Common      William K. Mills                           4,033,000(3)            *
Common      All Directors and Executive              131,702,944          13.18%
            Officers as a group
            (2 persons)
----------------------------------
*     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)   Includes  warrants to purchase up to 20,600,000  shares of common stock of
      the Company for services as CEO and President,  less 9,155,556  which have
      expired as of April 12, 2006.  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.

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

                                       34
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      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 on 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. The note is in default.

      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 $25,000 of
trade  accounts  payable to Mr. Weber were  cancelled.  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.  In exchange  for
amending the payment terms, the Company issued 2,000,000  unregistered shares of
common  stock  of the  Company  (at a fair  market  value  of  $24,000)  and Now
Solutions agreed to pay a 2.5% royalty of sales by Now Solutions of its software
that exceed  $8,000,000  per year up to a maximum of $200,000.  In January 2005,
the Company issued an additional  2,000,000  unregistered shares of common stock
to Mr. Weber at a fair market value of $10,000  pursuant to the  amendment.  For
additional details on the note, please see "Notes Payable and Convertible Debts"
under Note 10 of the Notes to Consolidated Financials Statements. The note is in
default.  Mr.  Weber is the  President  and a Director of GIS and a member of CW
International.

      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  bearing  interest at 10% per annum,  secured by its  assets.  In
connection with the loan, Now Solutions agreed to pay Mr. Farias a 5% royalty on
any sales by Now  Solutions  over  $8,000,000  up to a maximum of  $500,000.  In
connection with the loan, the Company issued (i) five-year  warrants to purchase
5,000,000  shares of common  stock at $0.01 per share;  (ii) 5-year  warrants to
purchase  5,000,000  shares of common  stock of the  Company at $0.02 per share;
(iii)  5-year  warrants  to  purchase  5,000,000  shares of common  stock of the
Company at $0.03 per share; (iii) a total of 10,000,000  unregistered  shares of
common  stock of the  Company.  In  addition,  the  Company  also  pledged a 30%
ownership interest in Now Solutions to ensure the making of the $500,000 loan to
Now Solutions.  During 2004 and 2005, Now Solutions had made principal  payments
totaling $183,000 to Robert Farias.  For additional  details on the note, please
see  "Notes  Payable  and  Convertible  Debts"  under  Note 10 of the  Notes  to
Consolidated  Financials  Statements.  In February 2006, this note was cancelled
and replaced by a $359,560 note issued to Tara Financial  Services,  Inc. ("Tara
Financial").   For  additional  details  on  the  refinanced  note,  please  see
"Subsequent  Events"  under  Note 16 of the  Notes  to  Consolidated  Financials
Statements. Robert Farias is a director of Now Solutions.

      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,
with  principal and interest due on June 1, 2002 was amended  whereby the assets
of Now Solutions  secured the note. For additional  details on the note,  please
see  "Notes  Payable  and  Convertible  Debts"  under  Note 10 of the  Notes  to
Consolidated  Financials  Statements.  In February 2006, this note was cancelled
and the  outstanding  debt was included  under a $955,103 note payable issued to
Tara  Financial.  For  additional  details on the  refinanced  note,  please see
"Subsequent Events" under Note 16. Robert Farias is a director of Now Solutions.

      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.  The $280,000 note was secured by the asset of Now Solutions and by the
SiteFlash(TM)  technology  owned by the Company.  For additional  details on the
note,  please see "Notes  Payable and  Convertible  Debts"  under Note 10 of the
Notes to  Consolidated  Financials  Statements.  In February 2006, this note was
replaced with a $438,795 note issued to Tara Financial.  For additional  details
on the refinanced  note,  please see  "Subsequent  Events" under Note 16. Robert
Farias is a director of Now Solutions.

      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.
The note was also secured by  10,450,000  shares of the  Company's  common stock
that  are  owned  by  Mountain  Reservoir  to  cover  any  shortfall.  MRC  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. For additional details on
the note, please see "Notes Payable and Convertible  Debts" under Note 10 of the
Notes to  Consolidated  Financials  Statements.  In February 2006, this note was
cancelled and the  outstanding  debt was included  under a $955,103 note payable
issued to Tara Financial.  For additional details on the refinanced note, please
see  "Subsequent  Events"  under Note 16.  Robert  Farias is a  director  of Now
Solutions.

                                       35
<PAGE>

      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. As of March 31, 2004, the transaction was fully reserved.  Robert Farias
is a director of Now Solutions.

      In August  2004,  the Company  licensed the use of the Forums and calendar
applications  of the  Company's  SiteFlash(TM)  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.  However,  as of April 5, 2006, EKG has not been launched
yet.  Also in August 2004,  the Company and its  subsidiaries  have entered into
various marketing and co-marketing agreements with Basix1. Charles Kensicki, the
President of Basix1, is currently a Director of GIS and of Now Solutions and the
President of Taladin.

      In October  2004,  the Company and  Stephen  Rossetti  agreed to amend the
terms of a consulting  agreement  and the $7,500  promissory  note issued in May
2003.  Pursuant  to the terms of the  amendment,  the Company  issued  6,500,000
unregistered  shares of common  stock of the Company (at a fair market  value of
$84,500),  as full payment for services rendered under the consulting  agreement
and the  $7,500  note,  which has been  cancelled.  Mr.  Rossetti  is  Executive
Vice-President  of  Government  Affairs,  Chairman,  CEO  and  Director  of GIS,
Director of Now Solutions and an officer of Markquest, Inc.

      In January 2005,  the Company  entered into a marketing  agreement with CW
International  whereby CW International will be entitled to receive a percentage
of  fees  for new  customers  of the  Company  generated  by CW  International's
efforts.  Mr.  Weber is a  Director  and  President  of GIS and a  member  of CW
International.

      In May 2005,  Now Solutions  and Robert  Farias  entered into an agreement
whereby Mr. Farias would provide consulting and design  specification  services.
Pursuant to this agreement, Mr. Farias shall receive an hourly fee and 2% of all
sales of the Now Solutions' products  specifically  designed and sold within the
context of the  agreement  up to the  earlier of either (a) four years after the
execution  of this  Agreement  or (b)  Contractor's  receipt  of  $1,000,000  in
commissions. In December 2005, Now Solutions assigned this agreement to Taladin.
Mr.  Farias is a director of Now  Solutions,  a  wholly-owned  subsidiary of the
Company.

      In August 2005,  Mr. Salz made a $5,000  payment to a third party pursuant
to an agreement and  promissory  note on the Company's  behalf.  Mr. Salz is the
Company's corporate counsel.

      In September 2005, Now Solutions entered into a consulting  agreement with
Markquest,  Inc. Mr. Rossetti is Executive Vice-President of Government Affairs,
Chairman,  CEO and Director of GIS,  Director of Now Solutions and an officer of
Markquest, Inc.

                                       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 Fuel           Provided herewith
                      Technology, Inc. into Vertical Computer Systems, Inc.

3.1                   Original Unamended Certificate of Incorporation of Vertical           Provided herewith
                      Computer Systems, Inc. (f/k/a Xenogen Technology, Inc.)

3.2                   Certificate of Amendment of Certificate of Incorporation (change      Provided herewith
                      name to Vertical Computer Systems, Inc.)

3.3                   Certificate of Amendment of Certificate of Incorporation (2000)       Provided herewith

3.4                   Amended and Restated By-Laws of the Company                           Provided herewith


4.1                   Certificate of Designation of 4% Cumulative Redeemable Series A       Provided herewith
                      Preferred Stock

4.2                   Certificate of Designation of 10% Cumulative Redeemable Series B      Provided herewith
                      Preferred Stock

4.3                   Certificate of Designation of 4% Cumulative Redeemable Series C       Provided herewith
                      Preferred Stock

4.4                   Certificate of Designation of 15% Cumulative Redeemable Series D      Provided herewith
                      Preferred Stock

4.5                   Form of Warrant                                                       Incorporated by reference to
                                                                                            Exhibit 10.96 to the Company's
                                                                                            Form 10-KSB filed on August 7,
                                                                                            2003

4.6                   Form of Cashless Exercise Warrant                                     Incorporated by reference to
                                                                                            Exhibit 4.55 to the Company's
                                                                                            Form 10KSB filed on March 31,
                                                                                            2005

4.7                   Form of Restricted Stock Agreement                                    Provided herewith

10.1                  1999 Stock Option Plan of the Company                                 Provided herewith
</TABLE>

                                       37
<PAGE>

<TABLE>
<CAPTION>
    Exhibit No.                                   Description                                           Location
-------------------   ----------------------------------------------------------------      ----------------------------------
<S>                   <C>                                                                   <C>

10.2                  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
                                                                                            19, 2001

10.3                  Form of Debenture                                                     Incorporated by reference to
                                                                                            Exhibit 10.44 to the Company's
                                                                                            Form 10-KSB A filed on May 20,
                                                                                            2002

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

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

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

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

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

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

10.10                 Promissory Note, dated June 3, 2002, between the Company and a        Incorporated by reference to
                      third party lender                                                    Exhibit 10.82 to the Company's
                                                                                            Form 10-QSB filed on June 24,
                                                                                            2002
                      Promissory Note, dated June 24, 2002, between the Company and a
10.11                 third party lender                                                    Incorporated by reference to
                                                                                            Exhibit 10.83 to the Company's
                                                                                            Form 10-QSB filed on September
                                                                                            25, 2002

10.12                 (a)  Valdetaro  Promissory  Note,  dated  August 20, 2002,            Incorporated by reference to
                      between the Company and Valdetaro                                     Exhibit 10.89 to the Company's
                                                                                            Form 10-QSB filed on September
                      (c) Valdetaro Warrants, dated August 20, 2002, between the Company    25, 2002
                      and Valdetaro
</TABLE>

                                       38
<PAGE>

<TABLE>
<CAPTION>
    Exhibit No.                                   Description                                           Location
-------------------   ----------------------------------------------------------------      ----------------------------------
<S>                   <C>                                                                   <C>
10.13                 Amendment Number Two to Deposit Account Pledge Agreement, dated       Incorporated by reference to
                      October 16, 2002, between the Company and Coast Business Credit       Exhibit 10.91 to the Company's
                                                                                            Form 8-K filed on October 23,
                                                                                            2002

10.14                 (a) Term Sheet, dated October 17, 2002, between the Company and a     Incorporated by reference to
                      third party lender                                                    Exhibit 10.93 to 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

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

10.16                 (a) Form of Director Agreement of Company's subsidiary, Government    Incorporated by reference to
                      Internet Systems, Inc. (GIS) Director Agreement, between GIS and      Exhibit 10.98 to the Company's
                      director                                                              Form  10-KSB  filed on  August 7,
                                                                                            2003
                      (b) Form of  Warrants  in  connection  with  GIS  Director
                      Agreement   between  the Company's Subsidiary, GIS, and GIS
                      director


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


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

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

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

10.21                 $200,000 Purchase of Convertible  Debentures,  dated April 14, 2003,
                      between the Company and third party buyers.
                                                                                            Incorporated by reference to
                      (a)  Securities   Purchase   Agreement  (for  $200,000  of            Exhibit 10.103 to the Company's
                      Convertible  Exhibit  10.103 to the Company's  Debentures)            Form 10-KSB filed on August 7, 2003
                      (b) Form of Debenture  2003
                      (c) Registration Rights Agreement
</TABLE>

                                       39
<PAGE>
<TABLE>
<CAPTION>
    Exhibit No.                                   Description                                           Location
-------------------   ----------------------------------------------------------------      ----------------------------------
<S>                   <C>                                                                   <C>

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

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

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

10.24                 Stock Sale Agreement,  dated April 11, 2003, between the Company and  Incorporated by reference to
                      Mike Radlovic                                                         Exhibit 10.106 to the Company's
                                                                                            Form 10-KSB filed on August 7,
                      (a) Stock Sale  Agreement,                                            2003
                      (b) Stock Pledge Agreement
                      (c) Promissory Note

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

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

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

10.28                 Loan, agreement, between the Company and a third party lender         Incorporated by reference to
                                                                                            Exhibit 10.111 to the Company's
                      (a) Term Sheet, dated June 25, 2003                                   Form 10-QSB for the quarter
                                                                                            ended March 31, 2003, filed on
                      (b)  $90,000 note, dated June 26, 2003                                June 22, 2004

                      (c) Pledge Agreement, dated June 26, 2003


10.29                 Loan  Agreement,  dated  September  4, 2003,  between  the            Incorporated by reference to
                      Company and Victor Weber                                              Exhibit 10.113 to the Company's
                                                                                            Form 10-QSB for the quarter
                      (a) Term Sheet                                                        ended March 31, 2003 filed on
                      (b) $50,000 Promissory Note                                           June 22, 2004

</TABLE>

                                       40
<PAGE>

<TABLE>
<CAPTION>

    Exhibit No.                                   Description                                           Location
-------------------   ----------------------------------------------------------------      ----------------------------------
<S>                   <C>                                                                   <C>
10.30                 $500,000 Farias Loan Agreement between Now Solutions and the          Incorporated by reference to
                      Company and Robert Farias, dated February 13, 2004                    Exhibit 10.114 to the Company's
                      (a) Loan Agreement                                                    Form 10-QSB for the quarter
                      (b) Promissory Note, issued by Now Solutions                          ended March 31, 2003 filed on
                      (c) Security Agreement between Robert Farias and Now Solutions        June 22, 2004
                      (d) Ownership Pledge Agreement between Robert Farias and the Company

10.31                 Arglen Settlement between Arglen Acquisitions, LLC and the Company    Incorporated by reference to
                                                                                            Exhibit 10.115 to the Company's
                      (a) Arglen Settlement Agreement, dated December 4, 2004               10-QSB for the quarter
                                                                                            ended March 31, 2003 filed on
                      (b) Promissory  Note,  dated February 13, 2004,  issued by            June 22, 2004
                      Now Form Solutions  to the Arglen Acquisitions, LLC

                      (c) Security Agreement, dated February 13, 2004

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

10.33                 Loan  Amendment,  dated June 15, 2004 between  WAMCO 32 Ltd. and the  Incorporated by reference to
                      Company and Now Solutions                                             Exhibit 10.117 to 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

10.34                 Weber Loans Amendment, between the Company and Victor Weber, dated    Incorporated by reference to
                      September 28, 2004                                                    Exhibit 10.118 to the Company's
                                                                                            Form 10-KSB filed on January 18,
                                                                                            2005

10.35                 Amendment to Consulting Agreement and $7,500 Promissory Note,         Incorporated by reference to
                      between the Company and Stephen Rossetti, dated October 12, 2004      Exhibit 10.119 to the Company's
                                                                                            Form 10-KSB filed on January 18,
                                                                                            2005

10.36                 Order Accepting Settlement Offer of Vertical Computer Systems,        Incorporated by reference to
                      Inc., Implementing Settlement and Staying Proceedings to Implement    Exhibit 99.1 to the Company's
                      Settlement                                                            Form 8-K filed on April 7, 2005

10.37                 Order Instituting Cease-and-Desist Proceedings, Making Findings and   Incorporated by reference to
                      Imposing a Cease-and-Desist Order Pursuant to Section 21C of the      Exhibit 99.2 to the Company's
                      Securities Exchange Act of 1934                                       Form 8-K filed on April 7, 2005

10.38                 Order Dismissing Proceedings without Prejudice as to Vertical         Incorporated by reference to
                      Computer Systems, Inc.                                                Exhibit 99.1 to the Company's
                                                                                            Form 8-K filed on April 19, 2005
</TABLE>

                                       41
<PAGE>

<TABLE>
<CAPTION>
    Exhibit No.                                   Description                                           Location
-------------------   ----------------------------------------------------------------      ----------------------------------
<S>                   <C>                                                                   <C>

10.39                 Letter Payout Agreement, dated August 24, 2004 entered into by the    Incorporated by reference to
                      Company.                                                              Exhibit 99.1 to the Company's
                                                                                            Form 8-K filed on August 21, 2005

10.40                 Form of Agreed Judgment                                               Incorporated by reference to
                                                                                            Exhibit 99.2 to the Company's
                                                                                            Form 8-K filed on August 31, 2005

10.41                 Settlement Agreement and Promissory Note, dated October 19, 2005      Provided herewith
                      between the Company and Parker, Mills & Patel

10.42                 Amended and Restated Term Secured Promissory Note in the principal    Incorporated by reference to
                      amount of $600,000.00, payable by NOW Solutions to Taladin, Inc.      Exhibit 10.1 to the Company's
                                                                                            Form 8-K filed on February 24,
                                                                                            2006

10.43                 Secured Term Promissory Note in the principal amount of               Incorporated by reference to
                      $450,000.00, payable by Taladin, Inc. to Tara Financial Services,     Exhibit 10.2 to the Company's
                      Inc.                                                                  Form 8-K filed on February 24,
                                                                                            2006

10.44                 Secured Term Promissory Note in the principal amount of               Incorporated by reference to
                      $150,000.00, payable by Taladin, Inc. to Strategic Growth Partners,   Exhibit 10.3 to the Company's
                      Inc.                                                                  Form 8-K filed on February 24,
                                                                                            2006

10.45                 Agreement dated as of February 13, 2006 among Tara Financial          Incorporated by reference to
                      Services, Inc., as lender, NOW Solutions, the Company, Robert         Exhibit 10.4 to the Company's
                      Farias, and Robert Mokhtarian                                         Form 8-K filed on February 24,
                                                                                            2006

10.46                 Secured Term Promissory Note in the principal amount of               Incorporated by reference to
                      $359,559.90, payable by NOW Solutions to Tara Financial Services,     Exhibit 10.5 to the Company's
                      Inc.                                                                  Form 8-K filed on February 24,
                                                                                            2006

10.47                 Secured Term Promissory Note in the principal amount of               Incorporated by reference to
                      $438,795.31, payable by the Company to Tara Financial Services, Inc.  Exhibit 10.6 to the Company's
                                                                                            Form 8-K filed on February 24,
                                                                                            2006

10.48                 Secured Term Promissory Note in the principal amount of               Incorporated by reference to
                      $955,103.30, payable by NOW Solutions to Tara Financial Services,     Exhibit 10.7 to the Company's
                      Inc.                                                                  Form 8-K filed on February 24,
                                                                                            2006


14.1                  Code of Ethics                                                        Incorporated by reference to
                                                                                            Exhibit 14.1 to the Company's
                                                                                            Form 10-KSB filed on January 18,
                                                                                            2005
</TABLE>

                                       42
<PAGE>

<TABLE>
<CAPTION>
    Exhibit No.                                   Description                                           Location
-------------------   ----------------------------------------------------------------      ----------------------------------
<S>                   <C>                                                                   <C>
21.1                  Subsidiaries of the Company                                           Provided herewith


31.1                  Certification of Chief Executive Officer Pursuant to Section 302 of   Provided herewith
                      the Sarbanes-Oxley Act of 2002, dated April 13, 2006

31.2                  Certification of Principal Accounting Officer Pursuant to Section     Provided herewith
                      302 of the Sarbanes-Oxley Act of 2002, dated April 13, 2006

32.1                  Certification of Chief Executive Officer Pursuant to Section 906 of   Provided herewith
                      the Sarbanes-Oxley Act of 2002, dated April 13, 2006

32.2                  Certification of Principal Accounting Officer Pursuant to Section
                      906 of the Sarbanes-Oxley Act of 2002, dated April 13, 2006           Provided herewith
</TABLE>

      (b)   Reports on Form 8-K:

      On February 24, 2006,  the Company  filed a Current  Report on Form 8-K to
disclose the transaction described below.

      On February 22, 2006, the Company closed two series of transactions having
the  effect  of   restructuring   and  extending  the   maturities  of  existing
indebtedness of the Company and its wholly-owned  subsidiaries.  As a prelude to
the  transactions,  the  Company  established  a  new  wholly-owned  subsidiary,
Taladin.

      In the first  series of  transactions,  Taladin  secured  financing in the
aggregate amount of $600,000,  which amount was utilized to acquire the existing
indebtedness of Now Solutions,  from WAMCO. The new financing,  evidenced by two
secured promissory notes, has a maturity date in the year 2011.

      In  the  second  series  of  transactions,  the  Company  and  two  of its
subsidiaries  (including Now Solutions)  consolidated  aggregate indebtedness in
the amount of $1.75 million into three new promissory notes having maturities in
the year 2018. The promissory notes payable by Now Solutions contain  provisions
requiring  additional  principal  reductions  in the event sales exceed  certain
financial thresholds.

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.,  were
$90,000 and $75,000 for the audit of the Company's annual  financial  statements
for the fiscal  years  ended 2005 and 2004,  which  included  the reviews of the
financial  statements in the Company's  Forms 10-QSB for the  applicable  fiscal
year.

      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 2005 for professional  services rendered by Hartman,  Leito, and Bolt, LLP
for tax advice,  tax  planning  and tax return  preparation  were $8,650 for the
years ended 2005.  The  aggregate  fees billed in the fiscal year ended 2004 for
professional  services rendered by BDO Seidman, LLP for tax advice, tax planning
and tax return  preparation  were  $11,050 for the fiscal  year ended  2004.  In
addition,  BDO  Dunwoody  LLP in Toronto  billed  23,219 and 11,925 in  Canadian
dollars for tax advice,  tax planning and tax return  preparation  for the years
ended 2005 and 2004, respectively. Dickstein Shapiro Moran & Oshinsky LLP billed
$10,667 and $3,427 and for tax advice and tax  planning for the years ended 2005
and 2004, 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 2005 and 2004.

                                       43
<PAGE>

                                   SIGNATURES

      In accordance with the  requirements of the Exchange Act, as amended,  the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                           VERTICAL COMPUTER SYSTEMS, INC.

April 13, 2006                            By:   /s/   Richard Wade
                                              ----------------------------
                                                 Richard Wade, President and
                                                 Chief Executive Officer



April 13, 2006                            By:   /s   David Braun
                                              ---------------------------
                                                 David Braun
                                                 Principal Accounting Officer

      In accordance  with the Exchange Act, this Report has been signed below by
the following  persons or on behalf of the  Registrant  and in the capacities on
the dates indicated.


                                           DIRECTORS:

April 13, 2006                            By:   /s/ Richard Wade
                                              ----------------------------
                                                 Richard Wade, Director


April 13, 2006                            By:   /s/ William Mills
                                              ----------------------------
                                                 William Mills, Director

                                       44
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm                     F-2

Consolidated Financial Statements

      Consolidated Balance Sheets                                           F-3
      Consolidated Statements of Operations                                 F-5
      Consolidated Statements of Stockholders' Equity                       F-6
      Consolidated Statements of Cash Flows                                 F-8

Notes to Consolidated Financial Statements                                  F-9

                                       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  sheets  of  Vertical
Computer Systems, Inc. and Subsidiaries as of December 31, 2005 and 2004 and the
related consolidated  statements of operations,  stockholders'  deficit and cash
flows for the years 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 audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits 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
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Vertical Computer
Systems,  Inc. and Subsidiaries as of December 31, 2005 and 2004 and the results
of their  operations and cash flows for the years 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, 2005, the Company had negative
working capital of approximately $11.2 million, a stockholders' deficit of $15.1
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
April 5, 2006

                                      F-2

<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                                              December 31,
                                                       -------------------------
                                                          2005          2004
                                                       -----------   -----------
Assets

Current assets:
  Cash                                                 $   285,366   $   330,780
  Securities available for sale                              2,760         9,128
  Accounts receivable, net of allowance for bad
    debts of $160,480 and $137,473                       1,011,806     1,325,114
  Other receivable                                         110,085       110,085
  Employee receivables                                      47,548        17,138
  Prepaid expenses and other assets                         83,046        23,789
                                                       -----------   -----------

Total current assets                                     1,540,611     1,816,034
                                                       -----------   -----------

Property and equipment, net of accumulated
  depreciation                                              96,703        82,824
Other intangibles, net                                     153,716       944,298
Deposits and other                                          10,372        10,373
                                                       -----------   -----------

Total assets                                           $ 1,801,402   $ 2,853,529
                                                       ===========   ===========

Liabilities, Convertible Preferred Stock and
  Stockholder's Deficit

Current liabilities:
  Accounts payable and accrued liabilities             $ 5,806,381   $ 6,113,310
  Deferred revenue                                       2,559,532     2,679,484
  Accrued income taxes                                      18,000        18,000
  Current portion-convertible debentures                   230,000        40,000
  Current portion-notes payable                          4,140,571     4,580,899
                                                       -----------   -----------

Total current liabilities                               12,754,484    13,431,693

Non current portion - Convertible debentures                    --       390,000
Non current portion - Notes payable                      1,190,734
Accrued dividends                                        2,913,712     2,313,712
                                                       -----------   -----------

Total liabilities                                      $16,858,930   $16,135,405
                                                       ===========   ===========

                                      F-3
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (Continued)

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                ----------------------------
                                                                    2005           2004
                                                                ------------    ------------
<S>                                                             <C>             <C>
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 947,291,670 and 867,768,895 issued and
  outstanding                                                          9,473           8,678


  Additional paid-in capital                                      27,723,121      27,385,191
  Accumulated deficit                                            (43,474,248)    (41,367,483
  Accumulated other comprehensive income                             132,826         140,438
                                                                ------------    ------------

Total stockholders' deficit                                      (15,057,528)    (13,281,876
                                                                ------------    ------------

Total liabilities and stockholders' deficit                     $  1,801,402    $  2,853,529
                                                                ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             Years ended December 31,
                                                              2005             2004
                                                         -------------    -------------
<S>                                                      <C>              <C>
Revenues

      Licensing and maintenance                          $   5,126,271    $   5,457,258
      Consulting Services                                    1,227,306          818,033
      Other                                                    246,642          136,716
                                                         -------------    -------------

Total Revenues                                               6,600,219        6,412,007

Selling , general and administrative expenses                7,605,874        8,877,495

Goodwill Impairment                                                 --        1,760,000
                                                         -------------    -------------

Operating loss                                              (1,005,655)      (4,225,488)

Interest income                                                  3,950            2,010
Interest expense                                              (505,059)        (478,732)
                                                         -------------    -------------

Net loss before income taxes                                (1,506,764)      (4,702,210)

Income Tax Provision  (benefit)                                     --               --
                                                         -------------    -------------

Net loss                                                    (1,506,764)      (4,702,210)

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

Net loss applicable to common stockholders               $  (2,106,764)   $  (5,302,210)
                                                         -------------    -------------


Basic and diluted loss per share                         $       (0.00)   $       (0.01)
                                                         -------------    -------------

Basic and diluted weighted average of common shares
      outstanding                                          888,580,402      853,830,749
                                                         -------------    -------------

Comprehensive loss and its components consist of the
      following:
      Net loss                                           $  (1,506,764)   $  (4,702,210)
      Unrealized loss on securities available for sale          (6,368)              --
      Translation adjustments                                   (1,244)            (422)

                                                         -------------    -------------
      Comprehensive loss                                 $  (1,514,376)   $  (4,702,632)
                                                         =============    =============
</TABLE>

See accompanying notes to consolidated financial statements

                                      F-5
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                     YEARS ENDED DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                      Common Stock                Preferred Stock
                                               ----------------------------------------------------------
                                                  Shares        Amount        Shares          Amount
                                               ------------  ------------  ------------------------------
<S>                                            <C>           <C>           <C>           <C>
Balance at 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>
                                                Additional                           Other
                                                 Paid-in       Accumulated       Comprehensive

                                                 Capital         Deficit             Income          Total
                                               ---------------------------------------------------------------
<S>                                            <C>           <C>                <C>               <C>
Balance at 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  $    (41,367,483)  $        140,438  $(13,281,876)
                                               ===============================================================
</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, 2005 AND 2004

<TABLE>
<CAPTION>
                                                       Common Stock                Preferred Stock
                                               ----------------------------  ----------------------------
                                                      Shares      Amount            Shares         Amount
                                               ----------------------------  ----------------------------
<S>                                            <C>            <C>            <C>            <C>
Balance at 12/31/04                              867,768,895  $       8,678  $     132,200  $     551,300

Issuing common shares for
 failure to make loan payments                     2,700,000             27

Issuing common shares for
 services to be rendered                           1,500,000             15

Issuing common shares for
 failure to file SB-2 Registration                 5,000,000             50

Issuing restricted stock,
net of cancellations                                      --             --

Issuing common shares upon
 conversion of convertible debentures             69,322,775            693

Conversion of warrants
 in the third quarter of 2005                      1,000,000             10

Net loss for the year ended December 31, 2005

Accrued dividends for preferred stock

Other comprehensive income
 translation adjustment

 Unrealized loss on investment
                                               ----------------------------------------------------------
Balance 12/31/05                                 947,291,670  $       9,473        132,200  $     551,300
                                               ==========================================================


<CAPTION>
                                                 Additional                       Other
                                                  Paid-in      Accumulated    Comprehensive
                                                  Capital        Deficit          Income          Total
                                               -----------------------------------------------------------
<S>                                            <C>            <C>             <C>            <C>
Balance at 12/31/04                            $  27,385,191  $ (41,367,483)  $     140,438  $ (13,281,876)

Issuing common shares for
 failure to make loan payments                        19,373                                    19,400

Issuing common shares for
 services to be rendered                               4,935                                     4,950

Issuing common shares for
 failure to file SB-2 Registration                    82,223                                    82,273

Issuing restricted stock,
net of cancellations                                   2,421                                     2,421

Issuing common shares upon
 conversion of convertible debentures                223,988                                   224,681

Conversion of warrants
 in the third quarter of 2005                          4,990                                     5,000

Net loss for the year ended December 31, 2005                  (1,506,764)                  (1,506,764)

Accrued dividends for preferred stock                            (600,000)                    (600,000)

Other comprehensive income
 translation adjustment                                                          (1,244)        (1,244)

 Unrealized loss on investment                                                   (6,368)        (6,368)
                                               -----------------------------------------------------------
Balance 12/31/05                               $  27,723,121  $ (43,474,248)  $     132,826  $ (15,057,528)
                                               ===========================================================
</TABLE>

                See accompanying notes to consolidated financial statements

                                      F-7
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 Years ended December 31,
                                                                --------------------------
                                                                    2005           2004
                                                                -----------    -----------
<S>                                                             <C>            <C>
Cash flows from operating activities:

  Net loss                                                      $(1,506,764)   $(4,702,210)
  Adjustments to reconcile net loss to net cash
    provided by operating activities:
    Depreciation and amortization                                   850,490      1,267,848
    Goodwill Impairment                                                  --      1,760,000
    Write-off of MedData Solutions Investment                            --        135,000
    Non employee stock compensation                                 136,304        808,976
    Employee stock compensation expense                               2,421         83,494
    Allowance for bad debts                                          23,007         16,469
    Changes in operating assets and liabilities:
      Accounts receivable                                           290,301       (359,302)
      Receivable from officers and employees                        (30,410)        (6,226)
      Prepaid expenses                                              (59,257)       187,223
      Accounts payable and accrued liabilities                      865,913      1,084,874
      Deferred Revenue                                             (119,952)       187,799
                                                                -----------    -----------

Net cash provided by operating activities                           452,053        463,945

Cash flows from investing activities:
  Acquisition of minority interest in Now Solutions                      --       (877,000)
  Purchase of equipment                                             (73,787)       (46,112)
                                                                -----------    -----------

Net cash used in investing activities                               (73,787)      (923,112)

Cash flows from financing activities:
  Payment of convertible debentures                                      --        (10,000)
  Payment of note payable                                          (422,436)      (765,583)
  Proceeds from issuance of notes payable                                --        500,000
  Release of restricted cash                                             --        102,655
                                                                -----------    -----------

Net cash provided by (used in) financing activities                (422,436)      (172,928)

Effect of changes in exchange rates on cash                          (1,244)           422

Net increase (decrease) in cash and cash equivalents,               (45,414)      (631,674)

Cash and cash equivalents, beginning of period                      330,780        962,454
                                                                -----------    -----------

Cash and cash equivalents, end of period                        $   285,366    $   330,780
                                                                ===========    ===========

Supplemental disclosures of cash flow information:
  Cash paid during the year for interest
    Interest                                                    $   228,234    $   189,913
                                                                ===========    ===========

  Non-cash investing and financing activities:
    Conversion of convertible debentures and accrued interest       224,681             --
    Conversion of accounts payable and accrued liabilities to
    notes payable                                                 1,148,161             --
    Common stock and debt issued for acquisitions               $        --      1,018,000
                                                                ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements

                                      F-8
<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"),   which  is   inactive;
Globalfare.com,  Inc. ("GFI"), which is inactive;  Pointmail.com,  Inc. ("PMI"),
which is nactive;  Scientific Fuel, Inc.  ("SFI"),  which is inactive inactive ;
"Vertical  Internet Solutions ("VIS"),  which is inactive;  Now Solutions,  Inc.
("Now Solutions");  Taladin, Inc.  ("Taladin"),  a newly established entity with
minor  activities  which is an 81.5% owned  subsidiary  of  Government  Internet
Systems,  Inc. ("GIS");  and GIS, which is 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, 2005 and 2004, 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,  2005 was  $15.1
million.  Additionally,  at December  31,  2005,  the Company  negative  working
capital of approximately $11.2 million (although it includes deferred revenue of
approximately   $2.6   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-9
<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 ("EITF")
No 00-21, "Revenue Arrangement with Multiple Deliverables."

Deferred  revenue on maintenance  contracts  represent cash received in advance,
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 2004,  in  accordance  with
Financial  Accounting  Standard No. 142 ("SFAS No 142"), the Company  determined
that there was  $1,760,000  impairment in goodwill,  all of which was located in
the Company. During 2005, there was no impairment of goodwill since all goodwill
had been written off.

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 2005 and 2004, no costs were
capitalized.

                                      F-10
<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, 2005 and 2004, 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 and restricted
stock grants. Actual results could materially differ from those estimates.

                                      F-11
<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,  2005  and  2004  were
approximately $206,000 and $189,000,  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 grand fathered 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-12
<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
that are Small  Business  Issuers,  this  Statement is  effective  for the first
annual period  beginning  after  December 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,  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  ("Ross")  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  agreement.  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  agreement.  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 note was 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. In
April  2005,  Arglen  filed a Notice  of Filing a Foreign  Judgment  in  Tarrant
County,  Texas. In August 2005, the Company entered into a Payout Agreement with
Arglen  allowing  payout  terms to the Company and pursuant to which the Company
agreed to enter  into the  Agreed  Judgment.  The  Agreed  Judgment  and  Payout
Agreement were entered into concerning a California judgment and Arglen's notice
of Filing a Foreign Judgment in Tarrant County,  Texas, which were in connection
with the 2003  Settlement.  Pursuant to the terms of the Agreed Judgment and the
Payout  Agreement,  the Company agreed to pay Arglen a total of $713,489,  which
includes the following amounts: (a) $600,000 in principal on the promissory note
issued  by the  Company  pursuant  to  the  2003  Settlement,  (b)  the  accrued
post-judgment interest on the California judgment from September 4, 2004 through
September 15, 2005, at the rate of 10% per annum, which equals $61,989,  and (c)
attorney's  fees incurred for the California  and Texas  judgment  actions which
were approximately $51,500.  Pursuant to the terms of the Payout Agreement,  the
Company began making monthly interest payments on the amounts specified above of
$5,945,  beginning  on  September  15,  2005,  which will be replaced by monthly
payments of $25,000 or 10% of the  Company's  new sales,  whichever  is greater,
beginning on February 15, 2006 until the  remainder of the $713,489 is paid.  In
accordance  with the  Payout  Agreement,  Arglen  shall not  execute  the Agreed
Judgment so long as the Company continues to make its payments as agreed.

Pursuant to the December 2003 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

                                      F-13
<PAGE>

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

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.

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,  2005,  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, issued by Now
Solutions,  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.  ("WAMCO"),  purchased the loan. As of December 31, 2005,  the  outstanding
principal  balance due on the $5.5  million note was  $865,302.  In August 2003,
WAMCO 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  earnings  before
interest,  taxes,  depreciation  &  amortization  ("EBITDA")  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.  Since  Now  Solutions  did not  qualify  for  reduced
payments,  the note became 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 was paid. In connection with the amendment,
Now Solutions was required to pay WAMCO 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  agreement.  Now Solutions had made all interest payments as of December
31, 2005 but was $865,302  delinquent  in principal  payments.  For an update of
this discussion since fiscal year-end, please see "Subsequent Events" under Note
16.

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 was $650,000,  was applied to the
outstanding debt of the Coast loan to Now Solutions.

                                      F-14
<PAGE>

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

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, 2005.

For  additional   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.

                                      F-15
<PAGE>

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-for-1  reverse stock split by RCG in
2002.  IN 2005,  OneTravel  Holdings  ("OTH"),  the  successor of RCG effected a
1-for-10 reverse stock split. Consequently,  the number of shares of OTH held by
the Company is 461 shares.

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 April 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 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 notes,
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.  In August  2004,  the Company
accepted $8,000 toward full payment of the April 2001 Note and returned  500,000
shares of TranStar common stock being held as collateral.

Also 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 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
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.
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. In October 2005, the parties entered into a settlement  agreement
regarding a lawsuit filed by PMP in January  2005.  Pursuant to the terms of the
settlement, the Company issued a promissory note to PMP in the amount of $75,000
with a maturity date of January 31, 2008,  bearing  interest at a rate of 6% per
annum,  which shall be paid in equal monthly  installments of $3,125,  beginning
February 1, 2006 for a period of 24 months.  In connection  with the settlement,
the lawsuit was dismissed.  For additional  detail on the legal  proceedings and
settlement,  please see "Litigation"  under Note 15 of the Notes to Consolidated
Financials  Statements.  Mr.  Mills is a partner  at PMP and a  director  of the
Company.

In August 2002, Mountain Reservoir  Corporation  ("Mountain  Reservoir") pledged
10,000,000  shares of common  stock to secure a loan of $25,000 to the  Company,
which issued a $25,000  note  payable on August 7, 2002 bearing  interest at 12%
per  annum,  and was due  July 1,  2005.  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.

                                      F-16
<PAGE>

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 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. The note is in default.

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 $25,000 of trade
accounts payable to Mr. Weber were cancelled. 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. In exchange for amending the
payment terms, the Company issued 2,000,000  unregistered shares of common stock
of the Company (at a fair market value of $24,000) and Now  Solutions  agreed to
pay a 2.5%  royalty  of sales  by Now  Solutions  of its  software  that  exceed
$8,000,000  per year up to a maximum of $200,000.  In January 2005,  the Company
issued an additional 2,000,000  unregistered shares of common stock to Mr. Weber
at a fair market  value of $10,000  pursuant to the  amendment.  For  additional
details on the note, please see "Notes Payable and Convertible Debts" under Note
10 of the Notes to Consolidated  Financials Statements.  The note is in default.
Mr.  Weber  is  the  President  and  a  Director  of  GIS  and  a  member  of CW
International, LLC ("CW International").

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  bearing  interest  at  10%  per  annum,  secured  by its  assets.  In
connection with the loan, Now Solutions agreed to pay Mr. Farias a 5% royalty on
any sales by Now  Solutions  over  $8,000,000  up to a maximum of  $500,000.  In
connection  with the loan,  the Company  issued (i) 5-year  warrants to purchase
5,000,000  shares of common  stock at $0.01 per share;  (ii) 5-year  warrants to
purchase  5,000,000  shares of common  stock of the  Company at $0.02 per share;
(iii)  5-year  warrants  to  purchase  5,000,000  shares of common  stock of the
Company at $0.03 per share; (iii) a total of 10,000,000  unregistered  shares of
common  stock of the  Company.  In  addition,  the  Company  also  pledged a 30%
ownership interest in Now Solutions to ensure the making of the $500,000 loan to
Now Solutions.  During 2004 and 2005, Now Solutions had made principal  payments
totaling $183,000 to Robert Farias.  For additional  details on the note, please
see  "Notes  Payable  and  Convertible  Debts"  under  Note 10 of the  Notes  to
Consolidated  Financials  Statements.  In February 2006, this note was cancelled
and replaced by a $359,560 note issued to Tara Financial  Services,  Inc. ("Tara
Financial").   For  additional  details  on  the  refinanced  note,  please  see
"Subsequent  Events"  under  Note 16 of the  Notes  to  Consolidated  Financials
Statements. Robert Farias is a director of Now Solutions.

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,  with
principal and interest due on June 1, 2002 was amended whereby the assets of Now
Solutions  secured  the note.  For  additional  details on the note,  please see
"Notes Payable and Convertible Debts" under Note 10 of the Notes to Consolidated
Financials  Statements.  In  February  2006,  this  note was  cancelled  and the
outstanding  debt was  included  under a $955,103  note  payable  issued to Tara
Financial. For additional details on the refinanced note, please see "Subsequent
Events" under Note 16. Robert Farias is a director of Now Solutions.

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.
The  $280,000  note  was  secured  by  the  asset  of Now  Solutions  and by the
SiteFlash(TM)  technology  owned by the Company.  For additional  details on the
note,  please see "Notes  Payable and  Convertible  Debts"  under Note 10 of the
Notes to  Consolidated  Financials  Statements.  In February 2006, this note was
replaced with a $438,795 note issued to Tara Financial.  For additional  details
on the refinanced  note,  please see  "Subsequent  Events" under Note 16. Robert
Farias is a director of Now Solutions.

                                      F-17
<PAGE>

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.  The note
was also 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. For additional details on
the note, please see "Notes Payable and Convertible  Debts" under Note 10 of the
Notes to  Consolidated  Financials  Statements.  In February 2006, this note was
cancelled and the  outstanding  debt was included  under a $955,103 note payable
issued to Tara Financial.  For additional details on the refinanced note, please
see  "Subsequent  Events"  under Note 16.  Robert  Farias is a  director  of Now
Solutions.

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. As of March
31, 2004, the transaction was fully reserved. Robert Farias is a director of Now
Solutions.

In  August  2004,  the  Company  licensed  the use of the  Forums  and  calendar
applications  of the  Company's  SiteFlash(TM)  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.
Charles Kensicki, the President of Basix1, is currently a Director of GIS and of
Now Solutions and the President of Taladin.

In October 2004, the Company and Stephen Rossetti agreed to amend the terms of a
consulting agreement and the $7,500 promissory note issued in May 2003. Pursuant
to the terms of the amendment,  the Company issued 6,500,000 unregistered shares
of common  stock of the  Company (at a fair market  value of  $84,500),  as full
payment for services  rendered  under the  consulting  agreement  and the $7,500
note,  which has been  cancelled.  Mr. Rossetti is Executive  Vice-President  of
Government Affairs, Chairman, CEO and Director of GIS, Director of Now Solutions
and an officer of Markquest, Inc.

In  January  2005,  the  Company  entered  into a  marketing  agreement  with CW
International  whereby CW International will be entitled to receive a percentage
of  fees  for new  customers  of the  Company  generated  by CW  International's
efforts.  Mr.  Weber is a  Director  and  President  of GIS and a  member  of CW
International.

In May 2005, Now Solutions and Robert Farias  entered into an agreement  whereby
Mr. Farias' would provide consulting and design specification services. Pursuant
to this agreement, Mr. Farias shall receive an hourly fee and 2% of all sales of
the Now Solutions' products specifically designed and sold within the context of
the agreement up to the earlier of either (a) four (4) years after the execution
of  this  Agreement  or  (b)   Contractor's   receipt  of  one  million  dollars
($1,000,000)  in  commissions.  In December  2005,  Now Solutions  assigned this
agreement to Taladin. Mr. Farias is a director of Now Solutions,  a wholly-owned
subsidiary of the Company.

In August 2005,  Mr. Salz made a $5,000  payment to a third party pursuant to an
agreement and promissory note on the Company's behalf. Mr. Salz is the Company's
corporate counsel.

In September  2005,  Now  Solutions  entered into a  consulting  agreement  with
Markquest,  Inc. Mr. Rossetti is Executive Vice-President of Government Affairs,
Chairman,  CEO and Director of GIS,  Director of Now Solutions and an officer of
Markquest, Inc.


Note 6.  Other Intangible Assets

Other intangible assets are as follows:
                                                      2005             2004
                                                  ------------     ------------

Purchased software source code                    $  4,753,972     $  4,753,972
Other amortizable intangible assets                    305,337          305,337
Accumulated amortization                            (4,905,593)      (4,115,011)
                                                  ------------     ------------
Net other intangible assets                       $    153,716     $    944,298
                                                  ============     ============

In 2004,  goodwill associated with the purchase of the minority interests in Now
Solutions of $1,760,000 was considered fully impaired.

                                      F-18
<PAGE>

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,  2005  and  2004,   respectively,
amortization expense consists of the following:

                                                     2005             2004
                                                  ------------     ------------
Software source code                              $    763,440     $  1,012,274
Other purchased intangible assets                       27,142           94,763
                                                  ------------     ------------
Total                                             $    790,582    $   1,107,037
                                                  ============     ============

The estimated amortization expense for the succeeding year is as follows:

Years ending December 31

        2006                                                      $     153,716
                                                                  -------------
        Total                                                     $     153,716
                                                                  =============

Note 7.  Property and Equipment

Property and equipment consist of the following:

                                                     2005             2004
                                                  ------------     ------------
Equipment                                         $    822,960     $    749,173
Leasehold improvements                                  87,712           87,712
Furniture and fixtures                                  40,803           40,803
                                                  ------------     ------------
Total                                                  951,475          877,688

Accumulated depreciation                              (854,772)        (794,864)
                                                  ------------     ------------
                                                  $     96,703     $     82,824
                                                  ============     ============

Depreciation  expense for the years ended December 31, 2005 and 2004 was $59,908
and $160,811, respectively.


Note 8. Accounts Payable and Accrued Expenses

Accounts payable and accrued liabilities consist of the following:

                                                     2005             2004
                                                  ------------     ------------
Accounts payable                                  $  1,398,486     $  2,304,960
Accrued payroll                                      1,733,573        1,536,840
Accrued payroll tax and penalties                      706,424          698,172
Accrued liabilities                                  1,967,898        1,538,338
                                                  ------------     ------------
                                                  $  5,806,381     $  6,078,310
                                                  ============     ============

Note 9.  Other Receivable

Other  receivable  of  $110,085  and  $110,085  at  December  31,  2005 and 2004
represent the amounts due from 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-19
<PAGE>

Note 10.  Notes Payable and Convertible Debts


                                                            December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------

The $5.5  million  note  payable,  issued by Now
Solutions  to Coast and  purchased  by WAMCO 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 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.  For the months of
May,  June,  July and August  2005,  the Company
paid to WAMCO  $60,000 of principal and interest
per  month at an  interest  rate of 11%  without
prejudice  subject  to  final  negotiation  with
WAMCO. Now Solutions made all interest  payments
as of December  31,  2005.  As of  December  31,
2005, the $865,302  balance was  delinquent.  In
February  2006,   WAMCO  assigned  the  note  to
Taladin. For more details, see Subsequent Events
in Note 16.                                        $    865,302     $  1,190,601

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 in terms of the
agreement  between Now Solutions  and Ross.  See
also  Note  15 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 PMP, a
related party, bearing interest at 6% per annum,
unsecured, principal and interest due at January
2002.  In January  2005,  PMP 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 October 2005, the
parties  entered  into a  settlement  agreement.
Pursuant  to the  terms of the  settlement,  the
Company  issued a promissory  note to PMP in the
amount  of  $75,000  with  a  maturity  date  of
January 31, 2008,  bearing interest at a rate of
6% per  annum,  which  shall  be paid  in  equal
monthly  installments  of  $  3,125,   beginning
February  1, 2006 for a period of 24 months.  In
connection with the settlement,  the lawsuit was
dismissed   and  the   $27,558   note  has  been
cancelled.  Mr.  Mills is a partner of PMP and a
Director of the Company.                                     --           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

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

                                      F-20
<PAGE>

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 and 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 was 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 has been
in default since February 1, 2004.                      161,504          167,141

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.  In May  2005,  the  Company  and a third
party lender  amended the terms of the note. Any
existing default on the note was waived, and the
Company agreed to commence  monthly  payments to
the lender of $2,500 in June 2005,  which  would
be raised to $4,000  beginning in October  2005,
and to pay the  lender's  reasonable  attorney's
fees.  In  connection  with  the  agreement  the
Company issued 600,000 shares of common stock of
the Company  (at a fair market  value of $9,000)
to the lender and warrants to purchase 1,200,000
shares  of  the   Company   common   stock  were
cancelled   by  the   lender.   The  Company  is
currently  in default of the  agreement  for the
August 2005 through March 2006 payments.                 47,784           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 were to 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 note has been
in default since 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  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 note has been in default since
April 1, 2003.                                           12,583           12,583

                                      F-21
<PAGE>

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  was to be
paid in  monthly  installments  in the amount of
$5,000,  which was to be replaced  with  monthly
payments of $10,000  beginning in January  2004.
All  interest  was due on the day the  principal
was to be  paid in  full.  In  exchange  for the
extensions,  the  interest  rate  accrued 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 did not
pay the  amounts  in a timely  manner,  then all
amounts   still  owing  under  these  notes  was
considered  in default and the  following  shall
applied:  (i) all such  remaining  amounts  were
added  to the  secured  loan  amounts  and  were
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  were to 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  might  have  received  due  to a
capital infusion or upfront  licensing fees from
a reseller  that was outside its normal scope of
business  (i.e.,  not part of software  sales in
the regular  course of business),  Now Solutions
was  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 had been paid in full  toward the  $280,000
and  $181,583  notes  if  the  Company  was  not
current in its  payments.  The $280,000 note was
also secured by  SiteFlash(TM)  technology owned
by the Company.  In February 2006, this note was
replaced  with a  $438,795  note  issued to Tara
Financial.   For   additional   details  on  the
refinanced note, please see "Subsequent  Events"
under Note 16.  Robert  Farias is a director  of
Now Solutions.                                          237,626          237,626

Note payable in the amount of $181,583 issued to
Robert  Farias,  bearing  interest  at  12%  per
annum, was to be paid 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. This note
was  issued  to  replace  two  notes  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)
all  remaining  past-due  amounts  to bring  the
notes  current by April 20,  2004.  In the event
the  Company did not pay the amounts in a timely
manner, then all amounts still owing under these
notes  was   considered   in  default   and  the
following   applied:   (i)  all  such  remaining
amounts  were added to the secured  loan amounts
and were  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 were  applied to the  $280,000 and
$181,583 notes until these notes were to be paid
in full; and (iii) with respect to cash proceeds
Now  Solutions  might  have  received  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
was  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 had been paid in full  toward the  $280,000
and  $181,583  notes  if  the  Company  was  not
current in its payments. The note was 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.  In
February  2006,  this note was cancelled and the
outstanding  debt was included  under a $955,103
note  payable  issued  to  Tara  Financial.  For
additional   details  on  the  refinanced  note,
please see  "Subsequent  Events"  under Note 16.
Robert  Farias is a director  of Now  Solutions.
Robert Farias is a director of Now Solutions.           108,034          108,034

                                      F-22
<PAGE>

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 Victor Weber and $25,000
in  expense  paid  by  Weber  on  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. Mr. Weber is the President
and  a  Director  of  GIS  and  a  member  of CW
International. The note is in default.                  215,000          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 were to be paid as  follows:  once the
Company's  subsidiary,  Now Solutions,  had 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,  would be
applied to the $350,000  and $90,000  notes on a
pro-rata basis.  Thereafter,  the Company was to
make  monthly  principal   payments  of  $76,860
applied on a pro-rata  basis toward the $350,000
and  $90,000  notes  until all  monies due under
these notes were paid.  In  connection  with the
amendment, Now Solutions entered into a security
agreement with the lender to guarantee the note.
In February  2006,  this note was  cancelled and
the  outstanding   debt  was  included  under  a
$955,103 note payable issued to Tara  Financial.
For additional  details on the refinanced  note,
please see  "Subsequent  Events"  under Note 16.
Robert  Farias is a director  of Now  Solutions.        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 in default.                                           25,000           25,000

Note  payable in the amount of $17,500,  bearing
no   interest   to  a   third-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 in default.                 11,000           11,000

                                      F-23
<PAGE>

Note  payable in the amount of $17,500,  bearing
no   interest   to  a   third-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 in default.                 11,000           11,000

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 has been in default  since  December 31,
2002.                                                    10,000           10,000

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 was accrued from the date the
note was  issued.  In  addition,  EnFacet was to
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  would be  payable as
follows:  once  the  Company's  subsidiary,  Now
Solutions,  had paid off the entire  balance due
under the $500,000  note issued by Now Solutions
to  Farias  on  February  13,  2004,  16% of any
remaining   amounts   from  the  final   $91,500
installment  payment on the $500,000  note would
be applied to the $84,000 note. Thereafter,  the
Company  or,  at  the  Company's   option,   Now
Solutions,   was  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  had  been  paid.   In
connection  with the  amendment,  Now  Solutions
entered  into  a  security  agreement  with  the
lender to guarantee the note. In February  2006,
this note was cancelled and the outstanding debt
was  included  under  a  $955,103  note  payable
issued to Tara Financial. For additional details
on the refinanced  note,  please see "Subsequent
Events"  under  Note  16.  Robert  Farias  is  a
director of Now  Solutions.  Robert  Farias is a
director  of  Now   Solutions,   a  wholly-owned
subsidiary of the Company.                               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

                                      F-24
<PAGE>

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.  In February  2004,  the parties
amended  the terms of the note.  Pursuant to the
amendment,  the parties  waived any  defaults on
the note  and  agreed  that  the  note  would be
payable   as   follows:   Once   the   Company's
subsidiary,  Now  Solutions,  had  paid  off the
entire  balance  due  under  the  $500,000  note
issued  by  Now   Solutions  to  Mr.  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,  would be
applied to the $350,000  and $90,000  notes on a
pro-rata  basis.  Thereafter,  the Company would
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 had been paid.  In  connection
with the amendment, Now Solutions entered into a
security  agreement with the lender to guarantee
the  note.  In  February  2006,  this  note  was
cancelled and the outstanding  debt was included
under a  $955,103  note  payable  issued to Tara
Financial.   For   additional   details  on  the
refinanced note, please see "Subsequent  Events"
under Note 16.  Robert  Farias is a director  of
Now Solutions.                                           90,000           90,000

Note payable in the amount of $60,000  issued by
GIS 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,   GIS  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 are
owned by Mountain Reservoir.  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.
This note is in default.                                 60,006           60,006

Note Payable in the amount of $40,000  issued by
GIS 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,   GIS  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 are
owned by Mountain Reservoir.  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.
$5,000 of this note was not funded until January
2004. This note is in default.                           40,000           40,000

                                      F-25
<PAGE>

Note Payable in the amount of $500,000 issued by
Now   Solutions,   the  Company's   wholly-owned
subsidiary  to  Robert  Farias.  This  note  was
secured by Now Solutions'  assets.  In addition,
Farias is  entitled to a 5% royalty on any sales
by  Now  Solutions  of  over  $8,000,000  up  to
$500,000.  The note  beared  interest at 10% per
annum and Now  Solutions  was  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 had  been  paid in full.  In the
event Now  Solutions  received cash proceeds due
to a capital infusion or upfront  licensing fees
from a  reseller  that was  outside  its  normal
scope of  business  (i.e.,  not part of software
sales in the regular  course of  business),  Now
Solutions  was  required  to  pay  50%  of  such
proceeds   remaining   toward   payment  of  the
$500,000 note. In connection  with the loan, the
Company   issued  (i)   five-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  Option Valuation Model); (ii)
five-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 Option Valuation Model);
(iii) five-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 Option 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.  In addition,
the  Company  also   pledged  a  30%   ownership
interest in Now  Solutions  to ensure the making
of the $500,000 loan to Now Solutions.  The note
is in default.  As of  December  31,  2005,  Now
Solutions had made principal  payments  totaling
$183,000  to Robert  Farias.  In  January  2005,
WAMCO  notified Mr.  Farias that pursuant to the
subordination  agreement  executed between WAMCO
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 wholly-owned  subsidiary of the
Company.   In  February  2006,   this  note  was
cancelled and replaced by a $359,560 note issued
to Tara Financial. For additional details on the
refinanced note, please see "Subsequent  Events"
under  Note  16 of  the  Notes  to  Consolidated
Financials Statements.                                  317,000          408,500

Note  payable  in the  amount  of  $5,000 to Mr.
James  Salz,   bearing   interest  at  10%  with
principal  and interest due on demand.  Mr. Salz
is the Company's corporate counsel.                       5,000               --

Note  payable  in the  amount of  $10,000 to Mr.
James Salz. Mr. Salz is the Company's  corporate
counsel. The note is in default.                         10,000               --

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. 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.  In April
2005,  Arglen filed a Notice of Filing a Foreign
Judgment  in Tarrant  County,  Texas.  In August
2005,  Company  entered into an  agreement  with
Arglen allowing payout terms to the Company (the
"Payout  Agreement")  and  pursuant to which the
Company agreed to enter into an Agreed  Judgment
for the  Foreign  Judgment  in  Tarrant  County,
Texas  (the  "Agreed   Judgment").   The  Agreed
Judgment and Payout  Agreement were entered into
concerning  a  California  judgment and Arglen's
notice of Filing a Foreign  Judgment  in Tarrant
County, Texas, which were in connection with the
2003    settlement    agreement    (the    "2003
Settlement").  Pursuant  to  the  terms  of  the
Agreed  Judgment and the Payout  Agreement,  the
Company   agreed  to  pay   Arglen  a  total  of
$713,489,  which includes the following amounts:
(a) $600,000 in principal on the promissory note
issued  by the  Company  pursuant  to  the  2003
Settlement,   (b)  the   accrued   post-judgment
interest  on  the   California   judgment   from
September 4, 2004 through September 15, 2005, at
the rate of 10% per annum, which equals $61,989,
and  (c)   attorney's   fees  incurred  for  the
California and Texas judgment actions which were
approximately $51,500.  Pursuant to the terms of
the Payout  Agreement,  the Company began making
monthly   interest   payments   on  the  amounts
specified   above  of   $5,945,   beginning   on
September  15,  2005,  which will be replaced by
monthly  payments  of  $25,000  or  10%  of  the
Company's  new  sales,   whichever  is  greater,
beginning   on  February   15,  2006  until  the
remainder of the $713,489 is paid. In accordance
with the  Payout  Agreement,  Arglen  shall  not
execute  the  Agreed  Judgment  so  long  as the
Company   continues  to  make  its  payments  as
agreed.  For  additional  details,  See Note 15,
Litigation.                                             713,489          600,000

                                      F-26
<PAGE>

Note payable in the amount of $75,000  issued by
the Company, bearing interest at a rate of 6% to
PMP in  October  2005.  The note was  issued  in
connection  with  a  lawsuit  filed  by  PMP  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.  The
$75,000 note has a maturity  date of January 31,
2008  and   shall  be  paid  in  equal   monthly
installments  of $3,125,  beginning  February 1,
2006 for a period of 24 months.                          75,000               --

Note payable in the amount of $992,723 issued by
Now   Solutions,   the  Company's   wholly-owned
subsidiary to Wolman Blair, PLLC on November 30,
2005.The  note is secured with the assets of Now
Solutions and bears  interest at the rate of 12%
compounded  annually.  The  note was  issued  in
connection with  refinancing  outstanding  legal
fees and expenses  (which where owed pursuant to
the legal services retainer agreement), together
with  interest  accrued  as of the date the note
was issued. The note is payable as follows:  (a)
$12,500 by  December  15,  2005;  (b) $30,000 by
December  30,  2005;  (c) $25,000 by January 10,
2006;  (d)  $12,500 by  January  20,  2006;  (e)
$25,000  by  February  1,  2006;  and (f)  equal
monthly    installments   of   $40,000,    each,
commencing  March 1, 2006, and continuing on the
first day of each month thereafter,  until March
1,  2008,   upon  which  date  all   outstanding
principal   and   interest   shall  be  due.  In
connection with the loan, Now Solutions  entered
into a  security  agreement  with the  lender to
guarantee the note. The note is in default.            992, 723               --
                                                   ------------     ------------
Total notes payable                                   5,331,305       4,580,899
Current maturities                                   (4,140,571)     (4,580,899)
                                                   ------------     ------------
Long-Term portion of notes payable                 $  1,190,734     $         --
                                                   ============     ============

Future minimum payments for the next five years is as follows:

                           Year                      Amount
                           2006                    $  4,140,571
                           2007                         668,238
                           2008                         475,932
                           2009                          46,564
                           2010                               0
                                                   ------------
   Total notes payable                             $  5,331,305

                                      F-27
<PAGE>

Note 10.  Notes Payable and Convertible Debts (Continued)

Convertible Debentures

                                                            December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------

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 five 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.                   10,000           10,000

Convertible  debentures  dated  April 14,  2003,
bearing no interest,  convertible into shares of
common  stock at 100% of the lowest  closing bid
price  three  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  was  due  at
maturity  in April  2006.  For an update of this
debenture  since  fiscal  year-end,  please  see
"Subsequent Events" under Note 16.                      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
five  trading  days  prior  to  the  conversion.
Principal  and  interest  are due at maturity in
April 2006. As of December 31, 2005, $200,000 of
principal and  $34,681of  interest was converted
into 69,322,775  shares of the Company's  common
stock.                                                       --          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.                                    30,000           30,000
                                                   ------------     ------------
Total convertible debentures                            230,000         430,000
Current maturities                                      230,000          40,000
                                                   ------------     ------------
Long-term portion of convertible debentures        $         --     $    390,000
                                                   ============     ============

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-28
<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.

The following table presents the income (loss) before income taxes for the years
ended December 31, 2005 and 2004.

                                                      Years ended December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------
Loss before income taxes in Vertical               $ (1,215,293)    $(4,392,543)
Loss before income taxes in Now Solutions              (291,471)       (309,667)
                                                   ------------     ------------
                                                   $ (1,506,764)   $ (4,702,210)
                                                   ------------     ------------

The  following  table  presents  the income tax  provision  for the years  ended
December 31, 2005 and 2004.

                                                      Years ended December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------
Current

Federal:
  Vertical                                         $         --     $         --
  Now Solutions                                              --               --
State:
  Vertical                                                   --               --
  Now Solutions                                              --               --
                                                   ------------     ------------
                                                             --               --
                                                   ------------     ------------
Deferred expense (benefit)
  Vertical                                                   --               --
  Now Solutions                                              --               --
                                                   ------------     ------------
                                                             --               --
                                                   ------------     ------------
Total income tax provision                         $         --     $         --
                                                   ============     ============

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

                                                            December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------
Expected statutory rate                                  (34.0)%         (34.0)%
Change in valuation allowance                              41.2           40.1
Income tax from a subsidiary which
  filed a separate return                                   0.0            0.0
Change in valuation allowance in
  subsidiary which filed a separate return                  0.0            0.0
State                                                      (7.6)          (6.0)
Other                                                       0.4           (0.1)
                                                   ------------     ------------
                                                            (0)%            (0)%
                                                   ------------     ------------

                                      F-29
<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:

                                                            December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------
Net operating loss carryforward                    $  7,553,000     $ 6,953,000
Accrued vacation and allowance for
  doubtful accounts                                      56,000          48,000
Deferred revenue                                        502,000         752,000
Deferred salary                                         690,000         612,000
Other                                                   375,000         375,000
                                                   ------------     ------------
                                                      9,176,000       8,740,000

Valuation allowance                                  (9,176,000)     (8,740,000)
                                                   ------------     ------------
                                                   $         --     $        --
                                                   ------------     ------------

At December 31, 2005, the Company  (Vertical only up through  December 31, 2003)
had available net operating loss  carryforwards of approximately $19 million for
federal tax purposes and $12.9 million for state tax  purposes,  which expire in
varying amounts through 2025 and 2010,  respectively.  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.

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  $9.4  million and $8.8
million at December 31, 2005 and 2004, 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, 2005 and 2004. As such,  management  has recorded a
valuation allowance for deferred tax assets at December 31, 2005 and 2004.

                                      F-30
<PAGE>

Note 12.  Stockholders' Equity

2005

Common Stock

In January 2005,  the Company  issued  2,000,000  unregistered  shares of common
stock 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 GIS and a member of CW
International.

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  registration  statement on Form SB-2 within 180 days from
the closing date of the settlement in February 2004.

In May 2005,  the Company  issued  600,000 shares of common stock of the Company
(at a fair  market  value of  $9,000)  to a third  party  lender  and three year
warrants to purchase 1,200,000 shares of the Company common stock at an exercise
price of $0.003 per share were cancelled by the lender.  These transactions were
made in connection with an agreement between the parties amending the terms of a
$50,000 note issued to the lender in June 2002.

In May 2005, the Company agreed to issue 600,000  unregistered  shares of common
stock of the Company (at a fair market value of $6,000) to an employee  pursuant
to a restricted  stock agreement  executed  between the Company and the employee
that  provides for the stock to vest over three years in equal  installments  at
the anniversary date of the agreement.

In August 2005,  an employee  purchased  1,000,000  common shares of the Company
pursuant to a warrant to purchase  up to  1,000,000  shares at a price of $0.005
per share.  The purchase  price of the shares was offset  against  unpaid monies
owed to the  employee.  The  fair  market  value  of the  shares  on the date of
issuance was $5,000.

In October 2005, the Company entered into an agreement with an inventor, whereby
the  inventor  agreed to  exclusively  assist the  Company  in the  contemplated
licensing and  enforcement of United States Patent No.  6,826,744.  In exchange,
the Company issued 1,500,000 shares of common stock of the Company and agreed to
pay a royalty fee of two percent to the inventor, less any legal fees and direct
costs. The fair market value of the shares on the date of issuance was $4,950.

In October 2005,  the Company  issued  4,500,000  unregistered  shares of common
stock of the Company (at a fair market  values of $18,000) to  employees  of Now
Solutions  pursuant to restricted stock agreements  executed between the Company
and Now Solutions' employees that provide for the stock to vest over three years
in equal installments at the anniversary date of the agreement.  The fair market
value of all stock issued pursuant to these agreements was $18,000.  In December
2005, 150,000 unregistered shares of restricted stock issued to an employee were
cancelled.

In November 2005,  the Company  issued  100,000  shares of the Company's  common
stock to a third  party  lender  pursuant to an  agreement  to waive the current
default and extend the payment terms under a $50,000  promissory  note. The fair
market value of the stock on the date of issuance was $500.

During  2005,  $200,000 of  principal  and $24,681 of interest  under a $200,000
debenture issued by the Company to Cornell Capital Partners, LP ("Cornell"),  in
April 2003 were converted into 69,322,775 shares of the Company's common stock.

Preferred Stock

During 2005, the Company paid no cash dividends to the  stockholders of Series A
and Series C preferred  stock.  During  2005,  the Company  accrued  $600,000 of
dividends payable to the stockholders of Series A and Series C preferred stock.

During 2005, one employee resigned.  Consequently,  Now Solutions cancelled 1.5%
ownership interest of "phantom stock".

                                      F-31
<PAGE>

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 agreement 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
agreement.

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 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  pursuant  the exercise of a warrant at an exercise
price of $0.037 per share.  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.

                                      F-32
<PAGE>

Note 12.  Stockholders' Equity (Continued)

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 April 5, 2006, $10,000 of remaining principal of the debenture
is outstanding to a third party.

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.  Mr.
Rossetti is Executive  Vice-President of Government Affairs,  Chairman,  CEO and
Director of GIS, Director of Now Solutions and an officer of Markquest, Inc.

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.

During 2004, the Company paid no cash dividends to the  stockholders of Series A
and Series C preferred  stock.  During  2004,  the Company  accrued  $600,000 of
dividends payable to the stockholders of Series A and Series C preferred stock.


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,  as  amended)  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.

2005

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 Option Valuation Model) that
were issued to Grant Consultants of America ("GCA") were automatically cancelled
pursuant to the terms of the agreement. These warrants were issued in connection
with an October 2004 consulting agreement between the Company's subsidiary,  GIS
and GCA.

In May 2005, the Company issued five-year  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  $45,000  (valued  using the  Black-Scholes  Option
Valuation  Model) to GCA in connection with an agreement in October 2004 between
GIS and GCA to provide services  concerning  government grants. In October 2005,
the Company  entered  into an agreement  with GCA whereby  these  warrants  were
cancelled  and the  Company  agreed  to issue  five-year  warrants  to  purchase
4,000,000  shares of common  stock at an  exercise  price of  $0.0165  per share
provided that GCA procures two government contracts acceptable to the Company.

In May 2005, the Company issued five-year  warrants to purchase 1,500,000 shares
of common stock at an exercise  price of $0.015 per share at a fair market value
at the date of  issuance  of  $22,500  (valued  using the  Black-Scholes  Option
Valuation  Model) to L&R  Consultants  ("L&R") in  connection  with a consulting
agreement between the Company and L&R to provide services in securing a loan for
Now  Solutions.  In the event that L&R does not secure a loan for Now  Solutions
for $3,200,000  within 90 days of the date of the  agreement,  the warrant would
automatically  be cancelled.  On August 14, 2005,  these warrants were cancelled
pursuant to the terms of the agreement.

                                      F-33
<PAGE>

There were no non-statutory stock options granted in 2005.

There were no incentive stock options granted in 2005.

During 2005,  incentive stock options to purchase 750,000 shares of common stock
of the Company at a price of $0.025 per share expired.

During  2005,  warrants to  purchase  36,321,647  shares of common  stock of the
Company at a price of $0.003 to $0.35 per share expired or were cancelled, which
includes  4,500,000  warrants that were issued in 2005 to third parties but were
also cancelled in 2005.

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 Option 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 Option 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 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  agreement  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
Option  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 OptionValuation 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 Option Valuation Model) to WAMCO 32, Ltd
in connection  with the  amendment of the note payable to the successor  lender,
WAMCO.  For an update of this  discussion  since  fiscal  year-end,  please  see
"Subsequent Events" under Note 16.

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 Option Valuation
Model) in connection with an agreement  between GIS and 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.

                                      F-35
<PAGE>

Note 13.  Stock Options and Warrants (Continued)


Option and warrant activities in 2004 and 2005 were summarized as follows:

<TABLE>
<CAPTION>
                                                                                                  Weighted
                                   Incentive Stock      Non-Statutory                              Average
                                       Options          Stock Options          Warrants         Exercise Price
                                   ----------------------------------------------------------------------------
<S>                                <C>                 <C>                 <C>                 <C>
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)       (101,092,952)              0.073

                                   ----------------------------------------------------------------------------
Outstanding at 12/31/04
                                          4,000,000                  --          84,932,758               0.092
                                   ----------------------------------------------------------------------------

Options/Warrants granted with an
exercise price of $0.01 to $0.03                 --                  --           4,500,000               0.016

Options/Warrants exercised                       --                  --           1,000,000               0.005
Options/Warrants
expired/cancelled                                --                  --         (36,321,647)              0.068
                                   ----------------------------------------------------------------------------
Outstanding at 12/31/05                   4,000,000                  --          52,111,111               0.039
                                   ============================================================================
</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, 2005, summarized
by exercise price, is as follows:

<TABLE>
<CAPTION>
                                      Warrants/Options Outstanding                      Exercisable
                          --------------------------------------------------------------------------------------------
<S>                       <C>                <C>                <C>               <C>                 <C>
                                                 Weighted
                                                  Average           Weighted                               Weighted
                                                 Remaining          Average                                Average
                                 Number         Contractual         Exercise            Number             Exercise
Exercise Price Per Share       Outstanding     Life (Months)         Price            Exercisable           Price
----------------------------------------------------------------------------------------------------------------------

Incentive Stock Options

$0.01 - $0.09                    4,000,000              37.76   $          0.013          1,600,000   $          0.010

                          --------------------------------------------------------------------------------------------
                                 4,000,000              37.76   $          0.013          1,600,000              0.010
                          ============================================================================================

Warrants
$0.003 - $0.100                 52,111,111              25.32   $          0.040         52,111,111   $          0.040
$0.100 - $0.350                         --                 --                 --                 --                 --
                          --------------------------------------------------------------------------------------------

                                52,111,111              25.32   $          0.040         52,111,111   $          0.040
                          ============================================================================================

                          --------------------------------------------------------------------------------------------
Grand total                     56,611,111              26.21   $         0.0378         53,711,111   $          0.039
                          ============================================================================================
</TABLE>

The range of assumptions  used in the Black Scholes Option Pricing Model in 2005
and 2004 were as follows:

                                                            December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------

Discount rate - bond yield rate                           3.83%     2.98 - 3.90%
Volatility                                              606.39%     226 - 270.1%
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, 2005 and
2004 are as follows:

                                                            December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------

Cash paid for interest                             $    228,234     $    189,913
                                                   ------------     ------------


Non-cash  activities  for the years  ended  December  31,  2005 and 2004 were as
follows:

                                                            December 31,
                                                   -----------------------------
                                                       2005             2004
                                                   ------------     ------------

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  69,322,775
   shares of common stock                               224,681               --

Conversion of warrants to 1,000,000 shares of
   common stock                                           5,000               --

Issuance of warrants for consulting services                 --           55,570

Issuance of warrants with notes payable                      --          297,225

Issuance  of  9,000,000  shares in 2004 of common
   stock for fees on notes payable                           --          116,000

Issuance of 1,500,000 shares in 2005 and
   15,750,000 shares in 2004 of the Company's
   common stock for professional services                 4,950           51,690

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

Issuance of common stock for failure to make loan
   payment                                               19,400               --

Shares of  common  stock to be issued  for
   failure  to file SB-2 Registration statement              --           82,273

Restricted stock for employee compensation
   expense                                                2,421               --

Shares of  common  stock to be issued  for
   failure  to make loan payment                             --           10,000
                                                   ------------     ------------
                                                   $    856,452     $  2,002,745
                                                   ------------     ------------

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

          2006                                                      $    151,145
          2007                                                            61,741
          2008                                                            53,556
          2009                                                            40,167
                                                                    ------------
         Total                                                      $    306,609
                                                                    ------------

Rental  expense for the years ended  December 31, 2005 and 2004 was $147,983 and
$185,489, respectively.

Commitments Related to Now Solutions

Effective on October 1, 2005,  Now  Solution  began paying the Company a monthly
management  fee of  $20,000,  plus  all  direct  costs  associated  with the Now
Solutions'  management  and  operations  incurred by the Company.  Now Solutions
shall  distribute  50%  of  the  taxable  income  on a  quarterly  basis  to its
shareholders  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 six 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,  2005 and
2004, respectively.

Employment Contracts

In  December  2001,  the Company  executed a 3-year  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 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,  9,155,556  have
expired as of April 5, 2006. 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  $154,097 and
$47,218 of his salary in 2005 and 2004, respectively.

                                      F-39
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

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 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  Option Valuation  Model). In addition,
Now Solutions  issued 1.5% of so-called  "phantom stock" of Now Solutions to Ms.
Pantermuehl.  In September 2005, Ms.  Pantermuehl  resigned.  Consequently,  Now
Solutions  cancelled 1.5% ownership interest of "phantom" stock. Ms. Pantermuehl
has continued to provide  accounting  services to the Company and Now Solutions,
on a part-time basis, in exchange for remuneration.

Payroll Taxes

The  Company  has not  remitted  all  required  payroll  tax returns or made the
related payroll tax payments since 2003. 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 involved in the following ongoing legal matters:

In February  2003,  the Company  filed a lawsuit and a derivative  action in New
York Supreme Court Case against  defendants Ross,  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 certain  assets 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
claims of breach of contract and  indemnification for failure to pay adjustments
at the  closing  on the sale of  assets  of Ross to Now  Solutions  for  prepaid
maintenance fees and for related relief.  In November 2003, the New York Supreme
Court  dismissed the claims against Ross and Tinley.  The portion of the lawsuit
involving  Arglen and Gyselen was settled in December 2003 and,  pursuant to the
settlement,  dismissed in February 2004. The Company  appealed the decision with
regard to its claim for breach of contract for Ross'  failure to give the proper
maintenance fee adjustment and related claims for offset and attorney's fees. 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.

                                      F-40
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

In March 2003,  Ross commenced an action in New York Supreme Court,  Westchester
County, 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  re-argument  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,  a minority  partner of Now Solutions,  pursuant to the 2003  Settlement
which pertains to issues related to Now Solutions.  The 2003 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. 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  agreement.  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 registration
statement on Form SB-2 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.  In April 2005,  Arglen filed a
Notice of Filing a Foreign  Judgment in Tarrant  County,  Texas. In August 2005,
the Company entered into a Payout Agreement with Arglen allowing payout terms to
the  Company and  pursuant to which the Company  agreed to enter into the Agreed
Judgment.  The Agreed Judgment and Payout Agreement were entered into concerning
a  California  judgment  and  Arglen's  notice of Filing a Foreign  Judgment  in
Tarrant  County,  Texas,  which  were in  connection  with the 2003  Settlement.
Pursuant  to the terms of the  Agreed  Judgment  and the Payout  Agreement,  the
Company  agreed to pay Arglen a total of $713,489,  which includes the following
amounts:  (a) $600,000 in principal on the promissory note issued by the Company
pursuant to the 2003 Settlement,  (b) the accrued post-judgment  interest on the
California  judgment from  September 4, 2004 through  September 15, 2005, at the
rate of 10% per annum,  which equals  $61,989,  and (c) attorney's fees incurred
for the California and Texas judgment actions which were approximately  $51,500.
Pursuant to the terms of the Payout Agreement,  the Company began making monthly
interest  payments  on the  amounts  specified  above of  $5,945,  beginning  on
September 15, 2005, which will be replaced by monthly payments of $25,000 or 10%
of the Company's new sales, whichever is greater, beginning on February 15, 2006
until the  remainder  of the  $713,489 is paid.  In  accordance  with the Payout
Agreement,  Arglen shall not execute the Agreed  Judgment so long as the Company
continues to make its payments as agreed.

In March 2004, Ross commenced an action in the New York Supreme Court,  New York
County, 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  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 denied over the objections of Now Solutions.  Now Solutions has filed
a  notice  of  appeal  of  this  decision.   Now  Solutions'   remaining   seven
counterclaims remain unaffected.

                                      F-41
<PAGE>

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,  PMP 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 April 2005,  the Company  answered the  complaint,
asserting  various legal  defenses.  In October 2005, the parties entered into a
settlement  agreement.  Pursuant  to the terms of the  settlement,  the  Company
issued a promissory note to PMP in the amount of $75,000 with a maturity date of
January 31,  2008,  bearing  interest at a rate of 6% per annum,  which shall be
paid in equal monthly installments of $ 3,125,  beginning February 1, 2006 for a
period  of 24  months.  In  connection  with the  settlement,  the  lawsuit  was
dismissed.

In the opinion of management, the ultimate resolution of any pending matters may
have a significant effect on the financial position, operations or cash flows of
the Company.

Matters Involving the United States Securities and Exchange Commission

In December 2004,  the Company was notified by the United States  Securities and
Exchange  Commission (the "SEC" or the "Commission")  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 and Exchange Act of 1934, as amended (the "Exchange Act"),  since the
period ending September 30, 2003.

Also in December 2004, the Company was notified by the SEC of an  administrative
proceeding In the Matter of Asset Equity Group,  Inc. et al., Admin.  Proc. File
No.  3-11761  (the  "Administrative  Proceeding"),  pursuant to the filing of an
"Order Instituting  Administrative Proceedings and Notice of Hearing Pursuant to
Section  12(j) of the  Exchange  Act of 1934" that  alleged that the Company was
delinquent with respect to the 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.
Thus, since commencement of the Administrative Proceeding, the Company has filed
each of the delinquent reports.

On April 1, 2005,  the SEC entered two orders in connection  with  accepting the
terms of an Offer of Settlement of Vertical Computer Systems, Inc. to settle the
Administrative  Proceeding. As part of the terms of settlement,  the SEC entered
in the  Administrative  Proceeding  its  Order  Accepting  Settlement  Offer  of
Vertical Computer Systems, Inc., Implementing Settlement and Staying Proceedings
to Implement  Settlement (the "Settlement Order"). The Settlement Order provided
that the Company  must file its Form  10-KSB for the fiscal year ended  December
31,  2004 (the "2004 Form  10-KSB")  no later than March 31,  2005.  The Company
filed its 2004 Form 10-KSB on March 31, 2005.

Pursuant to the Company's Offer of Settlement,  the SEC also entered on April 1,
2005, an Order  Instituting  Cease-and-Desist  Proceedings,  Making Findings and
Imposing a  Cease-and-Desist  Order  Pursuant to Section 21C of the Exchange Act
("Cease-and-Desist  Order"  in the case  captioned  In the  Matter  of  Vertical
Computer Systems,  Inc., Admin.  Proc. File No. 3-11879).  The  Cease-and-Desist
Order ordered that the Company  cease and desist from  committing or causing any
violations  or future  violations  of Section  13(a) of the Exchange Act and SEC
Rules 13a-1 and 13a-13  thereunder.  The Company  consented  to the entry of the
Cease-and-Desist Order without admitting or denying the findings in that Order.

                                      F-42
<PAGE>

On April 15, 2005, the SEC dismissed without prejudice the previously  disclosed
Administrative  Proceeding as to the Company. The SEC's dismissal was entered by
its Order Dismissing  Proceedings  Without Prejudice as to the Company.  The SEC
Order  provided  that it was entered  pursuant to the  previously  entered Order
Accepting  Settlement  and Staying  Proceedings to Implement  Settlement,  dated
April 1,  2005,  and for good  cause  shown.  Consequently,  the  Administrative
Proceeding has concluded with respect to the Company and is no longer pending as
to the Company.

Note 16.  Subsequent Events

In January 2006,  the Company  issued  4,500,000  unregistered  shares of common
stock of the Company to employees of Now Solutions  pursuant to restricted stock
agreements between the Company and Now Solutions' employees that provide for the
stock to vest over three years in equal  installments at the anniversary date of
the agreement.

In January 2006,  the Company  issued  5,950,000  unregistered  shares of common
stock of the Company to employees of the Company  pursuant to  restricted  stock
agreements  between the Company and each  employee that provide for the stock to
vest over one year in three equal installments at 4 month intervals.

On February 22, 2006, the Company closed two series of  transactions  having the
effect of restructuring and extending the maturities of existing indebtedness of
the Company and its wholly-owned subsidiaries. As a prelude to the transactions,
the Company established a new wholly-owned subsidiary, Taladin, Inc.

In the first series of transactions,  the indebtedness of Now Solutions to Wamco
was acquired by Taladin for $600,000,  representing a five percent (5%) discount
from  the  actual  amount  owing,  plus  legal  fees.  In  connection  with  the
acquisition of such indebtedness,  (a) a revenue participation agreement for the
benefit of Wamco was terminated  and (b) a warrant to purchase  shares of common
stock of the  Company,  also granted to Wamco,  was  cancelled.  Now  Solutions'
indebtedness to Wamco 32, Ltd. was secured by a first lien position  against all
assets of Now  Solutions  and this first lien position was assigned by Wamco 32,
Ltd.  to Taladin.  To  accomplish  this first  series of  transactions,  Taladin
secured financing from two lenders in the aggregate amount of $600,000. $450,000
of  the  financing  was  provided  by  Tara  Financial  Services,   Inc.  ("Tara
Financial"),  and the  remaining  $150,000  of the  financing  was  provided  by
Strategic Growth  Partners,  Inc.  ("SGP").  Each loan is evidenced by a secured
term  promissory  note.  Each  note  bears  interest  at 12% per annum and has a
maturity date in the year 2011.  The Tara Financial and SGP notes are secured by
Taladin's first lien position on the assets of Now Solutions. Tara Financial and
SGP share the first lien position, senior to all other security interests in the
assets of Now Solutions.  For additional  details on the  indebtedness of Now to
Wamco, please see Acquisitions Transactions- Now Solutions Operations under Note
3.

The $450,000 and $150,000 notes payable by Taladin also both contain  provisions
requiring  additional  principal  reductions in the event sales by Now Solutions
exceed  certain  financial  thresholds or if there is a judgment in favor of the
Company with respect to the pending Ross litigation.  For additional  details on
the Ross litigation,  please see "Commitments and Contingencies"  under Note 15.
The $450,000 note also contains a conversion option pursuant to which all or any
portion of the unpaid principal,  plus interest,  may be converted at the option
of Tara Financial,  into shares of common stock of Taladin equal to a maximum of
2.5% of Taladin's outstanding common stock at the time of conversion.

As  further  incentive  for  Tara  Financial  to make the  $450,000  loan and to
refinance approximately $1.75 million of existing debt (as described below), the
Company issued to Tara Financial the following: 5,000,000 shares of common stock
of the  Company,  and 4% of the common stock of GIS.  Additionally,  the Company
agreed to pay to Tara  Financial  4% of the  proceeds  received  by the  Company
(including litigation proceeds) related to the USPTO Patent No. 6,826,744 for an
invention for "System and Method for Generating Web Sites in an Arbitrary Object
Framework" owned by the Company.  Furthermore,  Now Solutions agreed to pay Tara
Financial a 6% royalty from gross  revenues in excess of $6.5  million,  up to a
cap of $2,640,606.

                                      F-43
<PAGE>

As further  incentive for SGP to make the $150,000  loan,  the Company issued to
SGP 3,000,000 shares of common stock of the Company. Additionally, Now Solutions
agreed  to pay SGP a 1.5%  royalty  from its  gross  revenues  in excess of $6.5
million, up to a cap of $150,000.

In the second series of transactions, the Company and two of its subsidiaries --
Now Solutions and EnFacet -- consolidated  aggregate  indebtedness in the amount
of approximately $1.75 million into three new promissory notes, each maturing in
the year 2018. Each new note is payable to Tara Financial, bears interest at 12%
per annum,  and is payable in various  installments  of principal  and interest.
These new notes and the notes they  replace are more  specifically  described as
follows:

      1. Secured Term Promissory Note in the principal amount of $438,795,  from
the Company to Tara  Financial,  dated February 13, 2006. This note reflects all
accrued interest on, and replaces,  a Promissory Note in the original  principal
amount of $280,000,  dated October 31, 2001,  from the Company to Robert Farias.
The $280,000 note has been cancelled.  The new note is secured by an interest in
certain  technology  developed  by Adhesive  Software  and owned by the Company,
commonly known as "SiteFlash(TM)".

      2. Secured Term Promissory Note in the principal amount of $359,560,  from
Now Solutions to Tara  Financial,  dated February 13, 2006. This note replaces a
Promissory Note in the original principal amount of $500,000, dated February 13,
2004, from Now Solutions to Robert Farias.  The $500,000 note was secured by the
assets  of Now  Solutions,  as well as a pledge of a  portion  of the  Company's
ownership of Now  Solutions.  The original  $500,000 note has been cancelled and
all  related  security   interests  have  been  released.   In  connection  with
cancellation and release,  a royalty agreement for the benefit of Mr. Farias has
also been cancelled. The new note is secured by all assets of Now Solutions.

      3. Secured Term Promissory  Note in the principal  amount of $955,103 from
Now Solutions to Tara Financial, dated February 13, 3006. This note replaces the
following four notes:

            a. Promissory Note in the original  principal amount of $84,000 from
EnFacet  to  Robert  Farias,  dated  June 1,  2001.  This  note  was  originally
unsecured,  but a subsequent  amendment included a pledge of a security interest
in all  assets  of Now  Solutions.  The  balance  of the note at the time of the
consolidation was $137,841;

            b. Promissory Note in the original principal amount of $181,583 from
the Company to Robert Farias, dated October 17, 2002. This note was secured by a
pledge by Mountain Reservoir of 10,450,000 shares of the Company's common stock.
The balance of the note at the time of the consolidation was $181,905;

            c. Promissory Note in the original principal amount of $350,000 from
EnFacet to Robert  Mokhtarian,  dated August 15, 2001.  This note was originally
unsecured,  but a subsequent  amendment included a pledge of a security interest
in all  assets  of Now  Solutions.  The  balance  of the note at the time of the
consolidation was $519,693; and

            d. Promissory Note in the original  principal amount of $90,000 from
the Company to Robert Mokhtarian,  dated June 26, 2003. This note was originally
unsecured,  but a subsequent  amendment included a pledge of a security interest
in all  assets  of Now  Solutions.  The  balance  of the note at the time of the
consolidation was $115,663.

Each  of the  foregoing  four  notes  was  cancelled  and the  related  security
interests  released.  The new  $955,103  note is  secured  by all  assets of Now
Solutions.

The three new  promissory  notes payable by Now Solutions to Tara Financial also
contain provisions  requiring additional principal reductions in the event sales
by Now Solutions exceed certain financial thresholds.

In March 2006, the Company  received a notice of allowance from the U.S.  Patent
and  Trademark  Office (the  "USPTO")  for a patent  application  serial  number
09/882,494 for a "Web-based collaborative data collection system." The notice of
allowance stated that all 41 patent claims of the patent  application are deemed
to be  allowable  to issue in a patent.  VCSY  intends to file with the USPTO to
issue  the  patent  shortly  thereafter  with  all 41  claims  being  valid  and
enforceable.

During the three months ended March 31, 2006,  the entire  $190,000 of principal
under a debenture  bearing no interest was converted into  24,298,094  shares of
the Company's  common stock in connection  with a commitment  fee pursuant to an
Equity Line of Credit  agreement  entered into in April 2003 between the Company
and Cornell.  In March 2006, $40,800 in liquidated damages claimed by Cornell in
connection  with  the  Equity  Line of  Credit  agreement  were  converted  into
4,387,095 shares of common stock.

                                      F-44
<PAGE>

During the three months ended March 31 2006, incentive stock options to purchase
1,500,000  shares of common  stock of the  Company at a price of $0.10 per share
were cancelled in connection with the issuance of  unregistered  shares of stock
to an employee of Now Solutions.

During the three  months ended March 31,  2006,  warrants to purchase  3,216,667
shares of common  stock of the  Company at a price of $0.0760 to $0.10 per share
expired.

David Braun, the Controller and Principal Accounting Officer of the Company, has
informed the Company he is resigning  from his position.  The effective  date of
his  resignation is the close of business today,  Friday,  April 14, 2006. He is
leaving for personal reasons.

                                      F-45