**UNITED**  **STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **________________________**
 
 **WASHINGTON,
        D.C. 20549**
  **AMENDMENT
        NO. 1 TO**
 **FORM
        10-KSB**
  x
              Annual
                  Report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934: for the fiscal year ended December 31,
                  2004
  o
              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 0-28287
 **_________________**
  **BSI2000,
        INC.**
 (Exact
        Name of Small Business Issuer in its charter)
 
 **Delaware**
              **88-0418749**(State
                  of Incorporation)
              (I.R.S.
                  Employer Identification No.)**12600
                  West Colfax Ave. Suite B410****Lakewood,
                  Colorado**
              **80215**(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
 **(303)
        231-9095**
 (Issuer’s
        Telephone Number)
  Securities
        Registered Under Section 12(b) of the Exchange Act: **Common
        Stock, $0.001 par value**
  Securities
        Registered Under Section 12(g) of the Exchange Act: **None**
  Check
        whether the issuer (1) filed all reports required to be filed by Section
        13
        or 15(d) of the Securities Exchange Act during the past 12 months (or
        for
        such shorter period that the registrant was required to file such reports),
        and (2) has been subject to such filing requirements for the past
        90 days. **Yes x
        No o**
  Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. x
  Issuer’s
        revenues for the fiscal year ended December 31, 2004 were: **$5,918**
  The
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which the common equity
        was
        sold, or the average bid and asked price of such common equity, was: **$3,970,926
        on March 11, 2005** .
  There
        were **99,273,157** shares
        of
        the Issuer’s common stock outstanding on **March
        11, 2005** .
  Documents
        incorporated by reference: **None**
  Transitional
        Small Business Disclosure Format (Check one): **Yes o
        No
        [X]**
  
  **BSI2000,
        INC.**
 **FISCAL
        YEAR 2004 FORM 10-KSB ANNUAL REPORT**
 **INDEX**
 
 PART
                  I
              1ITEM
                  1. DESCRIPTION OF BUSINESS
              1ITEM
                  2. DESCRIPTION OF PROPERTY
              5ITEM
                  3. LEGAL PROCEEDINGS
              5ITEM
                  4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
              6PART
                  II
              7ITEM
                  5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
                  SMALL
                  BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
              7ITEM
                  6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              11ITEM
                  7. FINANCIAL STATEMENTS
              21ITEM
                  8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND
                  FINANCIAL DISCLOSURE
              21ITEM
                  8A. CONTROLS AND PROCEDURES
              21ITEM
                  8B. OTHER INFORMATION
              21PART
                  III
              22ITEM
                  9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
              22ITEM
                  10. EXECUTIVE COMPENSATION
              23ITEM
                  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT
              24ITEM
                  12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
              25ITEM
                  13. EXHIBITS AND REPORTS ON FORM 8-K
              26ITEM
                  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
              28SIGNATURES
              29FINANCIAL
                  STATEMENTS
              F-1
  
  **PART
        I**
  **ITEM
        1. DESCRIPTION OF BUSINESS**
  **Formation**
  On
        March
        31, 2003, Knowledge Foundations, Inc. (“KFI”), now known as BSI2000, Inc.,
        closed its reverse triangular merger with BSI2000, Inc., a privately held
        Colorado corporation. Immediately prior to the closing, KFI spun-off all
        of its
        assets and liabilities (except for a $50,000 note payable and related accrued
        interest of $6,825) to Dr. Richard Ballard, Jan Pettitt, Michael Dochterman,
        Robert A. Dietrich, Joel Vest, all of whom are directors, officers, and/or
        principal shareholders of KFI, and certain other KFI shareholders. In connection
        with this spin-off, 34,105,900 shares of the common stock of KFI surrendered
        by
        the foregoing parties were cancelled. After this spin-off, 5,027,818 shares
        of
        KFI remained outstanding.
  In
        closing the reverse merger transaction, KFI issued 45,122,570 shares of its
        common stock for all of the outstanding shares of common stock of BSI2000,
        Inc.
        Immediately following the closing, KFI changed its name to BSI2000, Inc.
        and
        BSI2000, Inc., a wholly-owned subsidiary of KFI as a result of the merger,
        changed its name to BSI Operating, Inc.
  As
        a
        result of the foregoing transactions, KFI divested itself of its business
        and
        acquired the business of BSI2000, Inc. For financial reporting purposes,
        the
        foregoing transactions have been accounted for as a recapitalization of BSI2000,
        Inc. Accordingly the net increase in the BSI2000, Inc. outstanding shares
        of
        41,363,488 shares (from 8,786,900 to 50,150,388 shares of common stock) has
        been
        reflected in the financial statements as shares issued in the recapitalization
        of BSI2000, Inc.
  As
        a
        result of the accounting method adopted to record the merger, the historical
        financial statements of BSI2000, Inc. have become the historical financial
        statements of the continuing entity for financial reporting purposes. The
        historical financial statements of KFI are not presented herein.
  **Business**
  BSI2000,
        Inc. was incorporated under the name Unified Data Link, Incorporated in July
        1993, and changed its name to Bank Systems 2000, Inc. in April 1995. The
        company
        changed its name to BSI2000, Inc. (“BSI”) on May 19, 1995. BSI has a contract to
        buy optical cards, card reader heads, and software from LaserCard Systems
        Corporation, a division of Drexler Technology under a value-added reseller
        volume pricing agreement. See “CURRENT Contracts-LaserCard Systems” below. BSI
        develops and markets proprietary applications of optical card technology,
        using
        the LaserCard® products.
  BSI’s
        management believes that government agencies and companies in many industries
        have interest in developing new identification systems and end-user data
        management techniques that integrate carried data that can be updated onsite.
        For example, BSI management has presented the BSI technology to the U.S.
        Department of Homeland Security, the new Transportation Security Administration,
        the U.S. Maritime Administration, the U.S. Coast Guard, several port
        authorities, and others that have expressed interest. The U.S. Immigration
        and
        Naturalization Service (the “INS”) purchased a pilot unit from BSI in 2003;
        however, no other entities, including the foregoing, have purchased product
        from
        BSI as of the date hereof. BSI management has also presented its technology
        to
        commercial companies resulting in teaming and strategic alliance agreements
        with
        several such companies.
  BSI
        has
        developed technology that integrates special hardware and proprietary,
        patent-pending software, to provide turnkey optical card systems for the
        national identification and other card markets. BSI develops software
        applications for commercial and government customers. We expect to sell secure
        encrypted optical cards for distribution to customers’ end-users (e.g.,
        employees, patients, immigrants, etc.), as well as reading/writing transaction
        processing units that confirm the card carrier’s identity with biometrics and
        allow updating of the information on the card, as well as providing a complete
        audit trail of the use of the card. Each optical card system is developed
        specifically for the customer’s needs. Categories of development for prospective
        customers include government agencies, industrial companies, and healthcare
        providers.
  The
        cards
        are designed to securely store identification data (i.e., name, address,
        photograph, fingerprint, etc.), and other information desired by the customer
        (e.g., pension or health and medical data, police records, or border crossing
        and employment dates) in an updateable digital form. We believe that optical
        cards are essential due to their extreme high data capacity (equivalent to
        1,500
        typewritten pages); reliability and high security; their ability to have
        data
        partitioned to separate physical secure areas on the card; and ease of use
        and
        updating.
  1
  The
        plastic cards, which are about the same size as credit cards, are produced
        by
        the end-user to a customer employee at a transaction station (e.g., in a
        hospital, at a border crossing, etc.). The cards are first “read” at the
        station: user identification is visually confirmed by display of a color
        photograph (stored in the card) on the monitor, and digitally confirmed by
        comparing the user’s fingerprint (also stored in the card) to the optical
        reading of the user’s finger print at the transaction station. Then, the
        transaction station reads extensive data from the card, and new information
        can
        be added with a computer keyboard. The units run on AC current and are about
        the
        size of a shoebox. In contrast to “smart card” systems in which the card reader
        usually runs off a personal computer, all the optical card unit’s computing
        power is contained in the unit; the unit cannot be used for any other purpose,
        and usually is much easier to operate than smart card systems, which require
        a
        reader unit and a personal computer (not just the keyboard). Also, the card
        data
        is personal to the carrier. The transaction station manager cannot store
        or copy
        the card identification or any other data because the system is inherently
        offline (i.e., no online communications with a personal or main frame computer
        are needed to access the card).
  Optical
        cards provide about 1,000 times the memory, 30 times as fast update speed,
        and
        far more security and reliability than smart chip cards. Optical cards can
        store
        thousands of transaction records, account balances, audit trails, medical
        and
        insurance information, digital photographs, and personal databases. Any
        information that can be stored in a computer can be recorded and managed
        on an
        optical card.
  ***Current
        Products.*** BSI has
        developed three related products, each with biometric verification
        procedures:
  ***Securus
        2000 Access Control And Site Security.*** This
        product is designed to meet the most demanding security needs. Any number
        of
        these units can be linked together over an integrated and crypto-secure local
        network to cover any number of doors and buildings in a site. The entire
        system
        may be linked over the Internet to a remote control site. Each security officer
        has an administrative card to monitor and enable specific actions of controlling
        personnel.
  ***Civilitas
        2000 Government Id.*** The
        Civilitas (the Latin word for citizen) card is for government issue, to record
        identification data, and allows up to 16 separate government programs to
        be
        tracked and monitored on a single card, including border crossings, medical
        records, social pension eligibility and cash transfers, medical records,
        police
        records, etc. Each partition has its own crypto key. Border crossings also
        may
        be monitored and flagged by advanced heuristic software techniques to
        automatically flag suspicious events for closer inspection by personnel.
        Six
        units of a slightly modified version of Civilitas 2000 (the modified version
        is
        named SIGABA 2000) were sold to the INS in 2003.
  Technical
        Information. BSI’s systems use the optical cards to provide automatic
        fingerprint and signature verification, and photographic confirmation, to
        prevent card use by unauthorized persons. The data is safe and secure, in
        contrast to smart chip cards, which can be unstable due to static electricity
        and magnetic fields such as used in airport security.
  The
        optical cards may be partitioned into separate physical areas, each used
        for a
        different program: basic identification information may be stored in a common
        area; pension payments data in another; medical and health in another (itself
        partitioned for sensitive information such as psychiatric, HIV/AIDS, etc.).
        Each
        partitioned data area is protected by its own security system.
  Permanent
        data storage capacity on the card allows a complete audit trail to be maintained
        for all transactions. Such audit mechanisms are mandatory in order to
        reconstruct events after fraudulent use or system malfunction. Laws in many
        countries require such mechanisms to be in place.
  The
        large
        card capacity means that if the end-user wishes, almost all sensitive
        information (such as digital fingerprints) can reside only on the card and
        not
        in a central database, an important feature to gain citizen acceptance of
        identification cards.
  BSI’s
        systems all use a specific variation or application of the standard BSI
        developed transaction software and hardware protocol (named “ToolKit 2000”). The
        ROM-resident real-time process control software, that is embedded in the
        processing unit, consists of a combination of the standard BSI C/C++ coded
        modules from the following list: Embedded Windows NT multitasking operating
        system interface; optical drive interface and control; TCP/IP communications
        control for partially online systems; digital input/output module control;
        external interface control; printer formatting and control; database systems;
        crypto system; magnetic stripe reader control; barcode scanner control;
        fingerprint identification and control; signature verification and control;
        and
        components. The optical card reader head and related software is purchased
        from
        LaserCard Systems Corporation.
  2
  BSI
        continues to develop (and apply for patent protection covering) software
        in the
        area of strong encryption techniques and high-performance data management
        methods for optical card systems. BSI currently has twenty-two patent
        applications pending. These methods are required for secure and efficient
        optical card systems to be safely used in the field. Other patent applications
        cover the use of the technology.
  The
        hardware for most applications is fairly straightforward and consists of
        a metal
        or plastic shell, internal bracketry, power supply and switching, control
        button
        and status LEDs, color LCD screen, single board process control computer,
        integrated optical card device, sound transducer, thermal printer, and
        others.
  Devices
        integrated into BSI systems include fingerprint scanners, signature verification
        pads, and external door lock controls. The device is about the same size
        and
        shape as a shoebox.
  Patents.
        BSI’s business model is to contract with much larger companies to develop or
        expand specific vertical markets for their products and sell our products
        through these larger companies. In this way competitors must evaluate the
        cost
        of overtaking the larger partner company, which is already dominant in the
        market, which BSI believes represents a significant barrier to entry. We
        believe
        that a primary value of BSI’s patents, if awarded, will be to attract larger
        companies to contract with BSI, and protect their market share as well as
        protect BSI’s technology from copying by its partners and their
        competitors.
  BSI
        has
        applied to the U.S. Patent & Trademark Office for the following patents
        among others: (i) a patent covering the uses or methods of using certain
        technology which it has developed, including methods for entering and storing
        medical records by using bar codes and optical scanning to rapidly update
        records in less than several minutes; (ii) a patent involving a novel method
        of
        recording medical information with automatic analysis of statistical trends
        of
        the data by using card-based heuristic software techniques; (iii) a patent
        involving drug testing and personnel access to controlled areas (for controlling
        checkout of company or agency tools and equipment); and (iv) a patent involving
        the use of biometric data (e.g., digital fingerprint, signature and photograph)
        for controlling access to equipment and other assets. To date, one patent
        have
        been issued to BSI. To date, BSI has filed approximately 25 patent applications
        in the U.S. and one in South Africa.
  ***Sales
        And Marketing, And Sources Of Revenue.*** BSI’s
        sales and marketing strategy and our plan to create sources of revenue has
        three
        primary components:
  1.  Contract
        with a larger company that is dominant in a sector or country.
  2.  Where
        possible, negotiate contracts to include ongoing transaction fees, which
        will be
        earned each time an optical card is used (e.g., $0.02 - $0.06 per
        use).
  3.  Negotiate
        contracts to include the sale of transaction units, optical cards, replacement
        optical cards, and maintenance fees. We anticipate that the transaction units
        will be sold through the dominant companies with which we intend to associate.
        BSI intends to sell the systems with slim margins, because significantly
        more
        revenue can be obtained through selling the cards and through transaction
        fees.
        In the typical project, as much as 95% of the initial costs comes from the
        high
        margin cards. In some instances we may sell units at or below cost to access
        the
        revenue streams from cards and transactions. BSI intends to sell unique optical
        cards directly to customers, which are then distributed to end-users. The
        cost
        of optical cards is almost always the dominant initial expense for the customer.
        BSI’s systems require BSI-supplied cards that must be cryptologically
        initialized and embossed with our logo. In addition, BSI intends to sell
        replacement cards to customers, who are used to replacing cards (e.g., VISA
        cards) every two years or so. BSI buys the stock cards from LaserCard Systems
        Corporation. BSI also warrants the transaction units for one year, then charges
        for maintenance.
  **Current
        Contracts**
  It
        is
        important to note that BSI has not yet delivered product in any significant
        quantity; however, BSI received a pilot order from the INS and has also put
        into
        place various strategic teaming and alliance agreements with substantial
        external partner companies as follows:
  ***L.C.
        Sistemia.*** On May
        7, 2001, BSI signed a strategic alliance agreement with L.C. Sistemia (“LCS,” an
        Italian systems engineering and project management company with offices in
        Rome). Pursuant to legislation enacted in 2000 to implement a secure national
        identification card system, the Italian government awarded two contracts.
        One
        contract is held by Siemens A.G. to install and operate card initialization
        systems (i.e., issuance of secure optical cards) for ultimately up to 58,000,000
        people. The second contract is held by LCS to supply the optical cards and
        card
        transaction units for use in passport offices, medical clinics, police stations,
        post offices, and other government offices.
  3
  Until
        May
        7, 2011, BSI has the exclusive right to develop and market the transaction
        units
        into Italy through LCS, as required to satisfy LCS’ contract with the Italian
        government. LCS has agreed not to design, market or sell any other company’s
        optical card transaction units to the Italian government. The price for the
        units will be BSI’s actual direct cost plus 25%. Development costs and changes
        in products will be borne by BSI. BSI will be paid an additional amount equal
        to
        a 1% royalty on all amounts paid for optical cards sold into Italy by LaserCard
        Systems Corporation, and this royalty will be paid to BSI by LaserCard Systems
        Corporation. As of the date hereof, BSI has not received an initial order
        for
        transaction processing units or an estimate of the amount of the initial
        order
        or the timing thereof.
  BSI
        has
        the right to terminate the agreement with LCS if sales into Italy are less
        than
        target levels. BSI has developed the Civilitas 2000 national identification
        card
        system, which will be used in the LCS portion of the encryption and data
        programming of cards for the Italian government system. BSI retains all rights
        to this technology, and intends to market similar systems to other governments
        in the future.
  ***LaserCard
        Systems.*** BSI
        signed a one year agreement with LaserCard Systems Corporation on April 28,
        2000, which was renewed on June 3, 2004 for a term expiring on June 4, 2005.
        LaserCard has the right to sell its products to other resellers and end-users.
        To date, BSI has bought a limited amount of products from LaserCard but will
        rely upon this vendor for cards and parts to satisfy orders received in the
        future.
  **Competition**
  BSI
        has
        two sources of competition. In our opinion, the most serious competition
        comes
        from chip cards which are plastic credit card sized cards that contain embedded
        computer chips. Chip cards address markets where only very small amounts
        of
        low-value data is manipulated (e.g., telephone cards). We believe that
        applications that require larger amounts of data manipulation (e.g., medical
        cards) or higher security (e.g., bank cards) are better served by optical
        cards
        with their larger memory (1,000x), greater speed (30x for writing in data),
        and
        more robust reliability (i.e., impervious to static electricity and other
        environmental damage). However, most consumers are familiar with chip cards
        but
        not with optical cards.
  The
        other
        source of competition is tactical. BSI is aware of only one other competitor,
        Zerco Systems, Inc., a small company that markets embedded optical card systems
        of any form. BSI believes it can compete effectively against Zerco as Zerco
        sells to end-users (and to our knowledge, only those located in the U.S.),
        while
        BSI’s strategy is to sell to larger companies, like L.C. Sistemia, on a
        worldwide basis.
  **Manufacturing,
        Support And Facilities**
  BSI
        outsources hardware manufacturing to one or more contract assembly houses
        on a
        turnkey basis; the manufacturer manages all parts purchasing, inventory control,
        quality control, fabrication and assembly, testing, as well as burn-in
        operations.
  Fully
        tested and finished hardware products will be shipped to BSI’s office in
        Lakewood, Colorado where the proprietary control and security software is
        loaded
        and crypto keys installed. After complete checkout, the finished software
        and
        hardware units are packaged, inventoried, and shipped to the
        end-user.
  We
        believe that the primary advantages to this approach include the ability
        to
        control inventory on an agile 30-day (or less) schedule; the ability to benefit
        from the parts purchasing power of a large assembler; and the elimination
        of
        direct purchasing and components overhead.
  Except
        for the card reader drives and heads BSI buys from LaserCard Systems, all
        purchased electronic components for the products are standard and commercially
        available from multiple sources. A typical BSI machine has several hundred
        inventoried components and subassemblies including a number of custom machined
        pieces.
  4
  **Employees**
  As
        of
        March 1, 2005, BSI had 11 full-time and no part-time employees, of which
        five
        are involved in software programming and support, five are involved in the
        marketing and deployment of product, and one is involved in BSI’s administrative
        and financial operations. None of BSI’s employees is represented by a labor
        union, and BSI has never experienced a work stoppage. BSI believes its
        relationship with its employees to be good. BSI’s ability to achieve its
        financial and operational objectives depends in large part upon BSI’s continuing
        ability to attract, integrate, retain and motivate highly qualified sales,
        technical and managerial personnel, and upon the continued service of BSI’s
        senior management and key sales and technical personnel. See the section
        of this
        report entitled “Executive Compensation.” Competition for such qualified
        personnel in BSI’s industry and the geographical locations of BSI’s offices is
        intense, particularly in software development and technical
        personnel.
  **Research
        & Development**
  BSI
        expended $542,635 in 2004 for R&D purposes as compared to $446,605 in 2003.
        This increase is attributable to R&D components of $36,753, consulting fees
        of $64,248 and decreases in travel and entertainment, salaries and wages
        and
        other costs totaling $4,982. These costs were expensed as incurred and increased
        as a result of the needs identified relating to potential markets for BSI’s
        products in various parts of the world.
  **ITEM
        2. DESCRIPTION OF PROPERTY**
  BSI
        leases 2,800 square feet of space at 12600 West Colfax Avenue, B410, Lakewood,
        Colorado. The lease, which expires on February 1, 2007, provides for rental
        payments of $4,349.04 per month plus payment of BSI’s share of building
        operating expenses, such as real estate taxes, insurance and utilities. The
        offices house sales and marketing, software and hardware research and
        development as well as manufacturing control, limited inventory and other
        administrative tasks.
  **ITEM
        3. LEGAL PROCEEDINGS**
  BSI
        is
        not a party to any pending legal proceedings outside the ordinary course
        of its
        business other than as set forth below.
  BSI
        currently has a claim against it by a consultant over consideration with
        regard
        to a finder’s fee for potential equity financing for Knowledge Foundations, Inc.
        (“KFI”). BSI believes that neither the merit nor future outcome of such a claim
        nor potential damages is readily determinable at this time.
  On
        November 19, 2004, Excell HDI (“Excell”) brought a lawsuit against BSI in the
        District Court of Jefferson County, Colorado, alleging breach of contract
        and
        fraudulent inducement of contract in connection with a Marketing Services
        Agreement (the “MSA”) between the parties where Excell acted as a consultant to
        BSI. The suit sought damages of $78,750 and exemplary damages of another
        $78,750. BSI filed a Motion to Dismiss and to Compel Arbitration (the “Motion”)
        pursuant to the arbitration provision in the Agreement. The Court granted
        BSI’s
        Motion, dismissing Excell’s suit without prejudice and compelling the parties to
        arbitrate. Excell has made demand for arbitration and the parties are
        negotiating an arbitration agreement. In an effort to resolve this dispute
        amicably, BSI had previously tendered $17,500 to resolve all purported
        obligations under the MSA, which was rejected by Excell. At this time, the
        BSI
        intends to vigorously contest all claims asserted by Excell in arbitration
        and
        is investigating possible counterclaims against Excell. BSI does not believe
        it
        has material exposure (above the amount previously tendered) in this
        matter.
  In
        2003,
        BSI received requests from the Central Regional Office for United States
        Securities and Exchange Commission (the “SEC”) for certain documents including
        those concerning arrangements with certain strategic partners, relationships
        with the TSA and INS, recent issuances of securities, investor relations,
        and
        information relating to investment opinions distributed by third parties.
        BSI
        responded promptly and fully and will cooperate with any further requests.
        The
        SEC’s letter states that the staff’s inquiry should not be construed as an
        indication that any violations of securities laws have occurred or as an
        adverse
        reflection on any individuals, entities, or investments. There have been
        no
        further requests or developments in this matter during 2004.
  5
  **ITEM
        4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS**
  BSI
        held
        a special meeting of shareholders on September 22, 2004. At that meeting,
        the
        shareholders approved an increase in the authorized common stock of BSI from
        100,000,000 to 200,000,000. The shareholders also elected directors of BSI
        at
        the meeting.
  6
  **PART
        II**
   **ITEM
        5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
        ISSUER PURCHASES OF EQUITY SECURITIES**
  BSI’s
        common stock currently trades on the Over-the-Counter Bulletin Board (the
        “OTCBB”) under the trading symbol “BSIO”.
  The
        following table sets forth the average high and low bid information for the
        common stock for each quarter within the last two fiscal years as reported
        by
        the National Quotation Bureau, and represent interdealer quotations, without
        retail markup, markdown or commission, and may not be reflective of actual
        transactions.
  **Bid
                  Prices****High**
              
              **Low****2003**First
                  Quarter
              
              
              0.6200
              
              
              0.1000Second
                  Quarter
              
              
              0.5800
              
              
              0.2600Third
                  Quarter
              
              
              0.4800
              
              
              0.2400Fourth
                  Quarter
              
              
              0.3500
              
              
              0.1600**2004**First
                  Quarter
              
              
              0.1700
              
              
              0.0830Second
                  Quarter
              
              
              0.134
              
              
              0.036Third
                  Quarter
              
              
              0.105
              
              
              0.051Fourth
                  Quarter
              
              
              0.068
              
              
              0.0515
  BSI
        is
        authorized to issue 200,000,000 shares of common stock with $ 0.001 par value.
        As of March 11, 2005, there were 99,273,157 shares of common stock issued
        and
        outstanding. As of March 11, 2005, BSI had approximately 350 shareholders
        of
        record for its common stock.
  BSI
        is
        authorized to issue 20,000,000 shares of $0.001 par value preferred stock,
        none
        of which is outstanding. The preferred stock is undesignated and may not
        be
        designated or issued by the Board of Directors absent prior stockholder
        approval.
  **Dividends**
  BSI
        has
        not declared or paid cash dividends on its Common Stock since its inception
        and
        does not anticipate paying such dividends in the foreseeable future. The
        payment
        of dividends may be made at the discretion of the Board of Directors and
        will
        depend upon, among other factors, on BSI’s operations, its capital requirements,
        and its overall financial condition.
  **Recent
        Sales of Unregistered Securities**
  During
        the past three years ended December 31, 2002, December 31,
        2003 and
        December 31, 2004, BSI sold the following unregistered
        securities:
  On
        December 10, 2004, BSI received net proceeds of $435,723 from a $500,000
        secured promissory note issued to Cornell Capital Partners, LP. The note
        is due
        on March 11, 2005. The note is secured by substantially all of BSI’s non-cash
        assets. The note bears interest at 12% per annum during its term, and bears
        a
        default rate of interest of 24% if the note is not paid when due. BSI paid
        cash
        fees of $64,277 in connection with the issuance of the note. As of March
        1, 2005
        BSI effectively repaid $300,000 of the note and accrued interest pursuant
        to
        draw-downs under the Equity Line.
  On
        November 4, 2004, BSI received net proceeds of $178,051 from a $200,000 secured
        promissory note issued to Cornell Capital Partners. The note is due on
        December 4, 2004. The note is secured by substantially all of BSI’s
        non-cash assets. The note bears interest at 12% per annum during its term,
        and
        bears a default rate of interest of 24% if the note is not paid when due.
        BSI
        paid cash fees of $21,949 in connection with the issuance of the note. As
        of
        December 31, 2004, BSI effectively repaid this note and accrued interest
        thereon
        pursuant to draw-downs under the Equity Line.
  7
  On
        October 7, 2004, BSI issued a 5% convertible debenture in the amount of $500,000
        to Cornell Capital Partners that is due October 7, 2007, on December 10,
        2004, BSI issued a 5% convertible debenture in the amount of $500,000 to
        Cornell
        Capital Partners that is due December 10, 2007, and on January 20,
        2005,
        BSI issued a 5% convertible debenture in the amount of $250,000 to Cornell
        Capital Partners that is due January 20, 2008. These debentures are convertible
        into BSI’s common stock at either the fixed price of 120% of the Volume Weighted
        Average price on the closing date (October 7, 2007, December 10, 2007
        and
        January 20, 2008, respectively) or 80% of the average of the three lowest
        daily
        Volume Weighted Average Price, as reported by Bloomberg, L.P., of BSI’s common
        stock for the five trading days immediately preceding the conversion date.
        These
        debentures will automatically convert into BSI’s common stock on the third
        anniversary of issuance. BSI has the right to redeem the debentures with
        three
        days advance notice any or all of the outstanding debenture amount at its
        sole
        discretion. The redemption price shall be 120% of the face amount redeem
        plus
        accrued interest. Once the redemption notice has been given, Cornell Capital
        Partners may continue to convert the remaining outstanding debenture. On
        October
        7, 2004, BSI received $500,000 less a 10% fee of $50,000 and $10,000 for
        legal
        costs. BSI received $500,000 (net of 10% fee) on December 10, 2004
        and
        $250,000 (net of 10% fee) on January 20, 2005. Cornell Capital Partners has
        the
        option to convert the debenture on the same day as issuance. As a result
        of this
        conversion feature, Cornell Capital Partners has been provided intrinsic
        value
        that has been calculated as the difference between the price of the Company’s
        common stock on the date of issuance, as compared to the discounted conversion
        price (or 80% of the stock price on the date of issuance). This intrinsic
        value
        has been multiplied by the number of shares that would be issued to Cornell
        Capital Partners upon conversion, which has resulted in a $125,000 charge
        to
        operations during 2004 for each of the convertible debentures issued during
        2004. A $62,500 charge to operations will be taken during the first quarter
        of
        2005 for the debenture that issued during January 2005. In engaging in the
        foregoing transactions involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transactions involved the private offering
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investor was accredited, and the investor represented to
        BSI
        that it was acquiring the securities for investment purposes and for its
        own
        account, and not with an eye toward further distribution.
  On
        September 13, 2004, BSI issued 990,099 shares of common stock to Cornell
        Capital
        Partners for $50,000 cash. Costs associated with this transaction were $2,500.
        In engaging in the foregoing transaction involving unregistered securities
        of
        BSI, BSI relied upon the private offering exemption provided under Section
        4(2)
        of the Securities Act of 1933, as amended, in that the transaction involved
        a
        private offering of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  On
        July
        15, 2004, BSI issued Bernard Nann 250,000 options at a strike price of $0.089
        per share, 50,000 of which vested on the date of the grant, and the remaining
        200,000 vests 50,000 per year for so long as Mr. Nann remains a director
        of BSI.
        These options were issued as compensation to Mr. Nann for his present and
        future
        services as a director of BSI. All of these options have a 5-year term. In
        engaging in the foregoing transaction involving unregistered securities of
        BSI,
        BSI relied upon the private offering exemption provided under Section 4(2)
        of
        the Securities Act of 1933, as amended, in that the transaction involved
        a
        private offering of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  On
        June
        18, 2004, BSI received net proceeds of $231,935 from a $250,000 secured
        promissory note issued to Cornell Capital Partners. The note is due on October
        18, 2004. The note is secured by substantially all of BSI’s non-cash assets. The
        note bears interest at 12% per annum during its term, and bears a default
        rate
        of interest of 24% if the note is not paid when due. BSI paid cash fees of
        $18,065 in connection with the issuance of the note. BSI effectively repaid
        this
        note and accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  On
        June
        8, 2004, BSI received net proceeds of $320,208 from a $350,000 secured
        promissory note issued to Cornell Capital Partners. The note is due on September
        20, 2004. The note is secured by substantially all of BSI’s non-cash assets. The
        note bears interest at 12% per annum during its term, and bears a default
        rate
        of interest of 24% if the note is not paid when due. BSI paid cash fees of
        $29,792 in connection with the issuance of the note. BSI effectively repaid
        this
        note and accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  On
        April
        14, 2004, BSI received net proceeds of $229,679 from a $250,000 secured
        promissory note issued to Cornell Capital Partners. The note is due on June
        21,
        2004. The note is secured by substantially all of BSI’s non-cash assets. The
        note bears no interest during its term, but bears a default rate of interest
        of
        24% if the note is not paid when due. BSI paid cash fees of $20,321 in
        connection with the issuance of the note. BSI effectively repaid this note
        and
        accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  8
  On
        March
        12, 2004, BSI issued Richard Kirk 250,000 options at a strike price of $0.11
        per
        share, all of which vested on the date of the grant. These options were issued
        as compensation to Mr. Kirk for his services as a director of BSI. All of
        these
        options have a 5-year term. In engaging in the foregoing transaction involving
        unregistered securities of BSI, BSI relied upon the private offering exemption
        provided under Section 4(2) of the Securities Act of 1933, as amended, in
        that
        the transaction involved a private offering of BSI’s unregistered securities,
        BSI did not make a public offering or sale of its securities, the investor
        was
        accredited, and the investor represented to BSI that it was acquiring the
        securities for investment purposes and for its own account, and not with
        an eye
        toward further distribution.
  On
        March
        3, 2004, BSI received net proceeds of $229,524 from a $250,000 secured
        promissory note issued to Cornell Capital Partners. The note is due on June
        23,
        2004. The note is secured by substantially all of BSI’s non-cash assets. The
        note bears interest of 12% during its term, and bears a default rate of interest
        of 24% if the note is not paid when due. BSI paid cash fees of $20,476 in
        connection with the issuance of the note. BSI effectively repaid this note
        and
        accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  On
        February 4, 2004, BSI received net proceeds of $223,559 from a $250,000 secured
        promissory note issued to Cornell Capital Partners. The note is due on May
        12,
        2004. The note is secured by substantially all of BSI’s non-cash assets. The
        note bears no interest during its term, but bears a default rate of interest
        of
        24% if the note is not paid when due. BSI paid cash fees of $26,441 in
        connection with the issuance of the note. BSI effectively repaid this note
        and
        accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  On
        December 19, 2003, BSI received net proceeds of $170,917 from a $200,000
        secured promissory note issued to Cornell Capital Partners. The note is due
        on
        April 26, 2004. The note is secured by substantially all of BSI’s non-cash
        assets. The note bears no interest during its term, but bears a default rate
        of
        interest of 24% if the note is not paid when due. Discounts and fees paid
        to
        obtain the loan were $29,083. BSI effectively repaid this note and accrued
        interest thereon pursuant to draw-downs under the Equity Line.
  On
        October 31, 2003, BSI entered into an Equity Line of Credit Agreement (the
        “Equity Line”) with Cornell Capital Partners. Under the Equity Line, BSI may
        issue and sell to Cornell Capital Partners common stock for a total purchase
        price of up to $15 million. Subject to certain conditions, BSI will be entitled
        to commence drawing down on the Equity Line when the common stock to be issued
        under the Equity Line is registered with the SEC and the registration statement
        is declared effective and will continue for two years thereafter. The purchase
        price for the shares will be equal to 99% of the market price, which is defined
        as the lowest closing bid price of the common stock during the five trading
        days
        following the notice date. The amount of each advance is subject to an aggregate
        maximum advance amount of $210,000, with no advance occurring within seven
        trading days of a prior advance. Cornell Capital Partners received 1,875,000
        shares of common stock as a one-time commitment fee. Cornell Capital Partners
        is
        entitled to retain a fee of 4% of each advance. In addition, BSI entered
        into a
        placement agent agreement with Newbridge Securities Corporation (“Newbridge”), a
        registered broker-dealer. Pursuant to the placement agent agreement, BSI
        paid
        Newbridge a one-time placement agent fee of 35,714 shares of common stock.
        In
        engaging in the foregoing transaction involving unregistered securities of
        BSI,
        BSI relied upon the private offering exemption provided under Section 4(2)
        of
        the Securities Act of 1933, as amended, in that the transaction involved
        a
        private offering of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  On
        September 16, 2003, BSI received net proceeds of $455,000 from a $500,000
        secured promissory note issued to Cornell Capital Partners. The note is due
        on
        the earlier of 90 days from the date thereof or 60 days after BSI’s registration
        statement on Form SB-2 is declared effective by the SEC. The note is secured
        by
        substantially all of BSI’s non-cash assets. The note bears no interest during
        its term, but bears a default rate of interest of 24% if the note is not
        paid
        when due. BSI paid cash fees of $45,000 in connection with the issuance of
        the
        note. BSI effectively repaid this note and accrued interest thereon pursuant
        to
        draw-downs under the Equity Line.
  During
        the period August 1, 2003 through October 31, 2003, BSI received proceeds
        of
        $182,500 from the sale of 730,000 shares of its common stock in a private
        placement to Pursuit Capital, LLC (“Pursuit Capital”) at $0.25 per share. In
        engaging in the foregoing transactions involving unregistered securities
        of BSI,
        BSI relied upon the private offering exemption provided under Section 4(2)
        of
        the Securities Act of 1933, as amended, in that the transactions involved
        private offerings of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  9
  During
        the period August 1, 2003 through October 31, 2003, BSI received proceeds
        of
        $67,500 from the sale of 270,000 shares of its common stock to Doug Dragoo
        in a
        private placement at $0.25 per share. In engaging in the foregoing transaction
        involving unregistered securities of BSI, BSI relied upon the private offering
        exemption provided under Section 4(2) of the Securities Act of 1933, as amended,
        in that the transaction involved a private offering of BSI’s unregistered
        securities, BSI did not make a public offering or sale of its securities,
        the
        investor was accredited, and the investor represented to BSI that it was
        acquiring the securities for investment purposes and for its own account,
        and
        not with an eye toward further distribution.
  On
        July
        7, 2003, BSI sold $250,000 of convertible debentures to Cornell Capital
        Partners. Cornell Capital Partners was the purchaser of the convertible
        debentures. These debentures accrue interest at a rate of 5% per year and
        mature
        two years from the issuance date. The debentures are convertible at the Cornell
        Capital Partners’ option any time up to maturity at a conversion price equal to
        the lower of (i) 120% of the closing bid price of the common stock as of
        the
        closing date or (ii) 80% of the lowest closing bid price of the common stock
        for
        the five trading days immediately preceding the conversion date. At maturity,
        BSI has the option to either pay the holder the outstanding principal balance
        and accrued interest or to convert the debentures into shares of common stock
        at
        a conversion price equal to the lower of (i) 120% of the closing bid price
        of
        the common stock as of the closing date or (ii) 80% of the lowest closing
        bid
        price of the common stock for the five trading days immediately preceding
        the
        conversion date. BSI has the right to redeem the debentures upon 30 days
        notice
        for 120% of the amount redeemed. In engaging in the foregoing transactions
        involving unregistered securities of BSI, BSI relied upon the private offering
        exemption provided under Section 4(2) of the Securities Act of 1933, as amended,
        in that the transactions involved private offerings of BSI’s unregistered
        securities, BSI did not make a public offering or sale of its securities,
        the
        investor was accredited, and the investor represented to BSI that it was
        acquiring the securities for investment purposes and for its own account,
        and
        not with an eye toward further distribution.
  On
        July
        7, 2003, BSI entered into an Equity Line of Credit Agreement with Cornell
        Capital Partners that was subsequently terminated by the mutual agreement
        of the
        parties on October 30, 2003. On October 31, 2003, BSI entered into a new
        Equity
        Line of Credit Agreement with Cornell Capital Partners. Under this agreement,
        BSI may issue and sell to Cornell Capital Partners common stock for a total
        purchase price of up to $15 million. Subject to certain conditions, BSI became
        entitled to commence drawing down on the Equity Line of Credit effective
        on
        December 9, 2003, the date the registration statement filed with the
        SEC
        was declared effective, and for two years thereafter. The purchase price
        for the
        shares will be equal to 99% of, or a 1% discount to, the market price, which
        is
        defined as the lowest closing bid price of the common stock during the five
        trading days following the notice date. The amount of each advance is subject
        to
        an aggregate maximum advance amount of $210,000, with no advance occurring
        within seven trading days of a prior advance. Cornell Capital Partners received
        1,875,000 shares of BSI common stock as a one-time commitment fee. Cornell
        Capital Partners is entitled to retain a fee of 4% of each advance. In addition,
        BSI entered into a placement agent agreement with Newbridge Securities
        Corporation, a registered broker-dealer. Pursuant to the placement agent
        agreement, BSI paid Newbridge Securities a one-time placement agent fee of
        35,714 shares of common stock.
  During
        the first quarter of 2003, BSI received proceeds of $134,500 from the sale
        of
        134,500 shares of its common stock in a private placement. In engaging in
        the
        foregoing transactions involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transactions involved private offerings
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investor was accredited or unaccredited but sophisticated,
        and
        the investors represented to BSI that they were acquiring the securities
        for
        investment purposes and for their own account, and not with an eye toward
        further distribution.
  During
        the period December 2002 through February 2003, 1,072,386 shares at
        $1.00
        for $771,282 cash and $301,104 cancellation of debt (total $1,020,886) were
        issued to 11 accredited and 20 non-accredited investors. In engaging in the
        foregoing transactions involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transactions involved private offerings
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investors were accredited or unaccredited but sophisticated,
        and
        the investors represented to BSI 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 BSI, including audited financial
        statements, was in fact delivered to them.
  During
        November 2002, 80,000 shares at $0.625 for $50,000 were issued to eight
        employees as stock bonuses. No consideration was paid for these shares. In
        engaging in the foregoing transactions involving unregistered securities
        of BSI,
        BSI relied upon the private offering exemption provided under Section 4(2)
        of
        the Securities Act of 1933, as amended, in that the transactions involved
        private offerings of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investors were accredited or
        unaccredited but sophisticated, and the investors represented to BSI 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 BSI, including audited financial statements, was in fact delivered
        to
        them.
  10
  During
        July 2002, 800,000 shares at $0.625 were issued to Pursuit Capital, an
        accredited investor, in consideration of Pursuit’s forgiving the $500,000
        principal amount of the loan owed to Pursuit by BSI. In engaging in the
        foregoing transaction involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transaction involved a private offering
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investor was accredited, and the investor represented to
        BSI
        that it was acquiring the securities for investment purposes and for its
        own
        account, and not with an eye toward further distribution.
  During
        the period June through July 2002, BSI issued 529,191 shares at $0.625 for
        $330,745 to 14 accredited investors and five unaccredited. In engaging in
        the
        foregoing transactions involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transactions involved private offerings
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investors were accredited or unaccredited but sophisticated,
        and
        the investors represented to BSI 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 BSI, including audited financial
        statements, was in fact delivered to them.
  During
        July 2002, BSI issued 300,000 shares to two individuals, Bernie Ciazza and
        John
        Sloan (150,000 shares each) for introducing BSI to investors. In engaging
        in the
        foregoing transactions involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transactions involved private offerings
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investors were unaccredited but sophisticated, and the investors
        represented to BSI 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 both investors, all information required to
        be
        delivered to them concerning BSI, including audited financial statements,
        was in
        fact delivered to them.
  During
        February 2002, BSI issued warrants to purchase 800,000 shares of its common
        stock exercisable at $0.625 per share, issued to Pursuit Capital in a negotiated
        transaction. The warrants were issued in exchange for Pursuit’s $500,000 loan to
        BSI. In engaging in the foregoing transaction involving unregistered securities
        of BSI, BSI relied upon the private offering exemption provided under Section
        4(2) of the Securities Act of 1933, as amended, in that the transaction involved
        a private offering of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  During
        January 2002, BSI issued 500,000 shares of its common stock to a business
        consultant, D. David Breen, as a signing bonus for entering into his consulting
        agreement with BSI. In engaging in the foregoing transaction involving
        unregistered securities of BSI, BSI relied upon the private offering exemption
        provided under Section 4(2) of the Securities Act of 1933, as amended, in
        that
        the transaction involved a private offerings of BSI’s unregistered securities,
        BSI did not make a public offering or sale of its securities, the investor
        was
        unaccredited but sophisticated, and the investor represented to BSI that
        it was
        acquiring the securities for investment purposes and for his own account,
        and
        not with an eye toward further distribution. All information required to
        be
        delivered to this investor concerning BSI, including audited financial
        statements, was in fact delivered to them.
  **ITEM
        6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
  **General**
  The
        following discussion and analysis should be read in conjunction with the
        Consolidated Financial Statements, and the Notes thereto included
        herein.
  **Forward-Looking
        Statements**
  This
        Form
        10-KSB contains forward-looking statements within the meaning of Section
        27A of
        the Securities Act of 1933, as amended, and Section 21E of the Securities
        Exchange Act, as amended. Such statements include BSI’s beliefs, expectations,
        hopes, goals and plans regarding the future, including but not limited to
        statements regarding BSI’s strategy, competition, development plans, financing,
        revenue and operations. Forward-looking statements often can be identified
        by
        the use of terms such as “may,”“will,”“expect,”“anticipate,”“estimate,” or
“continue,” or the negative thereof. Such forward-looking statements speak only
        as of the date made. Any forward-looking statements represent management’s best
        judgment as to what may occur in the future. However, forward-looking statements
        are subject to risks, uncertainties, and important factors beyond the control
        of
        BSI that could cause actual results and events to differ materially from
        historical results of operations and events and those presently anticipated
        or
        projected. BSI disclaims any obligation subsequently to revise any
        forward-looking statements to reflect events or circumstances after the date
        of
        such statement or to reflect the occurrence of anticipated or unanticipated
        events.
  11
  **Going
        Concern**
  The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and liquidation of liabilities
        in
        the ordinary course of business. BSI has experienced losses since
        inception.
  The
        extended period over which losses have been experienced is, in the opinion
        of
        BSI, principally attributable to two factors: lack of capital and long sales
        lead times. Lack of capital has prevented BSI from quickly developing and
        aggressively marketing its products. In addition, most of BSI’s potential
        customers are large corporations or governments. Adopting BSI’s products will in
        many cases require changing the way business is done. These circumstances
        can
        result in two years or more elapsing from initial sales contact to delivery
        of
        product.
  In
        order
        to fund activities until positive operating cash flow is achieved, management
        recognizes that BSI must generate revenue from its operations and must raise
        capital from the sale of its securities. BSI anticipates that the capital
        raised
        under the Equity Line of Credit with Cornell Capital Partners, LP will be
        sufficient to fund BSI’s activities until positive cash flow is achieved.
        However, no assurances can be given that BSI will be successful in these
        activities. Should any of these events not occur, the accompanying financial
        statements will be materially affected and this in-turn could result in the
        suspension and/or termination of BSI’s operations.
  **Critical
        Accounting Policies And Estimates**
  Management’s
        discussion and analysis of BSI’s financial condition and results of operations
        are based upon BSI’s consolidated financial statements, which have been prepared
        in accordance with accounting principles generally accepted in the United
        States
        of America. The preparation of these financial statements requires that BSI
        make
        estimates and judgments that affect the reported amounts of assets, liabilities,
        revenues and expenses, and related disclosure of contingent assets and
        liabilities. At each balance sheet date, management evaluates its estimates,
        including but not limited to, those related to inventories, accrued liabilities,
        and the valuation allowance offsetting deferred income taxes. BSI bases its
        estimates on historical experience and on various other assumptions that
        are
        believed to be reasonable under the circumstances. Actual results may differ
        from these estimates under different assumptions or conditions. The estimates
        and critical accounting policies that are most important in fully understanding
        and evaluating BSI’s financial condition and results of operations include those
        listed below, as well as its valuation of equity securities used in transactions
        and for compensation, and its revenue recognition methods.
  **Principles
        Of Consolidation**
  The
        accompanying consolidated financial statements include the accounts of BSI2000,
        Inc. and its subsidiary, BSI Operating, Inc. All intercompany accounts and
        transactions have been eliminated in consolidation.
  **Cash
        And Equivalents**
  BSI
        considers all highly liquid instruments purchased with an original maturity
        of
        three months or less to be cash equivalents. BSI continually monitors its
        positions with, and the credit quality of, the financial institutions with
        which
        it invests.
  **Inventories**
  Inventory
        consists of raw materials and is stated at the lower of cost or market,
        determined using the first-in, first-out method (“FIFO”).
  12
  **Property
        And Equipment**
  Property
        and equipment is stated at cost. Depreciation is provided utilizing the
        straight-line method over the estimated useful lives for owned assets of
        five-to-seven years. Leasehold improvements are amortized over a five and
        one-half year period.
  **Use
        Of Estimates**
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities,
        disclosures of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from those estimates.
  **Revenue
        Recognition**
  BSI
        recognizes revenue in compliance with the SEC Staff Accounting Bulletin (“SAB”)
        No. 101, “Revenue Recognition in Financial Statements”. Revenue is recognized
        when an order has been placed by the customer, the product has been shipped
        and
        collectibility is reasonably assured. Prices of the products are determined
        prior to entering into a purchase agreement. From inception through
        December 31, 2004, revenues earned represented sales to distributors
        of
        demonstrations units of BSI’s products. Transaction-based revenue is recognized
        as transactions are completed and are billed monthly based on service agreement
        rates in effect. Distribution rights revenue is recognized ratable over the
        life
        of each underlying distribution agreement.
  **Intangible
        Assets**
  Intangibles
        include trademarks and patents, which are recorded at cost. To date, BSI
        has
        been awarded one patent by the United States Patent and Trademark Office
        (the
“USPTO”), and has 22 additional provisional and non-provisional applications for
        patents pending with the USPTO. Once accepted, BSI will begin amortization
        over
        the life of each patent.
  **Income
        Taxes**
  BSI
        recognizes deferred tax liabilities and assets based on the differences between
        the tax basis of assets and liabilities and their reported amounts in the
        financial statements that will result in taxable or deductible amounts in
        future
        years.
  **Advertising
        Costs**
  BSI
        expenses advertising costs as incurred.
  **Software
        And Research And Development Costs**
  Expenditures
        made for research and development are charged to expense as incurred. Costs
        incurred to date for the development of BSI’s products have been charged to
        expense as incurred. Future costs may be capitalized to the extent they meet
        the
        requirements of the Financial Accounting Standards Board’s (“FASB’s”) Statement
        of Financial Account Standards (“SFAS”) No. 86 “Accounting for the Costs of
        Computer Software to be Sold, Leased, or Otherwise Marketed.”
  **Basic
        And Diluted Earnings Per Common Share**
  Basic
        earnings per share are computed by dividing net income by the number of weighted
        average common shares outstanding during the year. Diluted earnings per share
        is
        computed by dividing net income by the number of weighted average common
        shares
        outstanding during the year, including potential common shares, which consisted
        of warrants, options and convertible debt.
  **SEC
        Inquiry**
  In
        2003,
        BSI received requests from the Central Regional Office of the United States
        Securities and Exchange Commission (“SEC”) for certain documents, including
        those concerning arrangements with certain strategic partners, relationships
        with the TSA and INS, recent issuances of securities, investor relations,
        and
        information relating to investment opinions distributed by third parties.
        The
        SEC’s letter states that the staff’s inquiry should not be construed as an
        indication that any violations of securities laws have occurred or as an
        adverse
        reflection on any individuals, entities, or investments. BSI responded promptly
        and fully to the request and will cooperate with any further requests. BSI
        did
        not receive any additional requests in 2004.
  On
          June
          27, 2005, BSI was contacted by the Staff of the SEC during the course of
          a
          routine review of its periodic filings and made inquiries regarding certain
          of
          BSI’s accounting policies. As a result of this inquiry, management re-evaluated
          BSI’s accounting for certain items on the consolidated balance sheet,
          consolidated statements of operations, consolidated statement of changes
          in
          stockholders' equity(deficit) and consolidated statements of cash flows.
          Following the evaluation, BSI determined that the consolidated balance
          sheet,
          consolidated statements of operations, consolidated statement of changes
          in
          stockholders' equity(deficit) and consolidated statements of cash flows 
          for the fiscal year ended December 31, 2004 should be restated in the Form
          10-KSB for the fiscal year ended December 31, 2004. The effect of these
          errors
          on the consolidated balance sheet, consolidated statements of operations,
          consolidated statement of changes in stockholders' equity(deficit) and
          consolidated statements of cash flows was considered material. Accordingly,
          BSI
          is required to restate its financials for the fiscal year ended December
          31,
          2004 as set forth below. Please refer to **Note 10- Intrinsic Value
          Associated with Issuances of Debentures** for more
          information.
 13
  **Financial
        Condition**
  BSI
        had
        net losses of $1,568,978 and $973,635 for the years ended December 31,
        2003
        and December 31, 2002, respectively. For the year ended December 31,
        2004, BSI had a net loss of $2,419,238, an increase of $850,260 or 54% from
        2003. As of December 31, 2004, BSI had cash and cash equivalents of
        $893,387 as compared to $125,550 at December 31, 2003, or an increase
        of
        612%; and current liabilities of $688,808 as compared to $908,330 at
        December 31, 2003, or a decrease of 24%. BSI does not have sufficient
        cash
        or other current assets to meet BSI’s current liabilities. In order to meet
        those obligations, BSI will need to raise cash from the sale of securities
        or
        from borrowings. BSI estimates that its cash reserves on December 31,
        2004
        will sustain BSI until May 2005. Our independent auditors have added an
        explanatory paragraph to their audit opinions issued in connection with the
        years 2004, 2003, 2002 and 2001 financial statements, which states that BSI’s
        ability to continue as a going concern depends upon its ability to resolve
        liquidity problems, principally by obtaining capital, commencing sales and
        generating sufficient revenues to become profitable. BSI’s ability to obtain
        additional funding will determine BSI’s ability to continue as a going
        concern.
  **Results
        Of Operations**
  The
        following discussion should be read in conjunction with BSI’s financial
        statements and the related notes and the other financial information appearing
        elsewhere in this report.
  **Comparison
        Of The Year Ended December 31, 2004 To The Year Ended December 31,
        2003**
  ***Overall
        Results Of Operations***
  For
        the
        year ended December 31, 2004 BSI incurred an overall loss of $2,419,238
        or
        $0.03 per share, which was a material increase from the loss of $1,568,978
        or
        $0.04 per share for the comparable period in the prior year.
  ***Revenue***
  BSI
        had
        revenues of $5,918 and $34,440 during the one-year periods ended
        December 31, 2004 and 2003, respectively, or a decrease of $28,522
        or 83%.
        Such revenues were from the sale of demonstration units and software development
        kits to potential distributors of BSI’s products, and distributions
        fees.
  ***Operating
        Expenses***
  Operating
        expenses for the year ended December 31, 2004, were $1,958,515 and
        represent an increase of $476,542 or nearly a 32% increase in operating expenses
        of $1,481,973 for the comparative period ended December 31,
        2003.
  The
        largest component of operating expenses for the periods ended December 31,
        2004 and 2003 related to general and administrative expenses. For the period
        ended December 31, 2004, general and administrative expense were
        $1,048,073, an increase of $287,803 or nearly 37% in general and administrative
        expenses of $760,270 for the comparative period ended December 31,
        2003.
        This increase is attributable to a decrease in fees of $43,625 incurred in
        connection with the merger with KFI, salaries, payroll taxes and related
        benefits of $155,890, shareholder relations expense included in selling in
        P/Y
        of $8,832, a decrease in legal fees of $58,237, increase in accounting and
        auditing fees of $35,420, general office expenses of $30,921, increase in
        consulting fee of $150,275, and increases in other expenses directly related
        to
        increased levels of activity.
  BSI
        had
        selling expenses for the year ended December 31, 2004 of $367,807,
        as
        compared to $275,098 for the comparative period ended December 31,
        2003, a
        decrease of $92,709 or 34%. The increases in selling expenses are primarily
        attributable to salary expense of $37,381, a decrease in consulting fees
        of
        $19,551, travel and entertainment expenses of $47,119, a decrease in material
        development and trade show costs of $3,240, and an increase in demonstration
        unit costs of $30,565.
  BSI
        had
        research and development expenses of $542,635 for the year ended
        December 31, 2004, as compared to $446,605 for the period ended
        December 31, 2003, or an increase of $96,030 or 22%. This increase
        is
        attributable to R&D components of $36,753, consulting fees of $64,248 and
        decreases in travel and entertainment, salaries and wages and other costs
        totaling $4,982. These costs were expensed as incurred and increased as a
        result
        of the needs identified relating to potential markets for BSI’s products in
        various parts of the world.
  14
  ***Other
        Expenses***
  As
        to the
        other expenses, BSI had other expense of $466,641 for the year ended
        December 31, 2004, as compared to other expense of $53,459 for the
        year
        ended December 31, 2003, which represents an increase of $413,182
        or 773%.
        BSI had interest expense of $53,864 and $8,152 for the years ended
        December 31, 2004 and 2004, respectively, which represents a $45,712
        or
        561% increase. BSI had interest income of $3 and $1,636 for the years ended
        December 31, 2004 and 2003, respectively, or a decrease of $1,633
        or 99%.
        BSI incurred financing costs of $413,030 and $46,943 during 2004 and 2003,
        respectively, or an increase of $366,087 or 780%, related to the Equity Line
        of
        Credit with Cornell Capital Partners, and convertible debentures issued to
        Cornell Capital Partners, which were partially paid in lieu of
        interest.
  **Liquidity
        And Capital Resources**
  As
        of
        December 31, 2004, BSI had cash of $893,387 as compared to $125,550
        at
        December 31, 2003, an increase of 612% and current liabilities of
        $688,808,
        as compared to $908,330, or a decrease of 24%; and cash used by operations
        was
        $2,139,380 in 2004 as compared to $1,339,634 at December 31, 2003,
        or an
        increase of $799,747 or 60%. BSI does not have sufficient cash and cash
        equivalents or other current assets to meet BSI’s current liabilities. In order
        to meet those obligations, BSI will need to raise cash from the sale of
        securities or from borrowings. Our independent auditors have added an
        explanatory paragraph to their audit opinions issued in connection with the
        years 2004, 2003, 2002 and 2001 financial statements, which states that BSI’s
        ability to continue as a going concern depends upon BSI’s ability to resolve
        liquidity problems, principally by obtaining capital, commencing sales and
        generating sufficient revenues to become profitable. Our ability to obtain
        additional funding will determine BSI’s ability to continue as a going concern.
        BSI estimates that is cash reserves as of December 31, 2004 will sustain
        BSI until May 2005.
  During
        the period December 2002 through February 2003, 1,072,386 shares at
        $1.00
        for $771,282 cash and $301,104 cancellation of debt (total $1,020,886) were
        issued to 11 accredited and 20 non-accredited investors. In engaging in the
        foregoing transactions involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transactions involved private offerings
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investors were accredited or unaccredited but sophisticated,
        and
        the investors represented to BSI 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 BSI, including audited financial
        statements, was in fact delivered to them.
  During
        the first quarter of 2003, BSI received proceeds of $134,500 from the sale
        of
        134,500 shares of its common stock in a private placement. In engaging in
        the
        foregoing transactions involving unregistered securities of BSI, BSI relied
        upon
        the private offering exemption provided under Section 4(2) of the Securities
        Act
        of 1933, as amended, in that the transactions involved private offerings
        of
        BSI’s unregistered securities, BSI did not make a public offering or sale of
        its
        securities, the investor was accredited or unaccredited but sophisticated,
        and
        the investors represented to BSI that they were acquiring the securities
        for
        investment purposes and for their own account, and not with an eye toward
        further distribution.
  On
        July
        7, 2003, BSI sold $250,000 of convertible debentures to Cornell Capital
        Partners. Cornell Capital Partners was the purchaser of the convertible
        debentures. These debentures accrue interest at a rate of 5% per year and
        mature
        two years from the issuance date. The debentures are convertible at the Cornell
        Capital Partners’ option any time up to maturity at a conversion price equal to
        the lower of (i) 120% of the closing bid price of the common stock as of
        the
        closing date or (ii) 80% of the lowest closing bid price of the common stock
        for
        the five trading days immediately preceding the conversion date. At maturity,
        BSI has the option to either pay the holder the outstanding principal balance
        and accrued interest or to convert the debentures into shares of common stock
        at
        a conversion price equal to the lower of (i) 120% of the closing bid price
        of
        the common stock as of the closing date or (ii) 80% of the lowest closing
        bid
        price of the common stock for the five trading days immediately preceding
        the
        conversion date. BSI has the right to redeem the debentures upon 30 days
        notice
        for 120% of the amount redeemed. In engaging in the foregoing transactions
        involving unregistered securities of BSI, BSI relied upon the private offering
        exemption provided under Section 4(2) of the Securities Act of 1933, as amended,
        in that the transactions involved private offerings of BSI’s unregistered
        securities, BSI did not make a public offering or sale of its securities,
        the
        investor was accredited, and the investor represented to BSI that it was
        acquiring the securities for investment purposes and for its own account,
        and
        not with an eye toward further distribution.
  15
  On
        July
        7, 2003, BSI entered into an Equity Line of Credit Agreement with Cornell
        Capital Partners that was subsequently terminated by the mutual agreement
        of the
        parties on October 30, 2003. On October 31, 2003, BSI entered into a new
        Equity
        Line of Credit Agreement with Cornell Capital Partners. Under this agreement,
        BSI may issue and sell to Cornell Capital Partners common stock for a total
        purchase price of up to $15 million. Subject to certain conditions, BSI became
        entitled to commence drawing down on the Equity Line of Credit effective
        on
        December 9, 2003, the date the registration statement filed with the
        SEC
        was declared effective, and for two years thereafter. The purchase price
        for the
        shares will be equal to 99% of, or a 1% discount to, the market price, which
        is
        defined as the lowest closing bid price of the common stock during the five
        trading days following the notice date. The amount of each advance is subject
        to
        an aggregate maximum advance amount of $210,000, with no advance occurring
        within seven trading days of a prior advance. Cornell Capital Partners received
        1,875,000 shares of BSI common stock as a one-time commitment fee. Cornell
        Capital Partners is entitled to retain a fee of 4% of each advance. In addition,
        BSI entered into a placement agent agreement with Newbridge Securities
        Corporation, a registered broker-dealer. Pursuant to the placement agent
        agreement, BSI paid Newbridge Securities a one-time placement agent fee of
        35,714 shares of common stock.
  During
        the period August 1, 2003 through October 31, 2003, BSI received proceeds
        of
        $182,500 from the sale of 730,000 shares of its common stock in a private
        placement to Pursuit Capital, LLC (“Pursuit Capital”) at $0.25 per share. In
        engaging in the foregoing transactions involving unregistered securities
        of BSI,
        BSI relied upon the private offering exemption provided under Section 4(2)
        of
        the Securities Act of 1933, as amended, in that the transactions involved
        private offerings of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  During
        the period August 1, 2003 through October 31, 2003, BSI received proceeds
        of
        $67,500 from the sale of 270,000 shares of its common stock to Doug Dragoo
        in a
        private placement at $0.25 per share. In engaging in the foregoing transaction
        involving unregistered securities of BSI, BSI relied upon the private offering
        exemption provided under Section 4(2) of the Securities Act of 1933, as amended,
        in that the transaction involved a private offering of BSI’s unregistered
        securities, BSI did not make a public offering or sale of its securities,
        the
        investor was accredited, and the investor represented to BSI that it was
        acquiring the securities for investment purposes and for its own account,
        and
        not with an eye toward further distribution.
  On
        September 16, 2003, BSI received net proceeds of $455,000 from a $500,000
        secured promissory note issued to Cornell. The note is due on the earlier
        of 90
        days from the date thereof or 60 days after BSI’s registration statement on Form
        SB-2 is declared effective by the SEC. The note is secured by substantially
        all
        of BSI’s non-cash assets. The note bears no interest during its term, but bears
        a default rate of interest of 24% if the note is not paid when due. BSI paid
        cash fees of $45,000 in connection with the issuance of the note and also
        issued
        500,000 shares of its common stock to Cornell as additional consideration
        in the
        transaction. BSI effectively repaid this note and accrued interest thereon
        pursuant to draw-downs under the Equity Line.
  On
        October 31, 2003, BSI entered into an Equity Line of Credit Agreement (the
        “Equity Line”) with Cornell. Under the Equity Line, BSI may issue and sell to
        Cornell common stock for a total purchase price of up to $15 million. Subject
        to
        certain conditions, BSI will be entitled to commence drawing down on the
        Equity
        Line when the common stock to be issued under the Equity Line is registered
        with
        the SEC and the registration statement is declared effective and will continue
        for two years thereafter. The purchase price for the shares will be equal
        to 99%
        of the market price, which is defined as the lowest closing bid price of
        the
        common stock during the five trading days following the notice date. The
        amount
        of each advance is subject to an aggregate maximum advance amount of $210,000,
        with no advance occurring within seven trading days of a prior advance. Cornell
        received 1,875,000 shares of common stock as a one-time commitment fee. Cornell
        is entitled to retain a fee of 4% of each advance. In addition, BSI entered
        into
        a placement agent agreement with Newbridge Securities Corporation (“Newbridge”),
        a registered broker-dealer. Pursuant to the placement agent agreement, BSI
        paid
        Newbridge a one-time placement agent fee of 35,714 shares of common stock.
        In
        engaging in the foregoing transaction involving unregistered securities of
        BSI,
        BSI relied upon the private offering exemption provided under Section 4(2)
        of
        the Securities Act of 1933, as amended, in that the transaction involved
        a
        private offering of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  On
        December 19, 2003, BSI received net proceeds of $170,917 from a $200,000
        secured promissory note issued to Cornell. The note is due on April 26, 2004.
        The note is secured by substantially all of BSI’s non-cash assets. The note
        bears no interest during its term, but bears a default rate of interest of
        24%
        if the note is not paid when due. Discounts and fees paid to obtain the loan
        were $29,083. BSI effectively repaid this note and accrued interest thereon
        pursuant to draw-downs under the Equity Line.
  16
  On
        February 4, 2004, BSI received net proceeds of $223,559 from a $250,000 secured
        promissory note issued to Cornell. The note is due on May 12, 2004. The note
        is
        secured by substantially all of BSI’s non-cash assets. The note bears no
        interest during its term, but bears a default rate of interest of 24% if
        the
        note is not paid when due. BSI paid cash fees of $26,441 in connection with
        the
        issuance of the note. BSI effectively repaid this note and accrued interest
        thereon pursuant to draw-downs under the Equity Line.
  On
        March
        3, 2004, BSI received net proceeds of $229,524 from a $250,000 secured
        promissory note issued to Cornell. The note is due on June 23, 2004. The
        note is
        secured by substantially all of BSI’s non-cash assets. The note bears interest
        of 12% during its term, and bears a default rate of interest of 24% if the
        note
        is not paid when due. BSI paid cash fees of $20,476 in connection with the
        issuance of the note. BSI effectively repaid this note and accrued interest
        thereon pursuant to draw-downs under the Equity Line.
  On
        March
        12, 2004, BSI issued Richard Kirk 250,000 options at a strike price of $0.11
        per
        share, all of which vested on the date of the grant. These options were issued
        as compensation to Mr. Kirk for his services as a director of BSI. All of
        these
        options have a 5-year term. In engaging in the foregoing transaction involving
        unregistered securities of BSI, BSI relied upon the private offering exemption
        provided under Section 4(2) of the Securities Act of 1933, as amended, in
        that
        the transaction involved a private offering of BSI’s unregistered securities,
        BSI did not make a public offering or sale of its securities, the investor
        was
        accredited, and the investor represented to BSI that it was acquiring the
        securities for investment purposes and for its own account, and not with
        an eye
        toward further distribution.
  On
        April
        14, 2004, BSI received net proceeds of $229,679 from a $250,000 secured
        promissory note issued to Cornell. The note is due on June 21, 2004. The
        note is
        secured by substantially all of BSI’s non-cash assets. The note bears no
        interest during its term, but bears a default rate of interest of 24% if
        the
        note is not paid when due. BSI paid cash fees of $20,321 in connection with
        the
        issuance of the note. BSI effectively repaid this note and accrued interest
        thereon pursuant to draw-downs under the Equity Line.
  On
        June
        8, 2004, BSI received net proceeds of $320,208 from a $350,000 secured
        promissory note issued to Cornell. The note is due on September 20, 2004.
        The
        note is secured by substantially all of BSI’s non-cash assets. The note bears
        interest at 12% per annum during its term, and bears a default rate of interest
        of 24% if the note is not paid when due. BSI paid cash fees of $29,792 in
        connection with the issuance of the note. BSI effectively repaid this note
        and
        accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  On
        June
        18, 2004, BSI received net proceeds of $231,935 from a $250,000 secured
        promissory note issued to Cornell. The note is due on October 18, 2004. The
        note
        is secured by substantially all of BSI’s non-cash assets. The note bears
        interest at 12% per annum during its term, and bears a default rate of interest
        of 24% if the note is not paid when due. BSI paid cash fees of $18,065 in
        connection with the issuance of the note. BSI effectively repaid this note
        and
        accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  On
        July
        15, 2004, BSI issued Bernard Nann 250,000 options at a strike price of $0.089
        per share, 50,000 of which vested on the date of the grant, and the remaining
        200,000 vests 50,000 per year for so long as Mr. Nann remains a director
        of BSI.
        These options were issued as compensation to Mr. Nann for his present and
        future
        services as a director of BSI. All of these options have a 5-year term. In
        engaging in the foregoing transaction involving unregistered securities of
        BSI,
        BSI relied upon the private offering exemption provided under Section 4(2)
        of
        the Securities Act of 1933, as amended, in that the transaction involved
        a
        private offering of BSI’s unregistered securities, BSI did not make a public
        offering or sale of its securities, the investor was accredited, and the
        investor represented to BSI that it was acquiring the securities for investment
        purposes and for its own account, and not with an eye toward further
        distribution.
  On
        September 13, 2004, BSI issued 990,099 shares of common stock to Cornell
        for
        $50,000 cash. Costs associated with this transaction were $2,500. In engaging
        in
        the foregoing transaction involving unregistered securities of BSI, BSI relied
        upon the private offering exemption provided under Section 4(2) of the
        Securities Act of 1933, as amended, in that the transaction involved a private
        offering of BSI’s unregistered securities, BSI did not make a public offering or
        sale of its securities, the investor was accredited, and the investor
        represented to BSI that it was acquiring the securities for investment purposes
        and for its own account, and not with an eye toward further
        distribution.
  17
  On
        October 7, 2004, BSI issued a 5% convertible debenture in the amount of $500,000
        to Cornell that is due October 7, 2007, on December 10, 2004, BSI
        issued a
        5% convertible debenture in the amount of $500,000 to Cornell that is due
        December 10, 2007, and on January 20, 2005, BSI issued a 5% convertible
        debenture in the amount of $250,000 to Cornell that is due January 20, 2008.
        These debentures are convertible into BSI’s common stock at either the fixed
        price of 120% of the Volume Weighted Average price on the closing date (October
        7, 2007, December 10, 2007 and January 20, 2008, respectively) or
        80% of
        the average of the three lowest daily Volume Weighted Average Price, as reported
        by Bloomberg, L.P., of BSI’s common stock for the five trading days immediately
        preceding the conversion date. These debentures will automatically convert
        into
        BSI’s common stock on the third anniversary of issuance. BSI has the right to
        redeem the debentures with three days advance notice any or all of the
        outstanding debenture amount at its sole discretion. The redemption price
        shall
        be 120% of the face amount redeem plus accrued interest. Once the redemption
        notice has been given, Cornell may continue to convert the remaining outstanding
        debenture. Cornell has the option to convert the debenture on the same day
        as
        issuance. As a result of this conversion feature, Cornell has been provided
        intrinsic value that has been calculated as the difference between the price
        of
        the Company’s common stock on the date of issuance, as compared to the
        discounted conversion price (or 80% of the stock price on the date of issuance).
        This intrinsic value has been multiplied by the number of shares that would
        be
        issued to Cornell upon conversion, which has resulted in a $125,000 charge
        to
        operations during 2004 for each of the convertible debentures issued during
        2004. A $62,500 charge to operations will be taken during the first quarter
        of
        2005 for the debenture that issued during January 2005. Also on October 7,
        2004,
        BSI received $500,000 less a 10% fee of $50,000 and $10,000 for legal costs.
        BSI
        received $500,000 (net of 10% fee) on December 10, 2004 and $250,000
        (net
        of 10% fee) on January 20, 2005. In engaging in the foregoing transactions
        involving unregistered securities of BSI, BSI relied upon the private offering
        exemption provided under Section 4(2) of the Securities Act of 1933, as amended,
        in that the transactions involved the private offering of BSI’s unregistered
        securities, BSI did not make a public offering or sale of its securities,
        the
        investor was accredited, and the investor represented to BSI that it was
        acquiring the securities for investment purposes and for its own account,
        and
        not with an eye toward further distribution.
  On
        November 4, 2004, BSI received net proceeds of $178,051 from a $200,000 secured
        promissory note issued to Cornell. The note is due on December 4,
        2004. The
        note is secured by substantially all of BSI’s non-cash assets. The note bears
        interest at 12% per annum during its term, and bears a default rate of interest
        of 24% if the note is not paid when due. BSI paid cash fees of $21,949 in
        connection with the issuance of the note. BSI effectively repaid this note
        and
        accrued interest thereon pursuant to draw-downs under the Equity
        Line.
  On
        December 10, 2004, BSI received net proceeds of $435,723 from a $500,000
        secured promissory note issued to Cornell Capital Partners, LP. The note
        is due
        on March 11, 2005. The note is secured by substantially all of BSI’s non-cash
        assets. The note bears interest at 12% per annum during its term, and bears
        a
        default rate of interest of 24% if the note is not paid when due. BSI paid
        cash
        fees of $64,277 in connection with the issuance of the note. As of March
        11,
        2005, BSI effectively repaid $300,000 of the note and accrued interest thereon
        pursuant to draw-downs under the Equity Line.
  The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and liquidation of liabilities
        in
        the ordinary course of business. BSI has experienced losses since inception.
        The
        extended period over which losses have been experienced is, in the opinion
        of
        BSI, principally attributable to two factors: lack of capital and long sales
        lead times. Lack of capital has prevented BSI from quickly developing and
        aggressively marketing its products. In addition, most of BSI’s potential
        customers are large corporations or governments. Adopting BSI’s products will in
        many cases require changing the way business is done. These circumstances
        can
        result in two years or more elapsing from initial sales contact to delivery
        of
        product. In order to fund activities until positive operating cash flow is
        achieved, management recognizes that BSI must generate revenue from its
        operations and must raise capital from the sale of its securities. However,
        no
        assurances can be given that BSI will be successful in these activities.
        Should
        any of these events not occur, the accompanying financial statements will
        be
        materially affected, which in-turn could result in the suspension or termination
        of BSI’s operations.
  **Capital
        Resources**
  Pursuant
        to the Equity Line of Credit, BSI may issue and sell to Cornell Capital Partners
        common stock for a total purchase price of up to $15 million. Subject to
        certain
        conditions, BSI became entitled to commence drawing down on the Equity Line
        of
        Credit when the common stock to be issued under the Equity Line of Credit
        was
        registered with the SEC and the registration statement is declared effective
        (December 9, 2003) and for two years thereafter. The purchase price
        for the
        shares will be equal to 99% of, or a 1% discount to, the market price, which
        is
        defined as the lowest closing bid price of the common stock during the five
        trading days following the notice date. The amount of each advance is subject
        to
        an aggregate maximum advance amount of $210,000, with no advance occurring
        within seven trading days of a prior advance. Cornell Capital Partners received
        1,875,000 shares of BSI common stock as a one-time commitment fee. Cornell
        Capital Partners is entitled to retain a fee of 4% of each advance. In addition,
        BSI entered into a placement agent agreement with Newbridge Securities. Pursuant
        to the placement agent agreement, BSI paid to Newbridge Securities a one-time
        placement agent fee of 35,714 shares of common stock.
  18
  BSI
        cannot predict the actual number of shares of common stock that will be issued
        pursuant to the Equity Line of Credit, in part, because the purchase price
        of
        the shares will fluctuate based on prevailing market conditions and BSI have
        not
        determined the total amount of advances BSI intend to draw. Pursuant to BSI’s
        Articles of Incorporation, BSI is authorized to issue up to 200,000,000 shares
        of common stock, of which 99,273,157 are outstanding as of March 11, 2005.
        At a
        recent price of $0.04 per share, BSI would be required to issue at $0.0396
        (99%
        of $0.04), 378,787,878 shares of common stock in order to fully utilize the
        $15
        million available under the Equity Line. At BSI’s current stock price, BSI would
        be required to authorize and register additional shares of BSI’s common stock to
        fully utilize the amount available under the Equity Line of Credit. At BSI’s
        current price of $0.04, BSI would need to authorize approximately 180,000,000
        additional shares to fully utilize the Equity Line of Credit. BSI would have
        to
        receive the affirmative vote of a majority of BSI’s outstanding shares to
        approve any increase in authorized shares. Our inability to obtain such approval
        would prohibit us from increasing BSI’s authorized shares of common stock and
        from issuing any additional shares under the Equity Line of Credit or to
        otherwise raise capital from the sale of capital stock.
  **Plan
        Of Operations**
  BSI
        continues to rely on funding by Cornell Capital Partners while it pursues
        potential sales of its Employee Tracking System and Access Control and Site
        Security products to commercial customers located in the United States, South
        Africa and Germany.
  If
        a
        contract is awarded, BSI will need to increase the size of its staff to
        approximately 15 to 25 employees and consultants and will need to establish
        and
        enhance its production capabilities. These activities will require additional
        financing.
  If
        a
        contract is not awarded, BSI may be required to significantly reduce its
        administrative costs, salaries and research and development activities until
        such time as a new plan of action can be developed. The new plan, if required,
        may include locating additional sources of funding or merger and acquisition
        activities.
  **Off-Balance
        Sheet Arrangements**
  None.
  **Property,
        Plant And Equipment**
  No
        material changes from December 31, 2003.
  **Current
        Accounting Pronouncements**
  In
        April
        2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement No. 4, 44 and
        64, Amendment of FASB Statement No. 13, and Technical Corrections.” This
        statement provides guidance on the classification of gains and losses from
        the
        extinguishment of debt and on the accounting for certain specified lease
        transactions. BSI adopted SFAS No. 145 January 1, 2003. Adoption of SFAS
        No. 145
        did not have a material impact on BSI.
  In
        June
        2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit
        or Disposal Activities,” (effective January 1, 2003) which replaces Emerging
        Issues Task Force (EITF) Issue No. 94-3 “Liability Recognition for Certain
        Employee Termination Benefits and Other Costs to Exit an Activity (including
        Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a
        liability for a cost associated with an exit or disposal activity be recognized
        when the liability is incurred and states that an entity’s commitment to an exit
        plan, by itself, does not create a present obligation that meets the definition
        of a liability. SFAS No. 146 also establishes that fair value is the objective
        for initial measurement of the liability. BSI adopted this statement on January
        1, 2003; adoption did not have an effect on results of operations and financial
        position.
  In
        October 2002, the FASB issued SFAS No. 147 “Acquisitions of Certain Financial
        Institutions.” SFAS No. 147 amends FASB Statements No. 72 and 144 and FASB
        Interpretations No. 9. Adoption of this statement did not have a material
        effect
        on BSI.
  19
  In
        November 2002, the Financial Accounting Standards Board issued Interpretation
        No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
        Including Indirect Guarantees of Indebtedness of Others” (the Interpretation),
        which addresses the disclosure to be made by a guarantor in its interim and
        annual financial statements about its obligations under guarantees. The
        Interpretation also requires the recognition of a liability by a guarantor
        at
        the inception of certain guarantees. The Interpretation requires the guarantor
        to recognize a liability for the non-contingent component of the guarantee,
        this
        is the obligation to stand ready to perform in the event that specified
        triggering events or conditions occur. The initial measurement of this liability
        is the fair value of the guarantee at inception. The recognition of the
        liability is required even if it is not probable that payments will be required
        under the guarantee or if the guarantee was issued with a premium payment
        or as
        part of a transaction with multiple elements. BSI adopted the disclosure
        provisions of the Interpretation beginning with its fiscal 2003 consolidated
        financial statements, and will apply the recognition and measurement provisions
        for all guarantees entered into or modified after December 31, 2002.
        However, BSI is not a guarantor of indebtedness of others.
  In
        December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
        Compensation - Transition and Disclosure.” This statement amends FASB Statement
        No. 123 “Accounting for Stock-Based Compensation,” to provide alternative
        methods of transition for a voluntary change to the fair value based method
        of
        accounting for stock-based employee compensation. This statement also amends
        the
        disclosure requirements of Statement 123 to require prominent disclosures
        in
        both annual and interim financial statements about the method of accounting
        for
        stock-based employee compensation and the effect of the method used on reported
        results. The provisions of this statement relating to alternative transition
        methods and annual disclosure requirements are effective for the year ended
        December 31, 2002. The transitional provisions did not have an impact
        on
        BSI’s financial statements as it has elected to retain the intrinsic value
        method. The provisions relating to annual and interim disclosures have changed
        the manner in which BSI discloses information regarding stock-based
        compensation.
  In
        January 2003, the Financial Accounting Standards Board issued Interpretation
        No.
        46, “Consolidation of Variable Interest Entities” (FIN No. 46)”. This
        interpretation clarifies existing accounting principles related to the
        preparation of consolidated financial statements when the equity investors
        in an
        entity do not have the characteristics of a controlling financial interest
        or
        when the equity at risk is not sufficient for the entity to finance its
        activities without additional subordinated financial support from other parties.
        FIN No. 46 requires a company to evaluate all existing arrangements to identify
        situations where a company has a “variable interest” (commonly evidenced by a
        guarantee arrangement or other commitment to provide financial support) in
        a
“variable interest entity” (commonly a thinly capitalized entity) and further
        determine when such variable interests require a company to consolidate the
        variable interest entities’ financial statement with its own. BSI is required to
        perform this assessment by December 31, 2003 and consolidate any variable
        interest entities for which it will absorb a majority of the entities’ expected
        losses or receive a majority of the expected residual gains. Management has
        not
        yet performed this assessment, however it does not have any variable interest
        entities as of December 31, 2004.
  In
        April
        2003, FASB issued SFAS No. 149, “Accounting for Derivative Instruments and
        Hedging Activities,” which is effective for contracts entered into or modified
        after June 30, 2003 and for hedging relationships designated after June 30,
        2003. This statement amends and clarifies financial accounting and reporting
        for
        derivative instruments including certain instruments embedded in other contracts
        and for hedging activities under SFAS No. 133, “Accounting for Derivative
        Instruments and Hedging Activities.” BSI has not entered into any contracts of
        this type.
  In
        May
        2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
        with Characteristics of Both Liabilities and Equity,” which is effective for
        financial instruments entered into or modified after May 31, 2003, and otherwise
        is effective at the beginning of the first interim period beginning after
        September 15, 2003. SFAS No. 150 establishes standards for how an issuer
        classifies and measures certain financial instruments with characteristics
        of
        both liabilities and equity. The adoption of this standard is not expected
        to
        have a material impact on BSI’s financial statements.
  In
        December 2004, the FASB issued SFAS No. 123 (revised), Share-Based
        Payment,
        which supersedes Accounting Principles Board (“APB”) No. 25, Accounting for
        Stock Issued to Employees, and its related implementation guidance. Under
        SFAS
        No. 123 (revised), all share-based payments would be treated as other forms
        of
        compensation by recognizing the costs, generally measured as the fair value
        at
        the date of grant, in the income statement. BSI will adopt, as required,
        SFAS
        No. 123 (revised) for its fiscal year beginning January 1, 2006. Management
        expects that the impact of the adoption of SFAS No. 123 (revised) will be
        that
        the share-based payment expense amounts historically disclosed as required
        by
        SFAS No. 123 will now be recognized as an expense on the statement of
        operations.
  20
  **ITEM
        7. FINANCIAL STATEMENTS**
  Attached
        hereto and filed as a part of this Form 10-KSB are BSI’s Consolidated Financial
        Statements.
  **ITEM
        8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  Effective
        February 17, 2003, BSI’s Board of Directors dismissed Corbin & Wertz as the
        independent auditor and engaged Ehrhardt Keefe Steiner & Hottman PC. Neither
        of the principal accountant’s reports for the past two years contained any
        adverse opinion or disclaimer, nor were they modified as to uncertainty,
        audit
        scope or accounting principles; however, the report for the past two years
        has
        been modified to include an emphasis paragraph indicating that substantial
        doubt
        existed about BSI’s ability to continue as a going concern. The decision to
        change accountants was approved by BSI’s Board of Directors. There were no
        disagreements with former or current independent auditors.
  **ITEM
        8A. CONTROLS AND PROCEDURES**
  **Evaluation
        Of Disclosure Controls And Procedures**
  BSI’s
        Chief Executive Officer and Interim Chief Financial Officer, after evaluating
        the effectiveness of BSI’s disclosure controls and procedures (as defined in
        Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
        as
        amended) as of the end of the period covered by this report, has concluded
        that
        as of such date, BSI’s disclosure controls and procedures were adequate and
        effective to ensure that material information relating to BSI and its
        consolidated subsidiary that is required to be disclosed by BSI in reports
        that
        BSI files or submits under the Securities Exchange Act of 1934, as amended,
        is
        recorded, processed, summarized and reported within the time periods specified
        in SEC rules and accumulated and communicated to BSI’s management, including
        BSI’s Chief Executive Officer and Interim Chief Financial Officer, to allow
        timely decisions regarding required disclosure.
  **Changes
        In Internal Controls Over Financial Reporting**
  There
        was
        no change in BSI’s internal controls over financial reporting that occurred
        during our last fiscal quarter that has materially affected, or is reasonably
        likely to materially affect, BSI’s control over financial
        reporting.
  **ITEM
        8B. OTHER INFORMATION**
  None.
  21
  **PART
        III**
  **ITEM
        9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**
  As
        of
        December 31, 2004, the directors and executive officers of BSI, their
        age,
        positions in BSI, the dates of their initial election or appointment as
        directors or executive officers, and the expiration of the terms are as
        follows:
  **Name
                  of Director/**
                **Executive
                  Officer**
              **Age**
              **Position**
              **Period
                  Served (1)**Jack
                  Harper
              52
              Chairman
                  and President
              1995
                  to presentRichard
                  A. Kirk
              74
              Director
                  and Secretary
              1995
                  to presentJohn
                  D. Woods
              65
              Director
              2005
                  to present
  (1)
        Period served includes the period served in same capacity with BSI, Inc.,
        a
        private Colorado corporation.
 
 None
        of
        BSI’s directors or executive officers is a director of any company that files
        reports with the SEC.
  **Family
        Relationships**
  To
        our
        knowledge, there are no family relationships between or among the directors,
        executive officers or any other person.
  **Legal
        Proceedings**
  None
        of
        BSI’s directors have been involved in legal proceedings.
  **Audit
        Committee Financial Expert**
  BSI
        does
        not have an audit committee, nor an audit committee financial
        expert.
  **Election
        Of Directors**
  BSI’s
        directors are elected at the annual meeting of stockholders and hold office
        until their successors are elected. BSI’s officers are appointed by the Board of
        Directors and serve at the pleasure of the Board of Directors and are subject
        to
        employment agreements, if any, approved and ratified by the Board of
        Directors.
  **Background
        of Directors**
  ***Jack
        Harper, President, Chief Executive Officer, And Chairman of the
        Board***
  Mr.
        Harper has been President and Chairman of the Board of BSI since late 1995.
        Previously, from 1989 until 1994, Mr. Harper was President of Technology
        Fusion,
        Inc., a company that specialized in low-cost add-in video hardware products
        for
        the Apple Macintosh. Mr. Harper received an MBA from the University of Denver
        in
        2000, having completed all studies in 1992; in 1975, Mr. Harper received
        a B.S.
        in Electrical Engineering and a B.A. in Mathematics with a Minor in Russian
        Language from the University of Houston.
  ***Richard
        A. Kirk, Secretary And Director***
  Mr.
        Kirk
        has been a Director of BSI since August of 1995 and acting Secretary since
        July
        of 1999. He was Chairman of the Board of Access Long Distance, a long distance
        provider that was sold in 2001. Mr. Kirk worked for United Bank of
        Denver/Norwest Bank/Wells Fargo from 1958 through 1990, ultimately serving
        as
        Chairman, President and Chief Executive Officer. In 1986, Mr. Kirk was elected
        Vice Chairman of the United Banks of Colorado, Inc. (now Wells Fargo). In
        1992,
        he retired from the Norwest Bank Denver but continues as Chairman Emeritus
        and
        serves on its Advisory Board. He is a graduate of the Haverford College;
        the
        Advanced Management Program of the Harvard Business School; and the Stonier
        Graduate School of Banking at Rutgers University. Mr. Kirk serves on boards
        of
        several nonprofit institutions and is an appointed Commissioner of the Denver
        Water Board.
  22
  ***John
        D. Woods, Director***
  John
        D.
        Woods is a founding shareholder of Community Bankshares Inc. and has served
        as
        Chairman of the Board since its incorporation in February 1989. He divides
        his
        business time on affairs of the holding company and also as Chairman and
        part
        owner of Market Reach, Ltd., London, England.
  He
        has
        spent 40 years in the banking industry, starting at the Northern Trust Company,
        Chicago, Illinois in 1956. During the course of his career, he has served
        as
        President and COO of Winters National Bank, Dayton, Ohio (an 42.5 billion
        bank
        now part of Bank One), and Chairman and CEO of Omaha National Bank and its
        successor , FirstTier Financial, Inc (a $4.7 billion banking organization
        now
        part of US Bank, Minneapolis, Minnesota). Mr. Woods received his B.A. degree
        from the University of Colorado in Boulder, Colorado.
  **Section
        16(a) Beneficial Ownership Reporting Compliance**
  Section
        16(a) of the Securities Exchange Act of 1934, as amended, and the rules
        promulgated thereunder require BSI’s officers and directors, and persons who
        beneficially own more than 10% of a registered class of BSI equity securities,
        to file reports of ownership and changes in ownership with the SEC and to
        furnish BSI with copies thereof.
  Based
        on
        its reviews of the copies of the Section 16(a) forms received by it, or written
        representations from certain reporting persons, BSI believes that, during
        the
        last fiscal year, all Section 16(a) filing requirements applicable to its
        officers, directors and greater than 10% beneficial owners were complied
        with
        and filed timely
  **Code
        of Ethics**
  On
        April
        12, 2004, the Board of Directors of BSI adopted a written Code of Ethics
        designed to deter wrongdoing and promote honest and ethical conduct, full,
        fair
        and accurate disclosure, compliance with laws, prompt internal reporting
        and
        accountability to adherence to the Code of Ethics. The Code of Ethics is
        attached hereto as an exhibit to this report.
  **ITEM
        10. EXECUTIVE COMPENSATION**
  The
        following table sets forth, for the fiscal year ended December 31,
        2004,
        2003, 2002 and 2001 certain information regarding the compensation earned
        by
        BSI’s President (the “Named Executive Officer”), with respect to services
        rendered by him to BSI. No other officer of BSI has been paid or earned
        compensation in excess of $100,000 in any such fiscal year.
  **Summary
        Compensation Table**
 
 **Annual
                  Compensation**
              
              **Long-Term
                  Compensation****Name
                  and principal Position**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Other
                  Annual Compensation**
              
              **Restricted
                  Stock Awards**
              
              **Securities
                  Underlying Options/SARs**
              
              **All
                  Other Compensation**Jack
                  Harper,
              
              
              2004
              
              $
              125,000
              
              
              35,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --Chairman
                  and
              
              
              2003
              
              $
              90,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --President
              
              
              2002
              
              $
              80,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
  (1)
              Mr.
                  Harper was issued 2,500,000 shares in consideration for $2,500
                  and the
                  forgiveness of accrued wages.
  (2)
              The
                  2004 bonus to Mr. Harper was in recognition of his financial support
                  during the early days of BSI that resulted in personal
                  debt.
  **Option
        / SAR Grants**
  BSI
        granted 3,097,500 stock options to directors, employees and consultants during
        the fiscal year ended December 31, 2004. No stock appreciation rights
        (“SARs”) were granted to these individuals during any year.
  On
        October 24, 1996, BSI adopted a Stock Option Plan whereby the Board of Directors
        can issue both incentive and nonqualified options to directors, employees
        and
        consultants. Currently, there are no outstanding stock options issued under
        the
        plan.
  **Compensation
        Of Directors**
  During
        the year 2003, BSI did not pay its directors any remuneration; however, BSI
        periodically reimburses its directors for out-of-pocket expenses they incur
        in
        fulfillment of their duties as directors of BSI. In 2004, BSI paid the following
        remuneration to its directors: (i) on March 12, 2004, BSI issued Mr. Kirk
        250,000 options at a strike price of $0.11 per share, all of which vested
        on the
        date of the grant; and (ii) on July 15, 2004, BSI issued Mr. Nann 250,000
        options at a strike price of $0.089 per share, 50,000 of which vested on
        the
        date of the grant, and the remaining 200,000 vests 50,000 per year for so
        long
        as he remains a member of the Board of Directors. All of the options issued
        to
        Messrs. Kirk and Nann have a five year term.
  **Employment
        Contracts, Termination of Employment, and Change-in-Control
        Arrangements**
  BSI
        presently has an oral employment contract with Jack Harper. The employment
        agreement provides for an annual salary of $125,000 per year, as well as
        group
        life, health, dental and disability insurance. The employment agreement is
        for
        an indefinite period, but is terminable at will.
  **Committees
        of the Board of Directors**
  Currently,
        BSI does not have an executive, audit or any standing committees of the Board
        of
        Directors.
  **ITEM
        11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT**
  The
        following table sets forth information with respect of the beneficial ownership
        as of March 1, 2005 for each officer and director of BSI and for each person
        who
        is known to BSI to be the beneficial owner of more than 5% of BSI’s common
        stock.
  **Security
        Ownership of Certain Beneficial Owners and Management**
 
 **Title
                  of Class**
              **Name
                  and Address of Beneficial Owner**
              **Amount
                  and nature of Beneficial Ownership**
              **Percentage
                  of Class****(1)**Common
              Jack
                  Harper
              10,403,102
              10.70%12600
                  West Colfax Ave. Suite B410Lakewood,
                  Colorado 80215Common
              Richard
                  Kirk
              4,601,340
              4.73%12600
                  West Colfax Ave. Suite B410Lakewood,
                  Colorado 80215Common
              Bernhard
                  Nann
              50,000
              *12600
                  West Colfax Ave. Suite B410Lakewood,
                  CO 80215All
                  Officers And Directors As A Group (3) Persons
              15,054,442
              15.48
                  %Common
              Cornell
                  Capital Partners, L.P.
              0
              8.68%101
                  Hudson Street, Suite 3606Jersey
                  City, NJ 07302
  *
              Less
                  than 1%.
  (1)
              Applicable
                  percentage of ownership is based on 99,273,157 shares of common
                  stock
                  outstanding as of March 11, 2005 for each stockholder. Beneficial
                  ownership is determined in accordance within the rules of the SEC
                  and
                  generally includes voting of investment power with respect to securities.
                  Shares of common stock subject to securities exercisable or convertible
                  into shares of common stock that are currently exercisable or exercisable
                  within 60 days of March 1, 2005 are deemed to be beneficially owned
                  by the
                  person holding such options for the purpose of computing the percentage
                  of
                  ownership of such persons, but are not treated as outstanding for
                  the
                  purpose of computing the percentage ownership of any other
                  person.
  23
  **Securities
        Authorized For Issuance Under Equity Compensation Plan**
  The
        following table sets forth the securities that have been authorized under
        equity
        compensation plans as of December 31, 2004.
  **Number
                  of Securities To Be Issued Upon Exercise Of Outstanding Options,
                  Warrants
                  And Rights**
              
              **Weighted-Average
                  Exercise price Of Outstanding Options, Warrants And
                  Rights**
              
              **Number
                  of Securities Remaining Available For Future Issuance Under Equity
                  Compensation Plans (Excluding Securities Reflected In Column
                  (a))****(a)**
              
              **(b)**
              
              **(c)**Equity
                  compensation plans approved by security holders
              
              
              --
              
              
              --
              
              
              --Equity
                  compensation plans not approved by security holders
              
              
              --
              
              
              --
              
              
              --TOTAL
              
              
              --
              
              
              --
              
              
              --
  **ITEM
        12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
  During
        the past two years, BSI has not entered into a transaction with a value in
        excess of $60,000 with a director, officer or beneficial owner of 5% or more
        of
        BSI’s common stock, except as disclosed in the following
        paragraphs.
  Stock
        Issued to an Officer and Employee. On September 11, 2001, BSI issued 2,500,000
        shares of common stock to Jack Harper, President and a Director of BSI, for
        $2,500.00 at $0.001 per share and forgiveness of $59,643 accrued wages. Also
        in
        2001, BSI issued 212,045 shares of common stock to Robert B. Lumen for $212.05
        at $0.001 per share. When the foregoing shares were issued, BSI was insolvent
        with negative working capital, and unable to pay salaries to employees. In
        engaging in the foregoing transactions, BSI relied upon the private offering
        exemption provided under Section 4(2) of the Securities Act of 1933, as amended,
        in that the transactions involved private offerings of BSI’s unregistered
        securities, BSI did not make a public offering or sale of its securities,
        the
        employees were either accredited or unaccredited but sophisticated investors,
        and the employees represented to BSI 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 investor, Mr. Lumen,
        all
        information required to be delivered to him concerning BSI, including audited
        financial statements, was in fact delivered to him.
  Loans
        by
        Director. From March 30, 2000 through December 31, 2001, Richard A.
        Kirk,
        director of BSI, had loaned $259,000 to BSI, all with annual interest at
        10%
        (accrued interest at March 31, 2002 was $19,935). Of the total debt, $64,000
        plus interest is currently due, and $195,000 is due when BSI has received
        cumulative funding of $3 million. In December 2002, BSI issued 301,104
        restricted shares of common stock to Mr. Kirk, for his cancellation of $301,104
        of debt (principal and all interest) owed to him by BSI. In engaging in the
        foregoing transaction, BSI relied upon the private offering exemption provided
        under Section 4(2) of the Securities Act of 1933, as amended, in that the
        transaction involved a private offering of BSI’s restricted securities, BSI did
        not make a public offering or sale of its securities, Mr. Kirk was an accredited
        investor, and he represented to BSI that he was acquiring the securities
        for
        investment purposes and for his own account, and not with an eye toward further
        distribution.
  24
  **ITEM
        13. EXHIBITS AND REPORTS ON FORM 8-K**
  **(a)**  **Exhibits:**
  **Exhibit
                    No.**
                **Description**
                **Location**2.1
                Agreement
                    and Plan of Merger, dated August 7, 2000, between Calipso and
                    Knowledge
                    Foundations, Inc.
                Incorporated
                    by reference to Exhibit 2(1) to the Current Report on
                    Form 8-K filed
                    on September 27, 2000 to2.2
                Merger
                    Agreement, dated April 23, 2002, between BSI2000, Inc., Knowledge
                    Foundations, Inc. and KFI, Inc.
                Incorporated
                    by reference to Exhibit 99.2 to the Current Report on Form 8-K
                    filed on
                    May 9, 20022.3
                First
                    Amendment to Merger Agreement dated August 8, 2002, between BSI2000,
                    Inc.,
                    KFI, Inc. and Knowledge Foundations, Inc.
                Incorporated
                    by reference to Form S-4 filed on August 13, 20022.4
                Separation
                    and Distribution Agreement by and among Knowledge Foundations,
                    Inc., Cyber
                    Knowledge, Inc. and CKI Group
                Incorporated
                    by reference to Form S-4 filed on August 13, 20022.5
                Second
                    Amendment to Merger Agreement dated November 20, 2002 between
                    BSI2000,
                    Inc., KFI, Inc. and Knowledge Foundations, Inc.
                Incorporated
                    by reference to Form S-4/A1 filed on November 27, 20023.1
                Certificate
                    of Incorporation of Knowledge Foundations, Inc. filed on May
                    31,
                    1994
                Incorporated
                    by reference to Form 10-SB filed on November 24, 19993.2
                Certificate
                    of Amendment of Certificate of Incorporation re: 36:1 forward
                    split
                Incorporated
                    by reference to Exhibit 3(i)(a) to the Current Report on  Form
                    8-K
                    filed on September 27, 20003.3
                Certificate
                    of Amendment of Certificate of Incorporation re: 35:1 forward
                    split
                Incorporated
                    by reference to Exhibit 3(i)(b) to the Current Report on  Form
                    8-K
                    filed on September 27, 20003.4
                Certificate
                    of Amendment of Certificate of Incorporation re: increase in
                    authorized
                    shares
                Incorporated
                    by reference to Exhibit 3(i)(c) to the Current Report on Form
                    8-K filed on
                    September 27, 20003.5
                Certificate
                    of Amendment of Certificate of incorporation re: name change
                Incorporated
                    by reference to Exhibit 3.3 to the Current Report on Form 8-K
                    filed on
                    April 8, 20033.6
                Bylaws
                    of Knowledge Foundations, Inc.
                Incorporated
                    by reference to Form 10-SB filed on November 24, 19993.7
                Certificate
                    of Merger, dated August 17, 2000, filed with the Secretary of
                    State of
                    Delaware
                Incorporated
                    by reference to Exhibit 3(i) to the Current Report on Form 8-K
                    filed on
                    September 27, 200010.1
                Stock
                    Repurchase Agreement dated September 18, 2002 between Calipso
                    and Wrights
                    & Bleers and Ocean Way Investments, Ltd.
                Incorporated
                    by reference to Exhibit 4(a) to the Current Report on Form 8-K
                    filed on
                    September 27, 200010.2
                Lock
                    Up Agreement dated September 18, 2000 between Calipso and Wright
&
                    Bleers and Ocean Way Investments, Ltd.
                Incorporated
                    by reference to Exhibit 4(b) to the Current Report on Form 8-K
                    filed on
                    September 27, 200010.3
                License
                    and Royalty Agreement dated April 6, 2000 between Richard L.
                    Ballard and
                    Janet J. Pettitt and Knowledge Foundations Inc.
                Incorporated
                    by reference to Exhibit 10(1) to the Current Report on Form 8-K
                    filed on
                    September 27, 200010.4
                Employment
                    Contract of Michael W. Dochterman dated May 1, 2000
                Incorporated
                    by reference to Exhibit 10(2) to the Current Report on Form 8-K
                    filed on
                    September 27, 2000
  25
  10.5
                  Employment
                      Contract of Robert A. Dietrich dated May 1, 2000
                  Incorporated
                      by reference to Exhibit 10(3) to the Current Report on Form
                      8-K filed on
                      September 27, 200010.6
                  Strategic
                      Alliance Agreement dated May 4, 2000 between BSI2000, Inc.
                      and Drug
                      Intervention Services of America, Inc.
                  Incorporated
                      by reference to Exhibit 10.4 to Form S-4 filed on August 13,
                      200210.7
                  Office
                      Lease by and between BSI2000, Inc. and Golden Hill Partnership,
                      dated as
                      of January 24, 2001.
                  Incorporated
                      by reference to Exhibit 10.7 to Form SB-2 filed on November
                      4,
                      2003.10.8
                  Strategic
                      Alliance Agreement dated May 7, 2001 between BSI2000, Inc.
                      and L.C.
                      Sistemia
                  Incorporated
                      by reference to Exhibit 10.5 to Form S-4 filed on August 13,
                      200210.9
                  Agreement
                      to replace options with common stock dated September 11, 2001
                      between
                      BSI2000, Inc. and Jack Harper and Bryan Luman
                  Incorporated
                      by reference to Exhibit 10.8 to Form S-4 filed on August 13,
                      200210.10
                  Certificate
                      of LaserCard Systems Corporation Issued to BSI2000, Inc. dated
                      April 28,
                      2002
                  Incorporated
                      by reference to Exhibit 10.10 to Form SB-2 filed on November
                      4,
                      2003.10.11
                  Strategic
                      Alliance Agreement between Titan Secure Systems and BSI2000,
                      Inc. dated
                      July 25, 2002
                  Incorporated
                      by reference to Exhibit 10.9 to Form S-4/A1 filed on November
                      27,
                      200210.12
                  Teaming
                      Agreement between Science Applications International Corporation
                      and
                      BSI2000, Inc. dated August 20, 2002
                  Incorporated
                      by reference to Exhibit 10.10 to Form S-4/A1 filed on November
                      27,
                      200210.13
                  Solicitation/Contract/Order
                      for Commercial Items dated September 2, 2002, issued by U.S.
                      Immigration
                      and Naturalization Service with BSI2000, Inc. as Contractor/Offeror
                      21
                  Incorporated
                      by reference to Exhibit 10.11 to Form S-4/A1 filed on November
                      27,
                      200210.14
                  Form
                      of Lock-Up Agreement between certain shareholders of BSI2000,
                      Inc. and
                      Knowledge Foundations, Inc.
                  Incorporated
                      by reference to Exhibit 4(c) to Form S-4/A3 filed on January
                      29,
                      200310.15
                  Securities
                      Purchase Agreement dated July 7, 2003 among the Registrant
                      and the
                      Buyers
                  Incorporated
                      by reference to Exhibit 10.15 to Form SB-2 filed on November
                      4,
                      200310.16
                  Escrow
                      Agreement dated July 7, 2003 among the Registrant, the Buyers,
                      and Law
                      Offices of Eric S. Hutner & Associates
                  Incorporated
                      by reference to Exhibit 10.16 to Form SB-2 filed on November
                      4,
                      200310.17
                  Debenture
                      Agreement Dated July 7, 2003 between the Registrant and Cornell
                      Capital
                      Partners LP
                  Incorporated
                      by reference to Exhibit 10.17 to Form SB-2 filed on November
                      4,
                      200310.18
                  Investor
                      Registration Rights Agreement dated July 7, 2003 between the
                      Registrant
                      and the Investors
                  Incorporated
                      by reference to Exhibit 10.18 to Form SB-2 filed on November
                      4,
                      200310.19
                  Equity
                      Line of Credit Agreement dated October 31, 2003 between the
                      Registrant and
                      Cornell Capital Partners LP
                  Incorporated
                      by reference to Exhibit 10.19 to Form SB-2 filed on November
                      4,
                      200310.20
                  Registration
                      Rights Agreement dated October 31, 2003 between the Registrant
                      and Cornell
                      Capital Partners, LP
                  Incorporated
                      by reference to Exhibit 10.20 to Form SB-2 filed on November
                      4,
                      200310.21
                  Escrow
                      Agreement dated October 31, 2003 among the Registrant, Cornell
                      Capital
                      Partners, LP, Law Offices of Eric S. Hutner & Associates
                  Incorporated
                      by reference to Exhibit 10.21 to Form SB-2 filed on November
                      4,
                      2003
  26
  10.22
                  Placement
                      Agent Agreement dated October 31, 2003 among the Registrant,
                      Newbridge
                      Securities Corporation and Cornell Capital Partners LP
                  Incorporated
                      by reference to Exhibit 10.22 to Form SB-2 filed on November
                      4,
                      200314.1
                  Code
                      of Ethics
                  Provided
                      herewith23.1
                  Consent
                      of Independent Registered Public Accounting Firm
                  Provided
                      herewith31.1
                  Certification
                      by Chief Executive Officer and Chief Financial Officer pursuant
                      to 15
                      U.S.C. Section 7241, as adopted pursuant to Section 302 of
                      the
                      Sarbanes-Oxley Act of 2002.
                  Provided
                      herewith.32.1
                  Certification
                      by Chief Executive Officer and Chief Financial Officer pursuant
                      to 18
                      U.S.C. Section 1350, as adopted pursuant to Section 906 of
                      the
                      Sarbanes-Oxley Act of 2002
                  Provided
                      herewith
  **(b)**  **Reports
        on Form 8-K:**
  The
        Registrant filed no reports on Form 8-K during the fourth quarter of fiscal
        year
        2004.
  **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
  BSI
        incurred fees to Ehrhardt Keefe Steiner & Hottman PC of $54,943 for auditing
        work, services related to the SEC Registration Statement on Form SB-2, review
        of
        various other SEC filings, and quarterly reviews on SEC Forms 10-QSB, as
        well as
        $3,200 for income tax preparation services. Ehrhardt Keefe Steiner & Hottman
        PC has provided no other services to BSI other than the foregoing.
  27
  **SIGNATURES**
  In
        accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
        as
        amended, the Registrant caused this report to be signed on behalf by the
        undersigned, thereunto duly authorized.
  Date:August
                  5, 2005
              **BSI2000,
                  INC.**By:
              */s/
                Jack Harper*Jack
                  Harper,President,
                  Chief Executive Officer, Interim Chief Financial Officer, Principal
                  Executive Officer, Principal Accounting Officer, and
                  Director
  In
        accordance with the Securities Exchange Act of 1934, as amended, this report
        has
        been signed below by the following persons on behalf of the Registrant and
        in
        the capacities and on the dates indicated.
  Date:August
                  5, 2005
              */s/ Jack Harper*Jack
                  Harper, DirectorDate:August
                  5, 2005
              ***/s/
                  Richard Kirk*Richard
                  Kirk, DirectorDate:August
                  5, 2005
              ***/s/
                  John D. Woods*John
                  D. Woods, Director
 
 28
  **BSI2000** **TM**
 **(A
        Development Stage Company)**
 
 **Consolidated
        Financial Statements**
 **and**
 **Independent
        Auditors’ Report**
 
 **Table
        of Contents**
 
 PageReport
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                  Financial StatementsConsolidated
                  Balance Sheet
              F-2Consolidated
                  Statements of Operations
              F-3Consolidated
                  Statement of Changes in Stockholders’ Equity (Deficit)
              F-4Consolidated
                  Statements of Cash Flows
              F-5Notes
                  to Consolidated Financial Statements
              F-7
 
 
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 Board
        of
        Directors and Stockholders
 BSI
        2000,
        Inc.
 Denver,
        Colorado
 
 We
        have
        audited the accompanying consolidated balance sheet of BSI 2000, Inc. and
        subsidiary (A Development Stage Company) (the Company) as of December 31,
        2004, and the related consolidated statements of operations, stockholders’
        equity (deficit) and cash flows for the years ended December 31, 2004
        and
        2003 and for the cumulative period from Inception (July 30, 1993) through
        December 31, 2004. 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 auditing standards of The Public
        Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall financial statement presentation.
        We believe that our 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 BSI 2000, Inc. and
        subsidiary as of December 31, 2004, and the results of their operations
        and
        their cash flows for the years ended December 31, 2004 and 2003 and
        for the
        cumulative period from Inception (July 30, 1993) through December 31,
        2004
        in conformity with accounting principles generally accepted in the United
        States
        of America.
  As
        discussed in Note 10, the accompanying 2004 consolidated balance sheet,
        consolidated statement of change in stockholders' equity (deficit), and
        consolidated statement of cash flows have been restated.
  The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern. As discussed in Note 2 to the
        consolidated financial statements, the Company has experienced circumstances,
        which raise substantial doubt about its ability to continue as a going concern.
        Management’s plans regarding those matters also are described in Note 2. The
        consolidated financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 Ehrhardt
        Keefe Steiner & Hottman PC
 March
        11,
        2005
 Denver,
        Colorado
 
 F-1
  BSI
        2000,
        INC.
 (A
        Development Stage Company)
 Consolidated
        Balance Sheet
 December 31,
        2004
 
 AssetsCurrent
                  assetsCash
                  and cash equivalents
              
              $
              893,387Inventories
              
              
              50,370Other
              
              
              3,432Total
                  current assets
              
              
              947,189Property
                  and equipment, net
              
              
              44,125Intangible
                  assets, net
              
              
              182,966Other
                  long-term assets
              
              
              4,232Total
                  assets
              
              $
              1,178,512Liabilities
                  and Stockholders’ DeficitCurrent
                  liabilitiesAccounts
                  payable
              
              $
              184,269Accrued
                  liabilities
              
              
              27,331Deferred
                  revenue, current portion
              
              
              6,375Convertible
                  notes payable, current portion
              
              
              470,833Total
                  current liabilities
              
              
              688,808Deferred
                  revenue, long-term portion
              
              
              13,208Convertible
                  notes payable, less current portion
              
              
              896,389Commitments
                  and contingenciesStockholders’
                  deficitPreferred
                  stock, $.001 par value, 20,000,000 shares authorized, no shares
                  issued and
                  outstanding
              
              
              --Common
                  stock, $.001 par value, 200,000,000 shares authorized, 90,891,798
                  shares
                  issued and outstanding
              
              
              90,892Additional
                  paid-in capital
              
              
              7,188,742Accumulated
                  deficit
              
              
              (7,699,527
              )Total
                  stockholders’ deficit
              
              
              (419,893
              )Total
                  liabilities and stockholders’ deficit
              
              $
              1,178,512
 
 See
        notes
        to consolidated financial statements.
 
 F-2
  BSI
        2000,
        INC.
 (A
        Development Stage Company)
 Consolidated
        Statements of Operations
 
 For
                  the Years Ended
              
              Inception
                (July
                  30, 1993) throughDecember 31,
              
              December 31,2004
              
              2003
              
              2004Revenues
              
              $
              5,918
              
              $
              34,440
              
              $
              101,648Cost
                  of goods sold
              
              
              --
              
              
              67,986
              
              
              67,986Gross
                  (loss) profit
              
              
              5,918
              
              
              (33,546
              )
              
              33,662Operating
                  expensesSelling
                  expenses
              
              
              367,807
              
              
              275,098
              
              
              1,406,780General
                  and administrative
              
              
              1,048,073
              
              
              760,270
              
              
              3,632,515Stock
                  based compensation expense
              
              
              --
              
              
              --
              
              
              253,741Research
                  and development
              
              
              542,635
              
              
              446,605
              
              
              1,903,524Total
                  operating expenses
              
              
              1,958,515
              
              
              1,481,973
              
              
              7,196,560Other
                  (expense) incomeInterest
                  expense
              
              
              (53,864
              )
              
              (8,152
              )
              
              (183,229
              )Interest
                  income
              
              
              3
              
              
              1,636
              
              
              23,047Financing
                  costs
              
              
              (413,030
              )
              
              (46,943
              )
              
              (459,973
              )Other
              
              
              250
              
              
              --
              
              
              83,526Total
                  other (expense) income
              
              
              (466,641
              )
              
              (53,459
              )
              
              (536,629
              )Net
                  loss
              
              $
              (2,419,238
              )
              $
              (1,568,978
              )
              $
              (7,699,527
              )Basic
                  and diluted weighted average common shares outstanding
              
              
              72,506,696
              
              
              41,412,101
              
              
              13,384,466Basic
                  and diluted loss per common share
              
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.58
              )
 
 See
        notes
        to consolidated financial statements.
 
 F-3
  BSI
        2000,
        INC.
 (A
        Development Stage Company)
 Consolidated
        Statement of Changes in Stockholders’ Equity (Deficit)
 For
        the
        Years Ended December 31, 2004 and 2003 and
 For
        the
        Period from Inception (July 30, 1993) to December 31, 2004
 
 Common
                    StockShares
                
                Amount
                
                Additional
                    Paid-in Capital
                
                Accumulated
                    Deficit During the Development Stage
                
                Total
                    Stockholders’ Equity (Deficit)Balance
                    at Inception - July 30, 1993
                
                
                --
                
                $
                -
                
                $
                --
                
                $
                --
                
                $
                --Stock
                    issued to founders for cash during the period ended December 31,
                    1993
                
                
                19,580
                
                
                85,000
                
                
                --
                
                
                --
                
                
                85,000Stock
                    issued for cash during the year ended December 31,
                    1993
                
                
                2,701
                
                
                57,500
                
                
                --
                
                
                --
                
                
                57,500Stock
                    issued to founders for services during the period ended December 31,
                    1993
                
                
                33,812
                
                
                146,793
                
                
                --
                
                
                --
                
                
                146,793Stock
                    issued for cash during the year ended December 31,
                    1994
                
                
                12,904
                
                
                65,000
                
                
                --
                
                
                --
                
                
                65,000Stock
                    issued for cash during the year ended December 31,
                    1995
                
                
                224,672
                
                
                118,763
                
                
                --
                
                
                --
                
                
                118,763Stock
                    issued for cash during the year ended December 31,
                    1996
                
                
                616,989
                
                
                227,872
                
                
                --
                
                
                --
                
                
                227,872Stock
                    issued for cash during the year ended December 31,
                    1997
                
                
                225,766
                
                
                144,612
                
                
                --
                
                
                --
                
                
                144,612Stock
                    issued for cash during the year ended December 31,
                    1998
                
                
                831,118
                
                
                788,309
                
                
                --
                
                
                --
                
                
                788,309Stock
                    issued for cash during the year ended December 31,
                    1999
                
                
                583,767
                
                
                364,854
                
                
                --
                
                
                --
                
                
                364,854Stock
                    issued for cash during the year ended December 31,
                    2000
                
                
                195,369
                
                
                122,106
                
                
                --
                
                
                --
                
                
                122,106Net
                    loss from Inception
                
                
                --
                
                
                --
                
                
                --
                
                
                (2,398,997
                )
                
                (2,398,997
                )Balance
                    - December 31, 2000
                
                
                2,746,678
                
                
                2,120,809
                
                
                --
                
                
                (2,398,997
                )
                
                (278,188
                )Stock
                    issued for cash
                
                
                46,600
                
                
                29,125
                
                
                --
                
                
                --
                
                
                29,125Stock
                    issued to officer for services
                
                
                2,500,000
                
                
                56,736
                
                
                --
                
                
                --
                
                
                56,736Stock
                    issued for services to an employee
                
                
                212,045
                
                
                212
                
                
                --
                
                
                --
                
                
                212Net
                    income
                
                
                --
                
                
                --
                
                
                --
                
                
                (338,679
                )
                
                (338,679
                )Balance
                    - December 31, 2001
                
                
                5,505,323
                
                
                2,206,882
                
                
                --
                
                
                (2,737,676
                )
                
                (530,794
                )Stock
                    issued for debt conversion
                
                
                1,159,426
                
                
                865,375
                
                
                --
                
                
                --
                
                
                865,375Stock
                    issued for cash
                
                
                1,082,651
                
                
                889,200
                
                
                --
                
                
                --
                
                
                889,200Stock
                    issued for services to finders of private placement offering
                    in June 2002
                    at $.01 per share, net of expense
                
                
                300,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --Stock
                    issued for services
                
                
                25,000
                
                
                25,500
                
                
                --
                
                
                --
                
                
                25,500Stock
                    based compensation expense
                
                
                580,000
                
                
                50,000
                
                
                --
                
                
                --
                
                
                50,000Net
                    loss
                
                
                --
                
                
                --
                
                
                -
                
                
                (973,635
                )
                
                (973,635
                )Balance
                    - December 31, 2002
                
                
                8,652,400
                
                
                4,036,957
                
                
                --
                
                
                (3,711,311
                )
                
                325,646Stock
                    issued for cash
                
                
                1,134,500
                
                
                135,500
                
                
                249,000
                
                
                --
                
                
                384,500Stock
                    issued for equity line of credit commitment and placement
                    fees
                
                
                1,910,714
                
                
                1,911
                
                
                (1,911
                )
                
                --
                
                
                --Stock
                    issued for convertible note payable fees
                
                
                500,000
                
                
                500
                
                
                (500
                )
                
                --
                
                
                --Issuance
                    of stock in connection with reverse acquisition
                
                
                41,363,488
                
                
                (4,121,307
                )
                
                4,121,307
                
                
                --
                
                
                --Stock
                    issued for debt conversion
                
                
                390,625
                
                
                391
                
                
                49,609
                
                
                --
                
                
                50,000Net
                    loss
                
                
                --
                
                
                --
                
                
                --
                
                
                (1,568,978
                )
                
                (1,568,978
                )Balance
                    December 31, 2003
                
                
                53,951,727
                
                
                53,952
                
                
                4,417,505
                
                
                (5,280,289
                )
                
                (808,832
                )Stock
                    issued for debt conversion
                
                
                35,949,972
                
                
                35,950
                
                
                2,454,579
                
                
                --
                
                
                2,490,529Stock
                    issued for cash
                
                
                990,099
                
                
                990
                
                
                46,510
                
                
                --
                
                
                47,500Intrinsic
                    value of convertible debt
                
                
                -
                
                
                -
                
                
                250,000
                
                
                -
                
                
                250,000Warrants
                    issued to consultants
                
                
                --
                
                
                --
                
                
                20,148
                
                
                --
                
                
                20,148Net
                    loss
                
                
                --
                
                
                --
                
                
                --
                
                
                (2,419,238
                )
                
                (2,419,238
                )Balance
                    December 31, 2004
                
                
                90,891,798
                
                $
                90,892
                
                $
                7,188,742
                
                $
                (7,699,527
                )
                $
                (419,893
                )
 
 See
        notes
        to consolidated financial statements.
  F-4
 
 BSI
        2000,
        INC.
 (A
        Development Stage Company)
 Consolidated
        Statements of Cash Flows
 
 For
                  the Years Ended
              
              Inception
                  (July 30, 1993) toDecember 31,
              
              December 31,2004
              
              2003
              
              2004Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (2,419,238
              )
              $
              (1,568,978
              )
              $
              (7,699,527
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesDepreciation
                  and amortization expense
              
              
              19,152
              
              
              27,128
              
              
              123,313Gain
                  on forgiveness of debt
              
              
              --
              
              
              --
              
              
              (65,485
              )Gain
                  on disposal of fixed assets
              
              
              (250
              )
              
              
              
              
              (250
              )Stock
                  based compensation
              
              
              20,148
              
              
              --
              
              
              273,889Intrinsic
                  value of convertible debt
              
              
              250,000
              
              
              -
              
              
              250,000Changes
                  in assets and liabilitiesInventories
              
              
              (15,009
              )
              
              (8,237
              )
              
              (50,370
              )Other
                  current assets
              
              
              (3,432
              )
              
              4,257
              
              
              (3,432
              )Other
                  long-term assets
              
              
              --
              
              
              --
              
              
              (4,232
              )Accounts
                  payable
              
              
              (11,868
              )
              
              186,890
              
              
              238,332Deferred
                  revenue
              
              
              19,583
              
              
              --
              
              
              19,583Accrued
                  liabilities
              
              
              1,533
              
              
              19,306
              
              
              80,880279,857
              
              
              229,344
              
              
              862,228Net
                  cash used in operating activities
              
              
              (2,139,381
              )
              
              (1,339,634
              )
              
              (6,837,299
              )Cash
                  flows from investing activitiesRedemption
                  of certificates of deposit
              
              
              --
              
              
              --
              
              
              35,000Purchase
                  of certificate of deposit
              
              
              --
              
              
              --
              
              
              (35,000
              )Proceeds
                  from fixed asset disposals
              
              
              250
              
              
              250Purchase
                  of fixed assets
              
              
              (10,755
              )
              
              (10,533
              )
              
              (118,882
              )Patent
                  application
              
              
              (120,585
              )
              
              (54,343
              )
              
              (183,168
              )Net
                  cash used in investing activities
              
              
              (131,090
              )
              
              (64,876
              )
              
              (301,800
              )Cash
                  flows from financing activitiesProceeds
                  from issuance of common stock
              
              
              47,500
              
              
              384,500
              
              
              3,324,341Proceeds
                  from long-term debt
              
              
              --
              
              
              --
              
              
              919,500Net
                  proceeds from convertible notes payable
              
              
              2,990,808
              
              
              916,943
              
              
              3,907,751Repayment
                  on long-term debt
              
              
              --
              
              
              --
              
              
              (81,516
              )Repayment
                  on capital lease obligation
              
              
              --
              
              
              --
              
              
              (37,590
              )Net
                  cash provided by financing activities
              
              
              3,038,308
              
              
              1,301,443
              
              
              8,032,486Net
                  (decrease) increase in cash and cash equivalents
              
              
              767,837
              
              
              (103,067
              )
              
              893,387Cash
                  and cash equivalents - beginning of year
              
              
              125,550
              
              
              228,617
              
              
              --Cash
                  and cash equivalents - end of year
              
              $
              893,387
              
              $
              125,550
              
              $
              893,387
 
 (Continued
        on following page.)
 
 See
        notes
        to consolidated financial statements.
  F-5
 
 BSI
        2000,
        INC.
 (A
        Development Stage Company)
 Consolidated
        Statements of Cash Flows
 
 (Continued
        from previous page.)
  **Supplemental
        disclosure of cash flow information:**
  Cash
        paid
        for interest during the years ended December 31, 2004 and 2003 was
        $0 and
        $0, respectively. Cash paid for interest expense from Inception (July 30,
        1993)
        through December 31, 2004 was $68,164.
  **Supplemental
        disclosure of non-cash activity:**
  During
        the year ended December 31, 2004, the Company issued 250,000 warrants
        to a
        consultant valued at $20,148.
  During
        the year ended December 31, 2004, the Company effectively repaid $2,290,529
        of notes payable and accrued interest pursuant to draw-downs under the Equity
        Line and converted $200,000 of convertible debentures into 3,009,558
        shares
        of common stock.
  During
          the year ended December 31, 2004, the Company issued notes payable to a
          third
          party with intrinsic value to the holder on the amount of
          $250,000.
    Effective
        March 31, 2003, the Company entered into a merger agreement, which has been
        accounted for as a reverse acquisition. No assets were acquired. As a result
        of
        the merger, there was an increase of 41,363,488 shares of common stock
        outstanding in the surviving company.
  As
        part
        of the merger, the Company assumed an existing liability of $56,825, which
        has
        been funded through a note receivable from shareholders of the
        Company.
  During
        the year ended December 31, 2002, the Company converted $812,326 of
        notes
        payable and $53,049 of accrued interest into 1,159,426 shares of common
        stock.
  During
        the year ended December 31, 2002, the Company converted $25,500 of
        accounts
        payable and accrued liabilities into 25,000 shares of common stock.
  During
        the year ended December 31, 2001, the Company converted accrued wages
        totaling $56,736 into 2,500,000 shares of common stock.
  During
        the year ended December 31, 1999, the Company converted $29,063 from
        accounts payable to notes payable.
  In
        September 1998, the Company obtained fixed assets totaling $37,590 through
        a
        capital lease. In addition, the Company financed leasehold improvements in
        the
        amount of $16,000 through a note payable.
  F-6
  BSI
        2000,
        INC.
 (A
        Development Stage Company)
 Notes
        to
        Consolidated Financial Statements
  **Note
        1 - Description of Business and Summary of Significant Accounting
        Policies**
  BSI
        2000,
        Inc. was formed on July 30, 1993 and is a value-added reseller (“VAR”) of
        LaserCard’s® optical cards and optical card readers. As a VAR, BSI 2000, Inc.
        develops proprietary hardware and software adapting LaserCard’s® optical card
        technology for specific applications. BSI 2000 Inc.’s products are designed as
        turnkey solutions for identified commercial and governmental card-based
        information needs.
  BSI
        2000,
        Inc. is a development stage company that has not had any significant revenue
        since inception. There is no assurance that the Company will generate
        significant revenue or earn a profit in the future.
  **Principles
        of Consolidation**
  The
        accompanying consolidated financial statements include the accounts of BSI
        2000,
        Inc. and its subsidiary, BSI Operating, Inc. (the Company). All intercompany
        accounts and transactions have been eliminated in consolidation.
  **Cash
        and Cash Equivalents**
  The
        Company considers all highly liquid instruments purchased with an original
        maturity of three months or less to be cash equivalents. The Company continually
        monitors its positions with, and the credit quality of, the financial
        institutions with which it invests. As of the balance sheet date, and
        periodically throughout the year, the Company’s cash and cash equivalents exceed
        federally insured limits.
  **Inventories**
  Inventories
        consist of raw materials and are stated at the lower of cost or market,
        determined using the first-in, first-out method (FIFO).
  **Property
        and Equipment**
  Property
        and equipment is stated at cost. Depreciation is provided utilizing the
        straight-line method over the estimated useful lives for owned assets of
        5 to 7
        years. Leasehold improvements are amortized over a 5 1/2 year
        period.
  **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, disclosures of contingent assets and liabilities at the date
        of the
        financial statements and the reported amounts of revenues and expenses during
        the reporting period. Actual results could differ from those
        estimates.
  **Revenue
        Recognition**
  The
        Company recognizes revenue in compliance with SAB 104, “Revenue Recognition in
        Financial Statements.” Revenue is recognized when an order has been placed by
        the customer, the product has been shipped and collectibility is reasonably
        assured. Prices of the products are determined prior to entering into a purchase
        agreement. From inception through December 31, 2004, revenues earned
        represented sales to distributors of demonstration units of the Company’s
        products.
  Transaction
        based revenue is recognized as transactions are completed and are billed
        monthly
        based on service agreement rates in effect.
  Distribution
        rights revenue is recognized ratable over the life of each underlying
        distribution agreement.
  F-7
  **Note
        1 - Description of Business and Summary of Significant Accounting Policies
        (continued)**
  **Intangible
        Assets**
  Intangibles
        include trademarks and patents, which are recorded at cost. These patents
        are
        awaiting approval from the U.S. Patent office. Once accepted, the Company
        will
        begin amortization over the life of the patent. If patents are not awarded,
        the
        related costs will be expensed.
  **Income
        Taxes**
  The
        Company recognizes deferred tax liabilities and assets based on the differences
        between the tax basis of assets and liabilities and their reported amounts
        in
        the financial statements that will result in taxable or deductible amounts
        in
        future years.
  **Advertising
        Costs**
  The
        Company expenses advertising costs as incurred.
  **Software
        and Research and Development Costs**
  Expenditures
        made for research and development are charged to expense as
        incurred.
  Costs
        incurred to date for the development of the Company’s products have been charged
        to expense as incurred. Future costs may be capitalized to the extent they
        meet
        the requirements of SFAS No. 86 “Accounting for the Costs of Computer Software
        to be Sold, Leased, or Otherwise Marketed.”
  **Basic
        and Diluted Earnings Per Common Share**
  Basic
        earnings per share are computed by dividing net income by the number of weighted
        average common shares outstanding during the year. Diluted earnings per share
        is
        computed by dividing net income by the number of weighted average common
        shares
        outstanding during the year, including potential common shares, which consisted
        of warrants, options and convertible debt.
  **Stock-Based
        Compensation**
  During
        the year ended December 31, 2004, the Company has issued options to
        employees to purchase 3,387,500 shares of common stock at an exercise prices
        ranging from $.04 to $0.11. Of the 3,387,500 options issued during 2004,
        1,127,500 were vested at the date of grant with the remainder vesting in
        2005
        through 2007.
  The
        Company accounts for stock-based compensation in accordance with Accounting
        Principles Board Opinion (“APB”) No. 25 and has adopted the disclosure-only
        provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”
        Accordingly, no compensation cost has been recognized for awards under the
        stock
        option plan as the exercise prices equaled or exceeded their fair value of
        the
        underlying stock as determined by the Board of Directors. Had compensation
        cost
        for the Company’s options issued to employees been determined based on the fair
        value at the grant date for awards consistent with the provisions of SFAS
        No.
        123, as amended by SFAS No. 148, the Company’s net loss would have been changed
        to the pro forma amount indicated below at December 31, 2004:
  Net
                  loss - as reported
              
              $
              (2,419,238
              )Deduct
                  recorded employee compensation expense
              
              
              --Add
                  fair value of employee compensation expense
              
              
              (86,899
              )Net
                  loss - pro forma
              
              $
              (2,506,137
              )Net
                  loss per share-pro forma
              
              $
              (0.03
              )
 
  The
        fair
        value of each option grant is estimated on the date of grant using the
        Black-Scholes option-pricing model with the following weighted-average
        assumptions used at December 31, 2004:
  F-8
  Approximate
                  risk free rate
              
              
              4.25
              %Average
                  expected life
              
              
              5
                  yearsDividend
                  yield
              
              
              0
              %Weighted
                  Average Volatility
              
              
              85.28
              %Estimated
                  fair value of total options granted
              
              $
              230,575
 
 During
        February 2004, the Company granted warrants to purchase 250,000 shares of
        common
        stock to a consulting firm. The warrants are exercisable at $.12 per share
        for a
        period of five years, and were fully vested on May 31, 2004. The warrants
        have
        been valued at $20,148 using the Black-Scholes option pricing model with
        the
        following weighted-average assumptions used at December 31,
        2004:
 
 Approximate
                  risk free rate
              
              
              4.25
              %Average
                  expected life
              
              
              5
                  yearsDividend
                  yield
              
              
              0
              %Volatility
              
              
              80.85
              %Estimated
                  fair value of total options granted
              
              $
              20,148
  The
        value
        of the warrants has been included in general and administrative expenses
        as of
        December 31, 2004.
  **Recently
        Issued Accounting Pronouncements**
  In
        April
        2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement No. 4, 44 and
        64, Amendment of FASB Statement No. 13, and Technical Corrections.” This
        statement provides guidance on the classification of gains and losses from
        the
        extinguishment of debt and on the accounting for certain specified lease
        transactions. The Company adopted SFAS No. 145 January 1, 2003. Adoption
        of SFAS
        No. 145 did not have a material impact on the Company.
  In
        June
        2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit
        or Disposal Activities,” (effective January 1, 2003) which replaces Emerging
        Issues Task Force (EITF) Issue No. 94-3 “Liability Recognition for Certain
        Employee Termination Benefits and Other Costs to Exit an Activity (including
        Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a
        liability for a cost associated with an exit or disposal activity be recognized
        when the liability is incurred and states that an entity’s commitment to an exit
        plan, by itself, does not create a present obligation that meets the definition
        of a liability. SFAS No. 146 also establishes that fair value is the objective
        for initial measurement of the liability. The Company adopted this statement
        on
        January 1, 2003; adoption did not have an effect on results of operations
        and
        financial position.
  In
        October 2002, the FASB issued SFAS No. 147 “Acquisitions of Certain Financial
        Institutions.” SFAS No. 147 amends FASB Statements No. 72 and 144 and FASB
        Interpretations No. 9. Adoption of SFAS No. 147 did not have a material impact
        on the Company.
  F-9
  **Note
        1 - Description of Business and Summary of Significant Accounting Policies
        (continued)**
  In
        November 2002, the Financial Accounting Standards Board issued Interpretation
        No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,
        Including Indirect Guarantees of Indebtedness of Others (the Interpretation),
        which addresses the disclosure to be made by a guarantor in its interim and
        annual financial statements about its obligations under guarantees. The
        Interpretation also requires the recognition of a liability by a guarantor
        at
        the inception of certain guarantees. The Interpretation requires the guarantor
        to recognize a liability for the non-contingent component of the guarantee,
        this
        is the obligation to stand ready to perform in the event that specified
        triggering events or conditions occur. The initial measurement of this liability
        is the fair value of the guarantee at inception. The recognition of the
        liability is required even if it is not probable that payments will be required
        under the guarantee or if the guarantee was issued with a premium payment
        or as
        part of a transaction with multiple elements. The Company adopted the disclosure
        provisions of the Interpretation beginning with its fiscal 2003 consolidated
        financial statements, and will apply the recognition and measurement provisions
        for all guarantees entered into or modified after December 31, 2002.
        However, the Company is not a guarantor of indebtedness of others.
  In
        December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
        Compensation — Transition and Disclosure.” This statement amends FASB Statement
        No. 123 “Accounting for Stock-Based Compensation,” to provide alternative
        methods of transition for a voluntary change to the fair value based method
        of
        accounting for stock-based employee compensation. This statement also amends
        the
        disclosure requirements of Statement 123 to require prominent disclosures
        in
        both annual and interim financial statements about the method of accounting
        for
        stock-based employee compensation and the effect of the method used on reported
        results. The provisions of this statement relating to alternative transition
        methods and annual disclosure requirements are effective for the year ended
        December 31, 2002. The transitional provisions did not have an impact
        on
        the Company’s financial statements as it has elected to retain the intrinsic
        value method.
  The
        provisions relating to annual and interim disclosures have changed the manner
        in
        which the Company discloses information regarding stock-based
        compensation.
  In
        January 2003, the Financial Accounting Standards Board issued Interpretation
        No.
        46, “Consolidation of Variable Interest Entities” (FIN No. 46)”. This
        interpretation clarifies existing accounting principles related to the
        preparation of consolidated financial statements when the equity investors
        in an
        entity do not have the characteristics of a controlling financial interest
        or
        when the equity at risk is not sufficient for the entity to finance its
        activities without additional subordinated financial support from other parties.
        FIN No. 46 requires a company to evaluate all existing arrangements to identify
        situations where a company has a “variable interest” (commonly evidenced by a
        guarantee arrangement or other commitment to provide financial support) in
        a
“variable interest entity” (commonly a thinly capitalized entity) and further
        determine when such variable interests require a company to consolidate the
        variable interest entities’ financial statement with its own. The Company is
        required to perform this assessment by December 31, 2003 and consolidate
        any variable interest entities for which it will absorb a majority of the
        entities’ expected losses or receive a majority of the expected residual gains.
        Management has not yet performed this assessment, however it does not have
        any
        variable interest entities as of December 31, 2004.
  In
        April
        2003, FASB issued SFAS No. 149, “Accounting for Derivative Instruments and
        Hedging Activities,” which is effective for contracts entered into or modified
        after June 30, 2003 and for hedging relationships designated after June 30,
        2003. This statement amends and clarifies financial accounting and reporting
        for
        derivative instruments including certain instruments embedded in other contracts
        and for hedging activities under SFAS No. 133, “Accounting for Derivative
        Instruments and Hedging Activities.” The Company has not entered into any
        transactions of this type.
  In
        May
        2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
        with Characteristics of Both Liabilities and Equity,” which is effective for
        financial instruments entered into or modified after May 31, 2003, and otherwise
        is effective at the beginning of the first interim period beginning after
        September 15, 2003. SFAS No. 150 establishes standards for how an issuer
        classifies and measures certain financial instruments with characteristics
        of
        both liabilities and equity. The adoption of this standard is not expected
        to
        have a material impact on the Company’s financial statements.
  F-10
  **Note
        1 - Description of Business and Summary of Significant Accounting Policies
        (continued)**
  In
        December 2004, the FASB issued SFAS No. 123 (revised), Share-Based
        Payment,
        which supersedes Accounting Principles Board (“APB”) No. 25, Accounting for
        Stock Issued to Employees, and its related implementation guidance. Under
        SFAS
        No. 123 (revised), all share-based payments would be treated as other forms
        of
        compensation by recognizing the costs, generally measured as the fair value
        at
        the date of grant, in the income statement. The Company will adopt, as required,
        SFAS No. 123 (revised) for its fiscal year beginning January 1, 2006. Management
        expects that the impact of the adoption of SFAS No. 123 (revised) will be
        that
        the share-based payment expense amounts historically disclosed as required
        by
        SFAS No. 123 will now be recognized as an expense on the statement of
        operations.
  **Note
        2 - Going Concern**
  The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and liquidation of liabilities
        in
        the ordinary course of business. The Company has experienced losses since
        inception (July 30, 1993) through December 31, 2004 of $7,699,527.
        The
        Company has working capital of $258,381 and stockholder’s deficit of $419,893 as
        of December 31, 2004 and used cash of $2,139,381 in its 2004
        operations.
  The
        extended period over which losses have been experienced is principally
        attributable to two factors, lack of capital and the type of potential
        customers. Lack of capital has prevented the Company from quickly developing
        and
        aggressively marketing its products. In addition, most of the Company’s
        potential customers are large corporations or governments. Adopting the
        Company’s products will in many cases require changing the way business is
        done.
  The
        Company has made advances in the sales process with several potentially large
        customers. Although there are no assurances that the Company will be successful,
        in order to fund activities until positive operating cash flow can be achieved,
        the Company has implemented the plan described below.
  During
        the first quarter of 2003, the Company signed an agreement to merge with
        a small
        public company (Note 3). The transaction was a reverse acquisition with the
        Company as the accounting acquirer. The Company became a wholly owned subsidiary
        of the public company, the Company’s shareholders became the majority
        shareholders of the public company, and the public company will changed its
        name
        to “BSI2000, Inc.”
  On
        October 31, 2003, the Company entered into an Equity Line of Credit Agreement
        with Cornell Capital Partners, LP (Cornell). Under this agreement, the Company
        may issue and sell to Cornell common stock for a total purchase price of
        up to
        $15 million (Note 5).
  On
        October 8, 2004 through January 20, 2005 the company issued a $1,250,000
        convertible debenture to Cornell Capital Partners, LP. (See note
        5).
  The
        Company expects that the capital raised in the transactions described above
        will
        be sufficient to fund the Company’s activities until positive operating cash
        flow is achieved
  **Note
        3 - Reverse Acquisition**
  On
        March
        31, 2003 the reverse triangular merger between the Company and Knowledge
        Foundation, Inc. closed. As a result of the closing BSI2000, Inc. became
        a 100%
        owned subsidiary of Knowledge Foundations, Inc. Also as result of the closing
        Knowledge Foundations, Inc.’s name changed to BSI2000, Inc. (“new BSI”) and
        BSI2000, Inc.’s name changed to BSI Operating, Inc. (“old BSI”).
  Immediately
        prior to the closing all of Knowledge Foundation, Inc.’s assets and all but
        $56,825 of its liabilities (see below) were spun-off to certain of its
        shareholders in exchange for 34,105,900 shares of common stock, which were
        then
        canceled. After the spin-off 5,027,818 shares of Knowledge Foundations, Inc.
        common stock (“new BSI stock”) remained outstanding.
  F-11
  **Note
        3 - Reverse Acquisition (continued)**
  Knowledge
        Foundations, Inc. (“new BSI”) acquired BSI2000, Inc. (“old BSI”) by issuing
        45,122,570 of its common shares (“new BSI stock”) to stockholders of BSI2000,
        Inc. (“old BSI”) in exchange for 100% of the outstanding 8,786,900 common shares
        of BSI2000, Inc. (“old BSI stock”).
  For
        financial reporting purposes the transaction has been accounted for as a
        re-capitalization of the Company. Accordingly the net increase in the
        outstanding shares of 41,363,488 resulting from the above transactions has
        been
        reflected in the financial statements as shares issued in connection with
        the
        re-capitalization of the Company. In recording the re-capitalization transaction
        $4,121,307 has been reclassified from common stock to additional paid in
        capital.
  As
        a
        result of the accounting method adopted to record the merger, for financial
        reporting purposes the historical financial statements of the Company, and
        only
        the historical financial statements of the Company, have become the historical
        financial statements of the continuing entity. Historical financial statements
        of Knowledge Foundation, Inc. are not presented.
  The
        terms
        of the merger agreement between the Company and Knowledge Foundations, Inc.
        provided that the liabilities of Knowledge Foundation, Inc. at the closing
        would
        not exceed $15,000. However, at the closing Knowledge Foundations, Inc. had
        a
        note payable and accrued interest outstanding in the amount of $56,825. In
        order
        to off set this liability certain shareholders of Knowledge Foundations Inc.
        executed a note payable to the Company in the amount of $56,825. The Knowledge
        Foundation, Inc. note and accrued interest have been recorded as a reduction
        of
        additional paid in capital. The note receivable from the Knowledge Foundation,
        Inc. stockholders has been recorded as an increase to additional paid in
        capital.
  **Note
        4 - Furniture and Fixtures**
  Property
        and equipment consist of the following at December 31, 2004:
  Leasehold
                  improvements
              
              $
              18,744Software
              
              
              7,919Equipment
              
              
              103,091Furniture
              
              
              36,588166,342Less
                  accumulated depreciation
              
              
              (122,217
              )$
              44,125
 
 **Note
        5 - Convertible Debt**
  On
        October 31, 2003, the Company entered into an Equity Line of Credit Agreement
        with Cornell. Under this agreement, the Company may issue and sell to Cornell
        common stock for a total purchase price of up to $15.0 million. Subject to
        certain conditions, the Company is entitled to commence drawing down on the
        Equity Line of Credit effective on December 9, 2003, the effective
        date of
        the registration statement filed with The Securities and Exchange commission,
        and will continue for two years thereafter. The purchase price for the shares
        will be equal to 99% of, or a 1% discount to, the market price, which is
        defined
        as the lowest closing bid price of the common stock during the five trading
        days
        following the notice date. The amount of each advance is subject to an aggregate
        maximum advance amount of $210,000, with no advance occurring within seven
        trading days of a prior advance. Cornell received 1,875,000 shares of the
        Company’s common stock as a one-time commitment fee and is entitled to retain a
        fee of 4.0% of each advance. In addition, the Company entered into a placement
        agent agreement with Newbridge Securities Corporation, a registered
        broker-dealer. Pursuant to the placement agent agreement, the Company paid
        a
        one-time placement agent fee of 35,714 shares of common stock equal to
        approximately $10,000 based on the Company’s stock price on July 7, 2003, the
        date the Company agreed to engage the placement agent.
  F-12
  **Note
        5 - Convertible Debt (continued)**
  On
        October 7, 2004, the Company issued a 5% convertible debenture in the amount
        of
        $500,000 to Cornell Capital Partners, LP (“Cornell”) that is due October 7,
        2007. On December 10, 2004, the Company issued a 5% convertible debenture
        in the amount of $500,000 to Cornell Capital Partners, LP (“Cornell”) that is
        due December 10, 2007. On January 19, 2005, the Company issued a 5%
        convertible debenture in the amount of $250,000 to Cornell Capital Partners,
        LP
        (“Cornell”) that is due January 19, 2008. The debentures are convertible into
        the Company’s common stock at either the fixed price of 120% of the Volume
        Weighted Average price on the closing date (October 7, 2007, December 10,
        2007 and January 20, 2008, respectively) or 80% of the average of the three
        (3)
        lowest daily Volume Weighted Average Price, as reported by Bloomberg, L.P.,
        of
        the Company’s common stock for the five (5) trading days immediately preceding
        the conversion date (date on which the Company receives a notice of conversion
        from Cornell). The debentures will automatically convert into the Company’s
        common stock on the third anniversary of issuance. The Company has the right
        to
        redeem the debentures with three (3) days advance notice any or all of the
        outstanding debenture amount at its sole discretion.
  The
        redemption price shall be 120% of the face amount redeem plus accrued interest.
        Once the redemption notice has been given, Cornell may continue to convert
        the
        remaining outstanding debenture.
  Cornell
        has the option to convert the debenture on the same day as issuance. As a
        result
        of this conversion feature, Cornell has been provided intrinsic value that
        has
        been calculated as the difference between the price of the Company’s common
        stock on the date of issuance, as compared to the discounted conversion price
        (or 80% of the stock price on the date of issuance). This intrinsic value
        has
        been multiplied by the number of shares that would be issued to Cornell upon
        conversion, which has resulted in a $125,000 charge to operations during
        2004
        for each of the convertible debentures issued during 2004. A $62,500 charge
        to
        operations will be taken during the first quarter of 2005 for the debenture
        that
        issued during January 2005.
  The
        Company received $500,000 on October 7, 2004, less a 10% fee of $50,000 and
        $10,000 for legal costs. The Company received $500,000 (net of 10% fee) on
        December 10, 2004 and $250,000 (net of 10% fee) on January 20,
        2005.
  In
        the
        event that the Company exercises it right of redemption as described above
        for
        either all or a portion of the outstanding debenture, Cornell shall receive
        for
        every $100,000 invested a warrant to purchase 50,000 shares of the Company’s
        common stock. The warrant will have “piggy-back” registration rights and will
        survive for two years from closing. The exercise price of the warrant shall
        be
        120% of the volume weighted average price on the closing date
 
 **Convertible
        secured debentures and notes payable consist of the following at
        December 31, 2004:**
  Secured
                    promissory note issued to Cornell, due on March 11, 2005 and
                    secured by
                    substantially all of Company’s non-cash assets. The note bears interest at
                    12% during its term, and bears a default rate of interest of
                    24% if the
                    note is not paid when due. Discounts and fees paid to obtain
                    the loan were
                    $37,500, of which $29,167 is unamortized at December 31,
                    2004.
                    Subsequent to December 31, 2004 and through March 11,
                    2005, the
                    Company effectively repaid $300,000 of the note and accrued interest
                    thereon pursuant to draw-downs under the Equity Line.
                
                $
                500,000Convertible
                    secured debenture issued to Cornell, bearing interest at 5% and
                    due on
                    October 7, 2007. The debenture is convertible at Cornell’s option at any
                    time up to maturity at a conversion price equal to the lower
                    of (i) 120%
                    of the closing bid price of the common stock as of the closing
                    date or
                    (ii) 80% of the lowest closing bid price of the common stock
                    for the five
                    trading days immediately preceding the conversion date. At maturity,
                    the
                    Company has the option to either pay the holder the outstanding
                    principal
                    balance and accrued interest or to convert the debentures into
                    shares of
                    common stock at a conversion price previously described. The
                    Company has
                    the right to redeem the debentures upon thirty days notice for
                    120% of the
                    amount redeemed. Discounts and fees paid to obtain the loan were
                    $60,000,
                    of which $55,000 is unamortized at December 31, 2004.
                    An intrinsic
                    value of $125,000 related to the conversion feature of this note
                    has been
                    included as a financing cost in the accompanying statement of
                    operations
                    for the year ended December 31, 2004.
                
                
                500,000Convertible
                    secured promissory debenture issued to Cornell, bearing interest
                    at 5% and
                    due on December 10, 2007. The debenture is convertible
                    at Cornell’s
                    option at any time up to maturity at a conversion price equal
                    to the lower
                    of (i) 120% of the closing bid price of the common stock as of
                    the closing
                    date or (ii) 80% of the lowest closing bid price of the common
                    stock for
                    the five trading days immediately preceding the conversion date.
                    At
                    maturity, the Company has the option to either pay the holder
                    the
                    outstanding principal balance and accrued interest or to convert
                    the
                    debentures into shares of common stock at a conversion price
                    previously
                    described. The Company has the right to redeem the debentures
                    upon thirty
                    days notice for 120% of the amount redeemed. Discounts and fees
                    paid to
                    obtain the loan were $50,000, of which $48,611 is unamortized
                    at
                    December 31, 2004. An intrinsic value of $125,000 related
                    to the
                    conversion feature of this note has been included as a financing
                    cost in
                    the accompanying statement of operations for the year ended December
                    31,
                    2004.
                
                
                500,000
  F-13
  Fees
                    and discounts
                
                
                (132,778
                )1,367,222Less
                    current portion
                
                
                (470,833
                )$
                896,389
 
 **Note
        6 - Commitments and Contingencies**
 
 **Litigation**
  In
        the
        normal course of business, the Company is party to litigation from time to
        time.
        The Company maintains insurance to cover certain actions and believes that
        resolution of such litigation will not have a material adverse effect on
        the
        Company.
  **Consulting
        Agreement**
  In
        September 2003, the Company entered into a consulting agreement for a term
        of
        six months. Under the term of the agreement, the Company paid a monthly fee
        of
        $3,500 for services performed. As of December 31, 2004, this agreement
        had
        been terminated.
  In
        February 2004, the Company entered into a consulting agreement through July
        31,
        2004. The Company is obligated to pay $7,000 per month plus expenses for
        services performed. The Company granted five-year warrants to purchase 250,000
        shares of the Company’s common stock at the closing price on February 1, 2004.
        Since August 1, 2004, this agreement has continued on a month to month
        basis.
  **Note
        7 - Stockholders’ Equity**
  **Stock
        Issued to Founders**
  During
        the period from Inception (July 30, 1993) through December 31, 1993,
        the
        Company issued shares of common stock to the founders for prior services
        at
        $4.34 per share, which was the value consistent with the cash sales of stock
        immediately preceding the issuance.
  **Stock
        Issued to an Officer and Employee**
  On
        September 11, 2001, BSI issued 2,500,000 shares of common stock to Jack Harper,
        president and director, for $2,500 ($0.001 per share) and forgiveness of
        accrued
        wages. Also in 2001, BSI issued 212,045 shares of common stock to Robert
        B.
        Lumen for $212 ($0.001 per share). When these shares were issued, BSI was
        insolvent with negative working capital, and unable to pay salaries to
        employees.
  F-14
  **Note
        7 - Stockholders’ Equity (continued)**
  **Private
        Offerings**
  On
        September 13, 2004, the Company issued 990,099 shares of common stock under
        the
        Equity Line of Credit Agreement to Cornell Capital for $50,000 cash. Costs
        associated with this transaction were $2,500.
  During
        2003, the Company sold 134,500 and 1,000,000 shares of common stock in private
        placement offerings at $1.00 and $.25 per share, respectively
  During
        2002, the Company sold 937,886 and 515,869 shares of common stock in private
        placement offerings at $1.00 and $.625 per share, respectively. The shares
        issued under the private placement for $1.00 per share include 371,104 shares
        issued in satisfaction of long-term debt.
  **Stock
        Options**
  During
        the period ended December 31, 2004, the Company has issued options
        to
        employees to purchase 4,310,000 shares of common stock at an exercise prices
        ranging from $.04 to $0.11. Of the 4,310,000 options issued during 2004,
        1,142,500 were vested at the date of grant with the remainder vesting in
        2005
        through 2007.
  The
        following table presents the activity for options outstanding:
  Incentive
                  Stock Options
              
              Weighted
                  Average Exercise PriceOutstanding
                  - December 31, 2003
              
              
              --
              
              $
              --Granted
              
              
              4,310,000
              
              
              .104Forfeited/canceled
              
              
              (1,212,500
              )
              
              (.110
              )Exercised
              
              
              --
              
              
              --Outstanding
                  - December 31, 2004
              
              
              3,097,500
              
              $
              .101
 
 The
        Company has adopted the disclosure-only provisions of Statement of Financial
        Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (as
        amended by SFAS No. 148 “Accounting for Stock Based Compensation - Transition
        and Disclosure”). Accordingly, no compensation cost has been recognized for the
        stock option plans. Had compensation cost for the Company’s option plan been
        determined based on the fair value at the grant date for awards consistent
        with
        the provisions of SFAS No. 123, the Corporation’s net loss and basic loss per
        common share would have been changed to the pro forma amounts indicated
        below:
  For
                  the Years Ended
              
              Inception
                (July
                  30, 1993) throughDecember 31,
              
              December 31,2004
              
              2003
              
              2004Net
                  loss - as reported
              
              $
              (2,419,238
              )
              $
              (1,568,978
              )
              $
              (7,699,527
              )Net
                  loss - pro forma
              
              $
              (2,506,137
              )
              $
              (1,568,978
              )
              $
              (7,786,426
              )Basic
                  loss per common share - as reported
              
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.56
              )Basic
                  loss per common share - pro forma
              
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.56
              )
 
 The
        fair
        value of each option grant is estimated on the date of grant using the
        Black-Scholes option-pricing model with the following weighted-average
        assumptions used: expected life of 5 years, 85.28% weighted average volatility,
        risk free rate interest rate of 4.25% and a 0% dividend yield.
  F-15
  **Note
        7 - Stockholders’ Equity (continued)**
  **Warrants**
  During
        February 2004, the Company granted warrants to purchase 250,000 shares of
        common
        stock to a consulting firm. The warrants are exercisable at $.12 per share
        for a
        period of five years, and were fully vested on May 31, 2004. The warrants
        have
        been valued at $20,148 using the Black-Scholes option pricing model with
        the
        following weighted-average assumptions used at December 31,
        2004:
  Approximate
                  risk free rate
              
              
              4.25
              %Average
                  expected life
              
              
              5
                  yearsDividend
                  yield
              
              
              0
              %Volatility
              
              
              80.85
              %Estimated
                  fair value of total options granted
              
              $
              20,148
  The
        Company issued warrants to purchase 2,250,000 shares common stock to a
        consulting firms that are exercisable at $.061 per share for a period of
        five
        years. These warrants vest according to specific performance criteria that
        were
        not met as of December 31, 2004. Accordingly, no expense has been
        recorded
        in these financial statements with respect to these warrants.
  The
        following table presents the activity for warrants outstanding:
  Number
                  of Warrants
              
              Weighted
                  Average Exercise PriceOutstanding
                  - December 31, 2003
              
              
              --
              
              $
              --Issued
              
              
              2,500,000
              
              
              .067Outstanding
                  - December 31, 2004
              
              
              2,500,000
              
              $
              .067
  During
        September 2004, the Board of Directors approved an amendment of the articles
        of
        incorporation to increase the authorized number of common shares from
        100,000,000 to 200,000,000.
  **Earnings
        Per Share**
  The
        following table sets forth the computation for basic and diluted earnings
        per
        share:
  Inception
                (July
                  30, 1993) throughDecember 31,
              
              December 31,
              
              December 31,2004
              
              2003
              
              2004Numerator
                  for basic earnings per share
              
              $
              (2,400,895
              )
              $
              (1,568,978
              )
              $
              (7,681,184
              )Numerator
                  for diluted income per common share
              
              $
              (2,400,895
              )
              $
              (1,568,978
              )
              $
              (7,681,184
              )Denominator
                  for basic earnings per share - weighted average shares
              
              
              72,506,696
              
              
              41,412,101
              
              
              13,384,466Denominator
                  for diluted earnings per share - adjusted weighted average
                  shares
              
              
              72,506,696
              
              
              41,412,101
              
              
              13,384,466Diluted
                  income per common share
              
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.56
              )
  **Note
        8 - Income Taxes**
  The
        Company did not provide a current or deferred federal or state income tax
        provision or benefit for any of the periods presented because it has experienced
        recurring operating losses. The Company has provided a full valuation allowance
        on the deferred tax asset, consisting primarily of the net operating loss,
        because of uncertainty regarding its realization.
  F-16
  **Note
        8 - Income Taxes (continued)**
  At
        December 31, 2004, the Company had federal net operating losses of
        approximately $6.3 million. Utilization of the net operating loss, which
        expires
        at various times starting in 2009, may be subject to certain limitations
        under
        Section 382 of the Internal Revenue Code of 1986, as amended, and other
        limitations under state tax laws.
  Deferred
        income taxes reflect the net tax effects of temporary differences between
        the
        carrying amounts of assets and liabilities for financial reporting purposes
        and
        the amounts used for income tax purposes. Significant components of the
        Company’s deferred tax assets are approximately as follows:
  For
                  the Years Ended
                December 31,2004
              
              2003Net
                  operating loss
              
              $
              2,205,000
              
              $
              1,439,000Total
                  deferred tax assets
              
              
              2,205,000
              
              
              1,439,000Valuation
                  allowance
              
              
              (2,205,000
              )
              
              (1,439,000
              )Net
                  deferred tax asset
              
              $
              --
              
              $
              --
 
 The
        following is a reconciliation of the statutory federal income tax rate applied
        to pre-tax accounting net income compared to the income taxes in the statements
        of income:
  For
                  the Years Ended
              
              Inception
                (July
                  30, 1993) throughDecember 31,
              
              December 31,
              
              December
                  31,2004
              
              2003
              
              2004Federal
                  tax benefit at statutory rates
              
              $
              762,000
              
              $
              550,000
              
              $
              2,201,000State
                  tax benefit at statutory rates
              
              
              72,000
              
              
              47,000
              
              
              195,000Valuation
                  allowance
              
              
              (834,000
              )
              
              (597,000
              )
              
              (2,396,000
              )Reported
                  income tax benefit
              
              $
              --
              
              $
              --
              
              $
              --
 
 **Note
        9 - Subsequent Event (Unaudited)**
  Subsequent
        to December 31, 2004, the Company issued one additional convertible
        debenture to Cornell for $250,000 and effectivelly repaid $300,000 of a secured
        promissory note and accrued interest thereon pursuant to draw-downs under
        the
        Equity Line.
  **Note
        10 - Intrinsic Value Associated with Issuance of
        Debentures**
 
 On
        June
        27, 2005, BSI was contacted by the Staff of the United States Securities
        and
        Exchange Commission during the course of a routine review of its periodic
        filings and made inquiries regarding certain of BSI’s accounting policies. As a
        result of this inquiry, management re-evaluated BSI’s accounting for certain
        items on the consolidated balance sheet, consolidated statements of operations,
        consolidated statement of changes in stockholders' equity(deficit) and
        consolidated statements of cash flows. Following the evaluation, BSI determined
        that the consolidated balance sheet, consolidated statements of operations,
        consolidated statement of changes in stockholders' equity(deficit) and
        consolidated statements of cash flows  for the fiscal year ended December
        31, 2004 should be restated in the Form 10-KSB for the fiscal year ended
        December 31, 2004. The effect of these errors on the consolidated balance
        sheet,
        consolidated statements of operations, consolidated statement of changes
        in
        stockholders' equity(deficit) and consolidated statements of cash flows was
        considered material.
  This
        error arose as a result of BSI issuing secured convertible debentures to
        Cornell
        Capital Partners, LP in October and December of 2004, which debentures by
        their
        terms were immediately convertible into shares of BSI common stock at a
        conversion price per share that was less that the then-current market price
        of
        BSI’s common stock. Accordingly, BSI should have recorded Financing Costs
        because the debentures had intrinsic value (i.e., the conversion price per
        share
        was less than the market price per share of BSI’s stock at the time of
        conversion). Accordingly, BSI is required to restate their financials for
        the
        fiscal year ended December 31, 2004 as set forth below.
  F-17
  The
        following is a summary of the effects of these restatements on BSI's
        consolidated balance sheet, consolidated statements of operations, consolidated
        statement of changes in stockholders' equity(deficit) and consolidated
        statements of cash flows for the fiscal year ended December 31,
        2004.
 
 **As
                  previously reported**
              
              **Adjustments**
              
              **As
                  restated**Additional
                  Paid-in Capital
              
              $
              6,938,742
              
              
              +$250,000
              
              $
              7,188,742Retained
                  Earnings
              
              $
              (7,449,527
              )
              
              -$250,000
              
              $
              (7,699,527
              )Financing
                  Costs
              
              $
              (163,030
              )
              
              +$250,000
              
              $
              (413,030
              )Net
                  Income
              
              $
              (2,169,238
              )
              
              -$250,000
              
              $
              (2,419,238
              )
 
 The
        adjustments noted above are primarily due to the adjustment of the following
        items:
 
 For
        the
        October 7, 2004 convertible debt, intrinsic value is equal to $0.0124, which
        is
        the difference between $0.062 (i.e., the price of BSI’s common stock) on October
        7, 2004, as compared to 80% of that price, or $0.0496. The intrinsic value
        of
        $0.0124 per share is then multiplied by 10,080,645 shares of common stock
        (i.e.,
        the $500,000 convertible debt divided by the conversion price of $0.0496),
        which
        equals an intrinsic value of $125,000.
 
 For
        the
        December 10, 2004 convertible debt, intrinsic value is equal to $0.009, which
        is
        the difference between $0.045 (i.e., the price of BSI’s common stock) on
        December 10, 2004, as compared to 80% of that price, or $0.036. The intrinsic
        value of $0.009 per share is then multiplied by 13,888,888 shares of common
        stock (i.e., $500,000 convertible debt divided by the conversion price of
        $0.036), which equals an intrinsic value of $125,000.
 
 BSI
        did
        not account for these conversion features in its December 31, 2004 Form 10-KSB.
        BSI is amending such Form 10-KSB by making adjustments that record an increase
        to Financing Costs of $250,000 at December 31, 2004, with a corresponding
        increase to Additional Paid-in Capital as noted above.
  F-18