U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934.

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934.

                  For the transition period from _____ to _____

                         Commission file number 0-28685

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

                 DELAWARE                                      65-0393635
      (State or Other Jurisdiction of                       (I.R.S. Employer
       Incorporation or Organization)                       Identification No.)

                           201 MAIN STREET, SUITE 1175
                              FORT WORTH, TX 76102
                    (Address of Principal Executive Offices)

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

                         VERTICAL COMPUTER SYSTEMS, INC.
                     --------------------------------------
                     (Former name of small business issuer)

                           201 MAIN STREET, SUITE 1455
                              FORT WORTH, TX 76102
                    (Former address of small business issuer)

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment of this Form 10-K. [ ]

         Registrant's revenues for the fiscal year ended December 31, 2003 were:
$ 6,656,572. The aggregate market value for the Registrant's voting common stock
held by non-affiliates based upon the closing bid price for the common stock on
January 12, 2005, as reported on the Pink Sheets, was approximately $3,737,552.

         Shares of common stock held by each officer and director and each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.

         The number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $.00001
per share, 867,768,895 shares issued and outstanding as of January 12, 2005.

         Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]


<PAGE>
                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
                                   FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                                                      <C>
PART I....................................................................................................................1
   ITEM 1.  DESCRIPTION OF BUSINESS.......................................................................................1
   ITEM 2.  DESCRIPTION OF PROPERTY......................................................................................10
   ITEM 3.  LEGAL PROCEEDINGS............................................................................................10
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................................12
PART II..................................................................................................................13
   ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................................................13
   ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...................................................21
   ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS.............................................................................36
   ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTANTS AND FINANCIAL DISCLOSURE.............................37
   ITEM 8A.  CONTROLS AND PROCEDURES.....................................................................................37
   ITEM 8B.  OTHER INFORMATION...........................................................................................37
PART III.................................................................................................................38
   ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
              OF THE EXCHANGE ACT........................................................................................38
   ITEM 10.  EXECUTIVE COMPENSATION......................................................................................40
   ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................44
   ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................45
   ITEM 13.  PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................................48
   ITEM 14.  DEFAULTS UNDER SENIOR SECURITIES............................................................................48
   ITEM 15.  EXHIBITS AND REPORTS ON FORM 8-K AND EVALUATION OF CONTROLS AND PROCEDURES..................................49
</TABLE>


                                       i
<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

         Management has used best efforts in writing Vertical's Form 10-KSB
report in plain, easy to understand English. Vertical Computer and the Industry
Overview Sections attempt to outline both the meaning and scope of the
strategies currently employed at Vertical Computer Systems, Inc. Although both
these sections are compelling, the other information contained in this report is
important and necessary in order to gain a thorough understanding of our
business, markets, customers and competition. Accordingly, please read our
entire Form 10-KSB report prior to making an investment in Vertical, as these
are complicated technologies and solutions that involve risks and uncertainties.
References to "we", "us", "our", "its", "Vertical" "Vertical Computer" or the
"Company" means Vertical Computer Systems, Inc. and its subsidiaries and
divisions, and their predecessor companies and subsidiaries.

         When used in this report, the words "anticipate", "believe",
"estimate", "will", "may", "intend", "in our opinion", and "expect" and similar
expressions identify forward-looking statements. Forward-looking statements in
this report include, but are not limited to, those relating to the general
expansion of our business, particularly with respect to our e-business
initiatives and including our ability to develop multiple applications, our
planned introduction of new products and services, the possibility of acquiring
complementary businesses, products, services and technologies and our
development of relationships with other providers of leading edge technologies.
Although we believe that our plans, intentions and expectations reflected in
these forward-looking statements are reasonable, we can give no assurance that
these plans, intentions or expectations will be achieved.

         Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained in this report. Important factors that could cause actual results to
differ materially from our forward-looking statements are set forth in this
report and contained in Item 7, "Management's Discussion and Analysis or Plan of
Operations." These factors are not intended to represent a complete list of the
general or specific factors that may affect us.

         At December 31, 2003, our independent registered public accounting
firm's report, dated December 31, 2004, includes an explanatory paragraph
related to substantial doubt as to our ability to continue as a going concern.
We experienced significant operating losses in 2003 and 2002, each quarter of
2003 and 2002. Our cash and cash equivalents have not been sufficient to cover
our debt obligations and we have defaulted on most of our notes payable at
December 31, 2003 and 2002.

         Management's current business plan is to concentrate on developing and
marketing the products of two of its subsidiaries, Now Solutions, Inc. ("Now
Solutions") a 100% owned subsidiary, and Government Internet Systems, Inc.
("GIS") an 85% owned subsidiary and to market its other SiteFlash-based products
(like NewsFlash or AffiliateFlash) directly or through third-parties. The
Company believes that Now Solutions and GIS have distinct marketing advantages
for their niche markets. The current strategy of GIS is to submit proposals to
the various city, county and state governments for ResponseFlash, an emergency
response communications web-based system and to simultaneously raise funds to
fast track the marketing and sales efforts and develop the infrastructure to
support any sales. In addition, GIS is acquiring the rights to market other
products, especially those compatible with ResponseFlash, in order to provide a
broader offering in the homeland security sector. GIS also plans to cross-market
ResponseFlash, to the Company's existing client base of its partners,
affiliates, and subsidiaries. Now Solutions, Inc. is a human resources and
payroll software and business solutions provider. Now Solutions' new web based
software, emPath 6.3 is being marketed in North America. Now Solutions has
already entered into co-marketing agreements with partners such as Total Care, a
provider of staff scheduling solutions for healthcare organizations, and
InfraHealth, Inc., a provider of transcription services in the healthcare
industry. By utilizing the strategic elements each individual business unit
offers, the Company intends to leverage each other's strengths in their
segments, as well as to exploit the network of customers, vendors, and support
agencies that the Company has built. There is no assurance that the Company will
achieve the expected results.

         The Company is also seeking sources of financing to refinance its
existing debt and provide additional working capital for Vertical Computer
Systems and its subsidiaries. The Company does not have any commitments for
funding. The Company's ability to continue as a going concern is dependent on
its ability to raise additional funds and to establish profitable operations.
The Company's inability to raise such funds will significantly jeopardize its
ability to continue operations. In addition, the Company is pursuing its
litigation against Ross Systems, Inc. for claims in excess of $4,000,000, which
includes a claim for unpaid maintenance fees. The Company's primary need for
cash is for repayment of debt. The ability of the Company to meet these needs is
uncertain.



                                       1
<PAGE>

         In December 2004, the Company was notified by the Securities Exchanges
Commission ("SEC") that the SEC has suspended trading of VCSY common stock
pursuant to an Order Filed by the SEC because the Company has been delinquent in
its periodic filing obligations under Section 13(a) of the Securities Exchange
Act of 1934 since the period ending September 30, 2003. Also in December 2004,
the Company was notified by the SEC of an administrative proceeding pursuant to
the filing of an "Order Instituting Administrative Proceedings and Notice of
Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934" due to
the delinquency of filing of the Form 10-KSB for the year ended December 31,
2003 and the Forms 10-QSB for the first three quarters of 2004.

         OVERVIEW

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

         In May 2000, the Company acquired Globalfare.com, Inc. (Globalfare).

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

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

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

         In March 2001, the Company invested $1,000,000 to obtain a 60 percent
majority interest in Now Solutions, Inc. ("Now Solutions"). In order to
facilitate the financing process, the Company had pledged a $1.5 million deposit
as collateral pursuant to a deposit pledge agreement to guarantee the payments
of the loan to finance the purchase of HRIS. Also in March 2001, Now Solutions
acquired the Renaissance CS(R) Human Resources and Payroll assets from Ross
Systems, Inc. ("Ross") for $6,100,000 and financed the purchase with a
$5,500,000loan from Coast Bank. The Renaissance Payroll System, which serves
small and growing businesses, was a human resources software system and used by
over 150 companies in North America. In April 2002 the Company took control of
the Executive Committee of Now Solutions by appointing the fifth representative
giving the Company three representatives in the five member board. In May 2002,
arbitration was commenced between the Company and the largest minority owner of
Now Solutions, Arglen Acquisitions LLC ("Arglen") regarding change of control
and ownership percentage. In February 2003 the Company sued Arglen Acquisitions,


                                       2
<PAGE>

Ross Systems Inc., and Garry Gyselen among others in the State of New York. The
Company sought damages and equitable relief arising out of actions of the
defendants constituting breach of contract, fraud, conspiracy and breach of
fiduciary duty in connection with certain transactions entered into between Ross
and Now Solutions, Ross and Arglen, Arglen and Now Solutions, Gyselen and Now
Solutions, and VCSY and Arglen. The Company and Arglen settled their dispute in
December 2003. In February 2004, in connection with the settlement, the Company
purchased Arglen's 35% interest in Now Solutions for $1,400,000 and 20,000,000
unregistered shares of common stock of the Company, subject to registration
rights and a "lock up" provision. The Company's purchase of Arglen's interest
resulted in the Company recognizing $1,680,000 of goodwill which was written off
in 2004. The Company currently owes Arglen $600,000, plus interest and legal
fees under a promissory note issued to Arglen as part of the purchase price of
its 35% interest. Pursuant to the settlement agreement, the Company is also
obligated to issue 5,000,000 unregistered shares of common stock of the Company
to Arglen, due to its failure to file a SB-2 registration statement within 180
days from the settlement date. For more details on the Delaware action, please
see Item 3, Legal Proceedings. This note is currently in default and Arglen
obtained a judgment in California against the Company in August 2004. The
judgment includes, $600,000 plus interest and legal fees owed to Arglen. The
Company has requested a stay in paying the judgment Arlgen has against the
Company in the Delaware court action instituted by Ross against the Company
until the Delaware action is resolved. In connection with the settlement
agreement, the Company cancelled warrants issued to Arglen to purchase
80,763,943 shares of common stock of the Company and the parties dismissed all
actions and claims concerning one another. In January 2004, the Company
purchased the remaining 5% minority interest in Now Solutions from Stephen
Parnes for $77,000 and 1,000,000 unregistered shares of the Company's common
stock, which is subject to "piggy back" registration rights and a "lock up"
provision. This transaction resulted in the Company recognizing $80,000 of
goodwill, which was written off in 2004. In March 2004, Now Solutions, LLC was
converted into a corporation named Now Solutions, Inc.

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

         In June 2001, the Company agreed to pay $250,000, of which $150,000 was
actually paid, in exchange for 51% equity interest in WorldBridge Webcasting
Services, LLC ("WorldBridge"), a webcast services company. In October 2001, the
Company agreed to reduce its interest in WorldBridge from 51% to 49%. In January
2002, the Company and Strategic Marketing Alliance agreed to terminate the
Company's interest in WorldBridge in exchange for services to be provided by
Strategic Marketing Alliance through December 31, 2002.

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

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

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

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

         In February 2004, the Company purchased a 21% ownership interest in
MedData Solutions, Inc. for 9,000,000 unregistered shares of common stock of the
Company. MedData Solutions is a provider of Internet and Palm-based software for
real-time EMS and trauma data management.



                                       3
<PAGE>

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

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

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

         BUSINESS OPERATIONS AND DIVISIONS

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

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

         NOW SOLUTIONS, INC.

         On February 28, 2001, the Company acquired 60% equity interest in Now
Solutions, Inc. (Now Solutions), a company that develops and maintains human
resource software, in exchange for $1 million in cash, which was paid to Now
Solutions, and warrants to purchase 80,763,943 shares of the Company's common
stock at a purchase price of $0.08 per share which was granted to Arglen
Acquisition, LLC ("Arglen"). Arglen negotiated Now Solutions' purchase of Ross
Systems assets related to its Payroll/Human Resources product including all
equipment, software and maintenance agreements. In January 2004, the Company
purchased the 5% minority interest in Now Solutions held by Stephen Parnes for
$77,000 and 1,000,000 unregistered shares of common stock of the Company,
subject to piggy back registration rights and a "lock up" provision. This
transaction resulted in the Company recognizing $80,000 of goodwill, which was
written off in 2004. The Company and Arglen settled their arbitration and
litigation in December 2003. In February 2004, at closing, the Company purchased
Arglen's 35% interest in Now Solutions for $1,400,000 and 20,000,000
unregistered shares of common stock of the Company, subject to registration
rights and a "lock up" provision, giving the Company 100% ownership and control
of Now Solutions. This transaction resulted in the Company recognizing
$1,680,000 of goodwill which was written off in 2004. Pursuant to the settlement
agreement, the Company also cancelled warrants to purchase 80,763,943 common
shares of the Company that were originally granted to Arglen in connection with
the Company's acquisition 60% of equity interest in Now Solutions. The Company
currently owes Arglen $600,000 plus interest and legal fees under a promissory
note issued to Arglen as part of the purchase price of its 35% interest. This
note is in default. Pursuant to the settlement agreement, the Company was also
obligated to issue 5,000,000 unregistered shares of common stock of the Company
to Arglen. The Company is awaiting the results of the pending Delaware action
involving the Company, Arglen and Ross before it issues these shares. For more
details on the Delaware action, please see Item 3, Legal Proceedings.



                                       4
<PAGE>

         In March 2001, Now Solutions purchased the rights to Human Resource
Information Service Application Software ("HRIS") and various other assets and
liabilities relating to HRIS of Ross Systems, Inc. ("Ross") in exchange for
approximately $5,100,000 in cash and a promissory note of $1 million due to
Ross. For further details on the purchase of HRIS from Ross and the financing,
please see Note 3 of Item 7 concerning Now Solutions.

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

         The existing revenue model of Now Solutions is based upon three
components: licensing fees, professional consulting services, and renewable
maintenance fees. However, Now Solutions intends to offer its software on an ASP
(Application Service Provider) model to be able to service small customers,
therefore increasing the market reach of its products. When this is implemented,
Now Solutions plans to collect service fees associated with this service.

         For information concerning additional details of the legal proceedings
concerning the Company, Now Solutions, Ross, Arglen, and Gary Gyselen, a
principal of Arglen and former Chairman of Now Solutions, please see Item 3,
Legal Proceedings.

         For the twelve months ended December 31, 2003, Now Solutions had
approximately $4,200,000 of total assets, revenues of approximately $6,600,000
and a net loss of approximately $2,300,000 which includes impairment loss of
approximately $1,600,000 of goodwill.

         GOVERNMENT INTERNET SYSTEMS, INC.

         The Company's 85% owned subsidiary, Government Internet Systems, Inc.
("GIS"), a Nevada corporation was formerly Emily Solutions, Inc. The Company
will license its proprietary technology, ResponseFlash, to GIS to market and
distribute this technology to government entities (excluding state universities
and schools) in the United States. GIS seeks to enter into agreements to
distribute other non-company products particularly in the homeland security
sector. GIS has already entered into co-marketing agreements with Basix1 and
InfraHealth. In October 2002, Emily Solutions, Inc., a Nevada corporation,
changed its name to Government Internet Systems, Inc. by amending its articles
of incorporation. Independent funding is being sought for GIS. The Company has
completed development and installation of ResponseFlash for the Metropolitan
Emergency Communications Agency, Indiana. The Company is in the process of
submitting proposals to various city, county and state governments.

         For the twelve months ended December 31, 2003, Government Internet
Systems (formerly Emily Solutions, Inc.) had no assets and no material revenue
or expenses.

          VERTICAL INTERNET SOLUTIONS, INC

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

         For the twelve months ended December 31, 2003, Vertical Internet
Solutions had no assets and no material revenue or expenses.



                                       5
<PAGE>

         ENFACET, INC.

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

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

         For the twelve months ended December 31, 2003, EnFacet had
approximately no material assets, revenue of $30,450, and a net loss of
approximately $75,000.

         GLOBALFARE.COM

         In May 2000, the Company acquired Globalfare.com, Inc. (Globalfare).
After the terrorist attacks at the World Trade Center, the Company had suspended
website and travel fulfillment operations. In April 2003, Globalfare, entered
into a services agreement whereby Globalfare would provide fulfillment services
for all leisure travel services booked through the Zegato Services Concourse,
for a commission on all sales. In March 2003 Globalfare entered into an
agreement with Picasso Travel, Inc. (Picasso) to provide the fulfillment
requirement for the Zegato agreement. The interface between Picasso and Zegato
became operational in November 2004. For the twelve months ended December 31,
2003, Globalfare.com had no assets, no revenue and no expenses.

         POINTMAIL.COM, INC.

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

         For the twelve months ended December 31, 2003, Pointmail.com had no
assets, no revenues and no expenses.

         MINORITY INTERESTS AND ROYALTY INTERESTS

         MEDDATA SOLUTIONS, INC.

         In February 2004, the Company purchased a 21% ownership interest in
MedData Solutions, Inc. ("MedData Solutions") from Robert Farias. In exchange,
the Company issued 9,000,000 restricted shares of common stock of the Company
(at a fair market value of $135,000), which have "piggy-back" registration
rights. Robert Farias is a director of Now Solutions, a 100% owned subsidiary of
the Company. MedData Solutions is a provider of Internet and Palm-based software
for real-time EMS and trauma data management.



                                       6
<PAGE>

         MedData Solutions has two main products: Regist*r and Regist*r Express.
Regist*r is an Internet-based data collection system for EMS and Trauma
providers, which may be utilized as a standalone application for data collection
after the field, or with MedData Solutions' data capture application,
Regist*rExpress. From MedData Solutions Internet database the EMS or trauma
provider may run reports on its data, or export it for reporting compliance or
into a billing solution. Regist*r Express is a comprehensive field data
management system for EMS professionals. Using the PDA as field data collection
hardware, an electronic run report is generated and IR printed in the ED. Data
is synced to the desktop and uploaded to MedData Solutions Internet backend,
where data is available for real time analysis, export for public health
reporting, and integration into billing software.

         INET PURCHASING, INC. The Company has a 2.5% minority interest in iNet
Purchasing and is also entitled to a royalty on all iNetPurchasing transactions
for 20 years.. iNet Purchasing, Inc., based in Bethesda, Maryland, is a
developer of Internet-based procurement services targeted at the specific needs
of public sector purchasing in the state and local government arena through
PublicBuy.net. In November 2001, the Company entered into a license agreement
with iNet, where the Emily software and technology were licensed for use in
connection with iNet's e-procurement system in Texas, Maine, and Idaho in
exchange for a 20% commission on subscription fees . The Company is entitled to
retain the entire $495 sales price for sales to any vendors. No royalties have
been received from iNet as of January 7, 2005.

         As of December 31, 2003, all of the iNet investments and advances paid
for royalties were fully reserved. There have been no revenues or expenses in
relation to the investments for the twelve months ended December 31, 2003.

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

         In October 2000, the Company agreed to provide $250,000 in funding to
TranStar for the enhancement of its smart card technology and development of its
service business in exchange for a 30% equity interest. In April 2003, the
Company and Mike Radlovic (Radlovic) entered into an agreement whereby Radlovic
would purchase the Company's interest in TranStar Systems, Inc. (TranStar).
Pursuant to the agreement, the Company transferred 3,000,000 shares of TranStar
common stock to Radlovic. In consideration of the sale, Radlovic issued a
$250,000 note bearing interest at 10% per annum due in April 2007. The note is
secured by 5 million shares of TranStar common stock owned and pledged by
Radlovic. Radlovic is CEO and President of TranStar.

         In October 2000, in consideration for $25,000 from the Company,
TranStar agreed to pay a royalty of 2% of all transaction fees up to $275,000
and 1% up to $3,000,000. In April 2001, the Company loaned TranStar $24,000,
which was due in June 2001. In May 2001, the Company loaned TranStar an
additional $24,000 which was due in July 2001. The loans are secured pursuant to
a stock pledge in the amount of 500,000 shares of TranStar common stock for each
of the two loans. In April 2003, the Company and TranStar Systems, Inc.
(TranStar) agreed to amend two $24,000 promissory notes bearing interest at 10%,
dated April 19 and May 8, 2001, as well as a royalty agreement, dated October
14, 2000. As part of the purchase by Radlovic of the Company's TranStar
ownership interest, the due date for the two $24,000 notes was extended to April
5, 2006 in exchange for increasing the royalty rate in the royalty agreement to
3% of any transaction fees and any other revenues generated in perpetuity. The
collateral to secure the note, consisting of 1,000,000 shares of TranStar common
stock, and the underlying security agreements will remain in full force and
effect. In connection with the agreement, TranStar also indemnified and released
the Company from any obligations owed to TranStar or any third party. In August
2004, TranStar made a payment of $8,000 in full satisfaction one of the $25,000
loans and the Company cancelled the note and returned 500,000 TranStar's shares
held as collateral. Radlovic is CEO and President of TranStar.

         As of December 31, 2003, the investment in notes receivable and all of
the advances paid to TranStar for royalties have been fully reserved. No
royalties have been received from TranStar as of January 7, 2005.


                                       7
<PAGE>

         JOINT VENTURES

         ZAP QUOTE, S.A. In March 2000, the Company entered into two joint
ventures with ZAP Quote, S.A. Both joint venture ownerships are held 50% by the
Company and 50% by ZAP Quote, S.A. As of January 7, 2005, neither joint venture
is operational.

         WIRELESS LEARNING SYSTEMS, LLC. In June 2001, Epsylon Technologies,
Taurus Global, LLC and the Company formed Wireless Learning Systems, LLC
("Wireless Learning"), which was formulating plans to develop wireless solutions
for schools to support teacher and student wireless educational systems. As of
January 7, 2005, this joint venture is not operational.

         For the twelve months ended December 31, 2003, all of the joint venture
investments are fully reserved. There have been no revenues or expenses in
relation to the investments for the twelve months ended December 31, 2003.

         SOFTWARE DISTRIBUTORS AND STRATEGIC MARKETING ALLIANCES

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

         DEFENSE SOLUTIONS, LLC. In November 2002, Government Internet Systems,
a majority owned subsidiary of the Company, and Defense Solutions, L.L.C.,
entered into an agreement whereby Defense Solutions agreed to assist in the
marketing of the its web based emergency response management products and
services to federal, state, and local governments of the United States in
exchange for one seat on GIS's Board of Directors, and a fifteen percent (15%)
commission on all contracts and first year maintenance fees (less any third
party royalties) from any United State's government, non-government, or
commercial enterprise or organization resulting from a contact initiated by
Defense Solutions. In connection with this agreement, the Company issued 3 year
warrants to purchase 4,000,000 shares of the Company's common stock at a strike
price of $0.0075.

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

         COMPETITION

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

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

         STRATEGIC OVERVIEW

         We believe that each of the Company's business units has distinct
marketing advantages for its niche markets. The Company plans to find national
marketers, such as Defense Solutions, LLC, and international resellers such as
Infotec in Japan, who can commercially exploit the Company's products in the
respective niche market. By utilizing the strategic elements each individual
business unit offers, the Company plans to leverage each other's strengths in
their segments, as well as to exploit the network of customers, vendors, and
support agencies that the Company has built. The Company has three business


                                       8
<PAGE>

units in North America (Now Solutions, Government Internet Systems, Globalfare)
that focus either in a selective targeted market like GIS does for the federal
governmental market with ResponseFlash or marketing a best-of-breed software
product to all potential markets such as Now Solutions. The Company currently
seeks to use a combination of direct marketing and strategic partnerships to
commercially exploit its products derived from SiteFlash, namely NewsFlash,
UniversityFlash, and AffiliateFlash. In this way the Company hopes to define the
best potential markets for SiteFlash products, then license the product to one
of the Company's subsidiaries. At this time, the Company has placed both its
Emily software and international bridge network on hold while it concentrates on
these immediate opportunities within its existing business units.

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

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

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

         PROPRIETARY RIGHTS

         The Company relies upon a combination of contract provisions and
patent, copyright, trademark and trade secret laws to protect its proprietary
rights in its products and services. The Company distributes its products and
services under agreements that grant users or customers a license to use its
products and services and relies on the protections afforded by the copyright
laws to protect against the unauthorized reproduction of its products. In
addition, the Company moves to protect its trade secrets and other proprietary
information through agreements with employees and consultants. Now Solutions'
emPath software technology is protected by copyright and trademark. The United
States Patent and Trademark Office granted a patent (No. 6,718,103) for an
invention for "Transmission of Images over a Single Filament Fiber Optic Cable"
in April 2004. This patent is in a theoretical stage only and is intended to be
used transmitting images on fiber optics that might improve in orders of
magnitude today's capacity of fiber optics to transmit images and data. The
Company has filed for a Continuation in Part for patent number 6,718,103 to
pursue possible additional derivative patents. The United States Patent and
Trademark Office granted a patent (No. 6,826,744) for an invention for "System
and Method for Generating Web Sites In an Arbitrary Object Framework" on
November 30, 2004. The Company has filed for a Continuation in Part for patent
number 6,826,744 to pursue possible additional derivative patents. This patent
is the foundation of Vertical's product, SiteFlash(TM), and forms the basis of
the ResponseFlash(TM), NewsFlash(TM), UniversiTyFlash(TM) and AffiliateFlash(TM)
products. In addition, the Company has also filed for a number of patents
related to Emily: (a) oNe patent application related to the Emily programming
language; (b) one patent application related to the Emily XML Enabler Agent and
Emily XML Broker. The patent application for the Emily XML Scripting Language
was published in February 2003. Although the Company intends to protect its
rights, there can be no assurance that these measures will be successful.
Policing unauthorized use of its products and services is difficult and the
steps taken may not prevent the misappropriation of its technology and
intellectual property rights. In addition, effective patent, trademark, trade
secret and copyright protection may be unavailable or limited in certain foreign
countries. The Company seeks to protect the source code of its products as a
trade secret and as an unpublished copyright work. Source code for certain
products has been or will be published in order to obtain patent protection or
to register copyright in such source code. The Company believes that its
products, trademarks and other proprietary rights do not infringe on the
proprietary rights of third parties. There can be no assurance that third
parties will not assert infringement claims against us in the future with
respect to current or future features or contents of services or products or
that any such assertion may not result in litigation or require us to enter into
royalty arrangements.



                                       9
<PAGE>

         REGULATORY ENVIRONMENT; PUBLIC POLICY

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

         EMPLOYEES

         As of January 7, 2005, the Company has 27 full-time employees and 14
consultants. This total includes 23 full-time employees at its subsidiary, Now
Solutions, of which 16 are employed in the United States and 7 are employed in
Canada as well as 12 consultants. The Company is not a party to any collective
bargaining agreements.

ITEM 2. DESCRIPTION OF PROPERTY

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

ITEM 3. LEGAL PROCEEDINGS

         The Company is, from time to time, involved in various lawsuits
generally incidental to its business operations, consisting primarily of
collection actions and vendor disputes. In the opinion of management, the
ultimate resolution of these matters, if any, may have a significant effect on
the financial position, operations or cash flows of the Company.

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

         In December 2003, the Company settled its arbitration and litigation
with Arglen Acquisitions, LLC ("Arglen"), a minority partner of Now Solutions,
regarding issues related to Now Solutions. The settlement resolved various
allegations by the Company and Arglen concerning violations of Now Solutions'
Operating Agreement. The arbitration has been dismissed and any actions with
respect to Arglen and Gary Gyselen and the Company and its related parties,
including Now Solutions, were also dismissed, except that the California
Superior Court, Los Angeles County retained jurisdiction regarding the terms of
the settlement between the parties. In February 2004, the Company completed the
settlement with Arglen. Pursuant to the terms of the settlement, the Company
purchased Arglen's interest in Now Solutions for $1.4 million as follows: (a)
$800,000, which was paid at the closing and (b) $600,000, pursuant to a
non-interest bearing secured promissory note providing for payments of $200,000
in April 2004, $100,000 in June 2004, and $300,000 in September 2004, which was
issued at closing. The security interest of Now Solutions' assets on the secured
promissory note will be junior to Now Solutions' present indebtedness to WAMCO
31, Ltd. In addition, at closing, the Company cancelled 80,763,943 warrants held
by Arglen and issued to Arglen 20,000,000 unregistered shares of the common
stock of the Company (at a fair market value of $280,000), which is subject to a
"lock up" provision. . The Company's purchase of Arglen's interest resulted in
the Company recognizing $1,680,000 of goodwill, which was written off in 2004.
The note is in default. In August 2004, Arglen obtained a default judgment in
Los Angeles court for the outstanding principal, plus attorney's fees and
interest at the rate of 10% per annum. The Company has filed a motion in the
Delaware court to stay the enforcement of the judgment pending resolution of the
Delaware action. Pursuant to the settlement agreement, the Company is also
obligated to issue 5,000,000 unregistered shares of common stock of the Company
to Arglen, due to its failure to file a SB-2 registration statement within 180
days from the settlement date.



                                       10
<PAGE>

         At December 31, 2003, the Company had non-restricted cash-on-hand of
$962,454. Now Solutions' non-restricted cash-on-hand of $954,720 was not
available to fund the Company's operations due to a court order obtained by
Arglen and bank covenants in connection with legal proceedings concerning Now
Solutions. The Company settled with Arglen in December 2003. The settlement was
completed in February 2004, and the Company and Arglen dismissed all claims with
respect to one another. As a result, the cash-on-hand of Now Solutions became
available to fund the Company's operations.

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

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

         In March 2004, Ross commenced an action in the Supreme Court, New York
County (New York State) by filing a motion for summary judgment in lieu of
complaint against Now Solutions to collect the note payable in the amount of
$750,000 plus 10% interest and attorneys fees. Now Solutions filed its
opposition to Ross' motion, which was submitted to the court for decision on May
20, 2004. Now Solutions opposed the Ross motion and, on October 7, 2004, the
Court ruled in favor of Now Solutions and denied the motion for summary
judgment. Pursuant to New York State law, in the event a motion for summary
judgment in lieu of complaint is denied, the action continues and the pleadings
supporting the motion are deemed to constitute the complaint. Accordingly, Now
Solutions has filed an answer containing affirmative defenses and nine (9)
counterclaims against Ross. The affirmative defenses asserted by Now Solutions
include the same grounds which comprise the causes of action against Ross in the
Derivative Action, namely Ross' breach of the Asset Purchase Agreement as a
result of its failure to credit Now Solutions with adjustments at closing in an
amount not less than $3,562,201.22. All of the counterclaims asserted by Now
Solutions against Ross relate to the Asset Purchase Agreement and Ross' breaches
thereof. The counterclaims include: (i) breach of the covenant not to compete,
whereby Now Solutions seeks damages in excess of $10,000,000.00; (ii) breach of
the covenant to deliver all Assets to Now Solutions at Closing, whereby Now
Solutions seeks damages in an amount not less than $300,000.00; (iii) breach of
a certain Transitional Services Agreement (executed in conjunction with the
Asset Purchase Agreement), whereby Now Solutions seeks damages in an amount not
less than $73,129.47; and (iv) reasonable attorney's fees. In December 2004,
Ross filed a motion to dismiss two counterclaims: one which alleges that Ross
and Chinadotcom used Ross to breach a covenant not to compete and the second
which requested that Ross be enjoined from further competition with NOW in
violation of the covenant. Now Solutions intends to vigorously oppose any such
motion.



                                       11
<PAGE>

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

         In December 2004, the Company was notified by the Securities Exchanges
Commission ("SEC") that the SEC has suspended trading of VCSY common stock
pursuant to an Order Filed by the SEC because the Company has been delinquent in
its periodic filing obligations under Section 13(a) of the Securities Exchange
Act of 1934 since the period ending September 30, 2003. Also in December 2004,
the Company was notified by the SEC of an administrative proceeding pursuant to
the filing of an "Order Instituting Administrative Proceedings and Notice of
Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934" due to
the delinquency of filing of the Form 10-KSB for the year ended 2003 and the
Form 10-QSB for the first three quarters of 2004.

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

         No matter was submitted to a vote of security holders during the twelve
months ended December 31, 2003.


                                       12
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common equity is quoted on the Pink Sheets under the symbol
"VCSY.PK". Prior to that date, the Company's common stock was quoted on the
Over-The-Counter Bulletin Board ("OTCBB") under the symbol "VCSY," which
commenced in October 1999. The Company's common stock traded on the `pink
sheets' prior to that date. In December 2004, the Company was notified by the
Securities Exchanges Commission ("SEC") that the SEC has suspended trading of
VCSY common stock pursuant to an Order Filed by the SEC because the Company has
been delinquent in its periodic filing obligations under Section 13(a) of the
Securities Exchange Act of 1934 since the period ending September 30, 2003. Also
in December 2004, the Company was notified by the SEC of an administrative
proceeding pursuant to the filing of an "Order Instituting Administrative
Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities
Exchange Act of 1934" due to the delinquency of filing of the Form 10-KSB for
the year ended 2003 and the Form 10-QSB for the first three quarters of 2004.

         The following is the range of high and low closing bid prices of our
stock, for the periods indicated below. As of January 7, 2005, there were
approximately 1,596 holders of record of our common stock. This information was
obtained from the Pink Sheets, LLC.

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

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

         Quarter Ended December 31, 2002               $0.0095       $0.0044
         Quarter Ended September 30, 2002              $0.0150       $0.0041
         Quarter Ended June 30, 2002                   $0.0130       $0.0023
         Quarter Ended March 31, 2002                  $0.0270       $0.0101

         Quarter Ended December 31, 2001               $0.0175       $0.0100
         Quarter Ended September 30, 2001              $0.0380       $0.0120
         Quarter Ended June 30, 2001                   $0.0910       $0.0350
         Quarter Ended March 31, 2001                  $0.1200       $0.0550


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

         The Company did not pay any dividends on outstanding Series A and
Series C Preferred Shares in 2002 and 2003, respectively. The Company presently
intends to retain future earnings, if any, to provide funds for use in the
operation and expansion of its businesses. Accordingly, the Company does not
anticipate paying cash dividends on its common stock in the near future.


                                       13
<PAGE>

UNREGISTERED SALES OF SECURITIES

         In December 2000, Vertical Computer entered into a month-to-month
agreement with Strategic Media Alliance, Inc., whereby Vertical Computer would
pay a monthly retainer fee of $10,000 in cash and would issue 3-year warrants
for 45,455 shares of common stock at a strike price of $0.11 per share for
marketing services. In January 2002, in connection with the agreement between
the Company and Strategic Media Alliance to terminate the Company's interest in
the WorldBridge Webcasting LLC, Strategic Media Alliance received 3-year
warrants to purchase stock equal to $5,000 per month, based on a strike price
formula of $0.01 plus the previous average five day market price on the date of
issuance. These warrants were issued in February and March of 2002 in lieu of
the warrants specified in the original consulting agreement with Strategic Media
Alliance. As of January 7, 2005, of the warrants to purchase 823,870 shares of
common stock of the Company that were issued, 590,915 have expired.

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

          In September and October 2001, the Company issued $125,000 and
$140,000 of convertible debentures, respectively. The debt accrues interest at
6% per annum and is due October 2006. The debentures were convertible into
shares of common stock at either 120% of the closing bid price on the date of
agreement or 80% of the 3 lowest closing bid prices 20 days prior to the
conversion. The debentures were convertible at the option of the holder, any
time after purchase. The Company has recognized $66,250 as interest expense in
relation to the beneficial feature conversion of the debentures. In September
2002, a debenture of $10,000 principal and $631 interest was converted into
2,278,153 shares of the Company's common stock. In October and November 2002,
$150,000 principal and $1,341 interest of debentures were converted into
35,611,428 shares of the Company's common stock. In January 2003, $105,000
principal of debentures were converted into 26,992,287 shares of the Company's
common stock.

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


                                       14
<PAGE>

Now Solutions is required to pay 50% of such proceeds remaining after the
$500,000 note payable issued by Now Solutions to Mr. Farias on February 13, 2004
has been paid in full toward the $280,000 and $181,583 notes if the Company is
not current in its payments. The $280,000 note is also secured by SiteFlash
technology owned by the Company. The $181,583 note is also secured by 10,450,000
shares of the Company's common stock that are owned by Mountain Reservoir Corp.
to cover any shortfall. Mountain Reservoir Corporation is a corporation
controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the
Company, is the trustee of the W5 Family Trust. Robert Farias is a director of
Now Solutions, a 100% owned subsidiary of the Company. These notes are in
default.

         In December 2001, the Company executed a $425,000 note payable to
Brighton Opportunity Fund, LP, a third party. The Company received proceeds of
$300,000 and paid a commitment fee of $125,000. The note accrued interest at 12%
per annum and was due January 31, 2002. The note was secured by 36,303,932
shares of common stock of the Company that were owned by Mountain Reservoir
Corporation, and 15,000,000 shares of common stock of the Company that were
owned by Mr. Valdetaro, the Company's Chief Technology Officer, to cover any
shortfall in the event of default. Mountain Reservoir Corp. is a corporation
controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the
Company, is the trustee of the W5 Family Trust. In January 2001, the Company
executed separate indemnity and reimbursement agreements with Mountain Reservoir
Corporation and Mr. Valdetaro to cover their pledges of 36,303,932 and
15,000,000 shares of common stock, respectively. Pursuant to these agreements,
the Company agreed to reimburse Mountain Reservoir and Mr. Valdetaro for any
shares sold as collateral to cover the default of any loan. On January 31, 2002,
the note was in default. In September 2002, the lender informed the Company that
19,751,000 shares of the collateral were sold for $254,382, the remaining
31,552,932 shares were transferred to two third parties, the debt was satisfied
as of April 1, 2002, and the note had been cancelled. Accordingly, the Company
reclassified the note payable to the third party including accrued interest to
the note payable to related parties. In September and October 2002, the Company
issued 36,303,932 and 15,000,000 shares of its common stock to Mountain
Reservoir Corporation and Mr. Luiz Valdetaro, respectively, in accordance with
the executed indemnity and reimbursement agreements of January 2002. At the time
of issuing common stock, the value of the note payable plus accrued interest was
approximately $450,000. The Company reclassified this from note payable to
related parties to common stock and additional paid in capital. In November
2002, Mountain Reservoir Corporation and Mr. Valdetaro assigned any additional
rights they had in the stock collateral to the Company. The differential between
the value of the stock issued for reimbursement of shares to Mr. Valdetaro and
Mr. Wade and the value of the note, plus accrued interest, was accounted for as
forgiveness of debt (contribution to additional paid-in capital).

         In January 2002, the Company executed an indemnity and reimbursement
agreement with Mountain Reservoir Corporation to cover the 10,450,000 shares of
stock pledged by Mountain Reservoir Corporation with regard to the October and
November 2001 notes each for a principal amount of $100,000. These notes were
cancelled and replaced with a $181,584 promissory note which the Company issued
in October 2002, at 12% interest per annum. Mountain Reservoir Corp. is a
corporation controlled by the W5 Family Trust, of which Mr. Wade is a trustee.
Mr. Wade is President, CEO, and a Director of the Company.

         In January 2002, the Company executed separate indemnity and
reimbursement agreements with Mountain Reservoir Corporation and Mr. Valdetaro
to cover their respective 36,303,932 and 15,000,000 shares of common stock
pledged by Mountain Reservoir Corporation and Valdetaro in connection with the
$425,000 note issued in December 2001, whereby the Company would reimburse
Mountain Reservoir Corporation and Valdetaro with the respective number of
shares equal to any shares sold as collateral to cover the default of any loan.
Mountain Reservoir Corp. is a corporation controlled by the W5 Family Trust, of
which Mr. Wade is a trustee. Mr. Wade is President, CEO, and a Director of the
Company. In September 2002, the lender informed the Company that 19,751,000
shares of the collateral were sold for $254,382, the remaining 31,552,932 shares
were transferred to two third parties, the debt was satisfied as of April 1,
2002, and the note had been cancelled. In September 2002, the Company issued
5,774,704 shares of common stock to Luiz Valdetaro and 13,976,296 shares of
common stock to Mountain Reservoir Corporation. The combined 19,751,000 common
shares of the Company Stock had a fair market value of $118,000 on September 23,
2002, the date of issuance. In October 2002, the Company issued 9,225,296 shares
of common stock to Luiz Valdetaro, the Chief Technology Officer of the Company,
and 22,327,636 shares of common stock to Mountain Reservoir Corporation. These
shares were issued in connection with indemnity and reimbursement agreements
between the Company and Mountain Reservoir Corporation and Mr. Valdetaro,
respectively in connection with the $425,000 note issued in December 2001,
whereby the Company would reimburse Mountain Reservoir Corporation and Mr.
Valdetaro with the respective number of shares of the Company stock equal to any
shares sold as collateral to cover the default of any loan. With the issuance of
these shares, Mountain Reservoir Corporation and Mr. Valdetaro have received
their full reimbursement of shares in the amounts they initially pledged on
behalf of the Company, or 36,303,932 and 15,000,000 shares, respectively. In
November 2002, Mountain Reservoir Corporation and Mr. Valdetaro assigned any
additional rights they had in the stock collateral to the Company. The
differential between the value of the stock issued for reimbursement of shares
to Mr. Valdetaro and Mr. Wade and the value of the note, plus accrued interest,
was accounted for as forgiveness of debt (contribution to additional paid-in
capital).



                                       15
<PAGE>

         Also in January 2002, the Company and Taurus Global LLC agreed to
extend a consulting services agreement entered into in July 2001 for 6 months.
In consideration of Taurus Global's services, the Company agreed to pay a
monthly fee of $12,500 and issued an additional 100,000 warrants. The warrants
have vested and are exercisable for five years from issuance at a strike price
equal to the fair market value of the Company's common stock on the day of
grant. The warrants were valued at $1,240 and were expensed when issued.

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

         For the three months ended March 31, 2002, the Company issued 1,167,857
warrants to purchase shares of its common stock to one marketing consultant for
services. The fair market value of these warrants at the date of issuance was
$3,132 (valued using the Black-Scholes valuation model).

         For the three months ended June 30, 2002, the Company issued warrants
to two consultants to purchase a total of 1,500,000 shares of common stock at a
strike price of $0.005. The fair value of these warrants at the date of issuance
of these grants of warrants was $3,565 (valued using the Black-Scholes valuation
model).

         In June 2002, the Company issued a $50,000 note to a third party
lender, which was due January 2003 and originally did not bear any interest. In
connection with the note, the Company issued three year warrants to purchase
1,200,000 shares of its common stock at a price of $0.003 per share. The
warrants vested immediately and are exercisable for three years from issuance.
The fair value of the warrants was $2,291 (valued using the Black-Scholes
valuation model). The Company also pledged a limited interest in a deposit
account on behalf of Now Solutions in the event the Company defaulted on the
loan. In March 2003, the parties entered into an amendment, whereby the parties
agreed that to accrue interest beginning in October 2002 at 12% per annum. The
parties also agreed that the Company would make monthly payments of accrued
interests beginning in April 2003 and an additional principal payment of $5,000
beginning in July 2003. The note is currently in default.

         In June 2002, the Company issued a $50,000 note to a third party
lender, which bears interest at 12% per annum, which is due January 2003. In
connection with the note, the Company issued three year warrants to purchase
1,500,000 shares of its common stock at a price of $0.004 per share. The
warrants vested immediately and are exercisable for three years from issuance.
The fair market value of the warrants was $3,818 (valued using the Black-Scholes
valuation model). The Company also pledged a limited interest in a deposit
account on behalf of Now Solutions in the event the Company defaults on the
loan. In March 2003, the parties agreed to amend the terms of the notes.
Pursuant to the amendment, the Company agreed to pay accrued interest in the
amount of $4,200 for the $50,000 note and $1170 for a $25,000 note issued in
August 2002 and monthly interest payments for all accrued interest for both
notes thereafter shall be made. Beginning in July 2003, the above interest
payments shall be replaced with a monthly installment payment of $5,000.00, with
the initial payments applied first to the $25,000 note and then to the $50,000
note. The note is currently in default.

         In June 2002, the Company issued 3 year warrants to purchase 3,000,000
shares of its common stock to two employees at an average share price of $0.012.
The fair market value of these warrants on the date of issuance of each grant
was $3,565 (valued using the Black-Scholes valuation model).

         In July 2002, the Company retained the services of Equitilink, Inc. to
provide investor relations services. As compensation, the Company issued
5,000,000 shares of Company's common stock with a fair market value of $23,500.

         In August 2002, the Company issued a $25,000 note to a third party
lender, which was due in August 2002 and bears interest at a rate of 12%. The
note is secured by 10,000,000 shares of common stock of the Company that is
owned by Mountain Reservoir Corporation, to cover any shortfall in the event of
default. Mountain Reservoir Corp. is a corporation controlled by the W5 Family
Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5
Family Trust. The Company made a $12,500 payment on the note. The note is
currently in default.


                                       16
<PAGE>

         In August 2002, the Company retained a consultant to provide investment
services on behalf of the Company. Upon execution of the agreement, the Company
issued warrants to purchase 500,000 shares of common stock at a share price of
$0.015, which expire in August 2005, and vested immediately. The fair market
value of the warrant issued was $5,467 (valued using the Black-Scholes valuation
model). The consultant is also entitled to 2.5% of any cash funds raised and in
the event the consultant raises $1,500,000, the Company will issue warrants to
purchase 2.0 million shares of common stock, based on 90% of the average closing
price for the five previous trading days prior to the closing date of the
transaction.

         In August 2002, the Company agreed with a third party lender to loan
the Company $60,000. The lender has currently loaned the Company $31,859. In
April 2003, the Company issued, but did not deliver, 3,000,000 restricted shares
of common stock of the Company (at a fair market value of $15,045) to a third
party lender in anticipation of finalizing the terms of the loan made by the
lender.

         In August 2002, the Company issued an $8,000 note, which is due
February 2003 and accrued interest at a rate of 10% in exchange for a loan with
the same amount from Mr. Luiz Valdetaro, the Chief Technology Officer of the
Company. In connection with the note, the Company issued 3 year warrants to
purchase 1,000,000 shares of its common stock at a price of $0.005 per share.
The warrants vested immediately and were issued at a fair market value of $9,316
(valued using the Black-Scholes valuation model). This note has been paid at
December 31, 2002.

         In September 2002, the Company issued 3 year warrants to purchase
1,750,000 shares of common stock of the Company at a strike price of $0.006 per
shares to two consultants in connection with accounting services provided to the
Company. The fair market value of the warrants issued was $13,845 (valued using
the Black-Scholes valuation model).

         In September 2002, the Company issued a promissory note in the amount
of $13,000 to a third party lender bearing interest at 8% due in October 2002,
and warrants to purchase 250,000 shares of common stock of the Company at a
strike price of $0.008 per share in consideration for a loan in the amount of
$12,500 with a commitment fee of $500. In connection with the loan, the Company
also issued warrants to purchase 250,000 shares of common stock of the Company
at a strike price of $0.008 per share to a third party as a finder's fee. The
warrants were issued at a fair market value of $7,531 (valued using the
Black-Scholes valuation model). This note has been paid in full.

         In September 2002, Equitilink, LLC whom the Company retained to provide
its investor relations services, purchased 3,000,000 shares of the Company's
common stock for a total of $17,100 at a fair market value price of $0.005 per
share.

         In September 2002, the Company amended the consulting agreement of July
2001 of Stephen Rossetti to provide services in the capacity of Executive V.P.
Governmental Affairs, in consideration for 3 year warrants to purchase 1,000,000
shares of its common stock at a share price of $0.012, $30,000 for services
rendered through August 31, 2002, and $5,000 per month for a period of one year.
The warrants were issued at a fair market value of $6,191 (valued using the
Black-Scholes valuation model).

         In November 2002, in connection with an agreement between Government
Internet Systems, Inc. ("GIS")(formally Emily Solutions, Inc.), a wholly-owned
subsidiary of the Company, and Defense Solutions, L.L.C, the Company issued 3
year warrants to purchase 4,000,000 shares of the Company's common stock at a
strike price of $0.0075. The warrants were issued at a fair market value of
$14,064 (valued using the Black-Scholes valuation model).

         In December 2002, the Company agreed to issue 2,000,000 unregistered
shares of the Company common stock to Victor Weber in connection with loans of
$45,000 and $65,000 made by Victor Weber to Vertical and in consideration of
financial consulting services rendered on the Company's behalf. The stock was
issued in February 2003 with a fair market value of $11,890. Mr. Weber is
President and Director of Government Internet Systems, Inc, a subsidiary of the
Company.

         In December 2002, the Company issued warrants to purchase to 6,600,000
shares of common stock at an exercise price of $0.010 per share to 6 employees.
The warrants are vested and expire 3 years after vesting. The stock was issued
with a fair market value of $25,664 (valued using the Black-Scholes valuation
model).

         During the year ended 2002, 3 year stock options to purchase 18,200,000
shares of common stock of the Company to employees and various consultants
issued in December 1999 expired and the rights to purchase any shares under
those options terminated.



                                       17
<PAGE>

           In December 2002, the Company, acting as the sole shareholder of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the services of Victor Weber as a Director of GIS for 250 shares of the 25,000
shares of the outstanding common stock of GIS, subject to a buyback agreement
between the Company and the director. The value of these shares is nominal. In
addition, the Company issued 5 year warrants to purchase 250,000 shares of the
Company's common stock at an exercise price of $0.01 in connection with
retaining this director. The warrants were issued at a fair market value of
$629.32 (valued using the Black-Scholes valuation model). In December 2004, the
parties agreed to extend the services of this Director for an additional year.

         Also in December 2002, the Company's subsidiary, Government Internet
Systems, Inc. (GIS) retained Victor Weber as the President and Secretary of GIS
for 500 shares of the 25,000 shares of outstanding common stock of GIS, subject
to a buyback agreement between the Company and the director. The value of these
shares is nominal. In connection with retaining Victor Weber's services, the
Company also issued 5 year warrants to purchase 1,000,000 shares of the
Company's common stock at an exercise price of $0.01 per share. The warrants
were issued at a fair market value of $2,517 (valued using the Black-Scholes
valuation model). The agreement is subject to a 30 day notice of termination by
either party.

         In December 2002, the Company, acting as the majority shareholder of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the services of Stephen Rossetti as a Director of GIS for 250 shares of the
25,000 shares of the outstanding common stock of GIS, subject to a buyback
agreement between the Company and the director. The value of these shares is
nominal. In addition, the Company issued 5 year warrants to purchase 250,000
shares of the common stock of the Company at an exercise price of $0.01 in
connection with retaining this director. The warrants were issued at a fair
market value of $1,242.25 (valued using the Black-Scholes valuation model). In
December 2004, the parties agreed to extend the services of this Director for an
additional year.

         Also in December 2002, the Company's subsidiary, Government Internet
Systems, Inc. (GIS) retained Stephen Rossetti as Chief Executive Officer and
Chairman of GIS for 1000 shares of the 25,000 shares of the outstanding common
stock of GIS, subject to a buyback agreement between the Company and the
executive. The value of these shares is nominal. The agreement is subject to a
30 day notice of termination by either party.

         In December 2002, the Company, acting as the majority shareholder of
Government Internet Systems, Inc. ("GIS"), a subsidiary of the Company, retained
the services of Chuck Kensicki as a Director of GIS for 250 shares of the 25,000
shares of the outstanding common stock of GIS, subject to a buyback agreement
between the Company and the director. The value of these shares is nominal. In
addition, the Company issued 5 year warrants to purchase 250,000 shares of the
Company's common stock at an exercise price of $0.01 in connection with
retaining this director. The warrants were issued at a fair market value of
$1,672 (valued using the Black-Scholes valuation model). In December 2004, the
parties agreed to extend the services of this Director for an additional year.

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

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

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

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



                                       18
<PAGE>

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

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

         In April 2003, the Equity Line of Credit agreement entered into in
August 2001 was cancelled and a new Equity Line of Credit Agreement was executed
between the Company and Cornell Capital Partners, L.P., whereby up to
$10,000,000 worth of the Company's common stock could have been purchased. The
Equity Line of Credit Agreement contained a commitment fee of $190,000, payable
in a convertible debenture, which was issued to Cornell, and a placement fee of
$10,000, payable to the third party placement agent. In July 2003, the Company
issued 2,049,180 shares of common stock as payment of the $10,000 placement fee.
As of January 7, 2005, no debentures have been converted.

         In April 2003, the Company issued $200,000 of convertible debentures.
The debt accrues interest at 5% per annum and is due April 2006. The holder may
convert the debenture into shares of common stock at either $0.03 or 80 % of the
lowest closing bid price for the 5 trading days prior to the conversion. In
accordance with the beneficial conversion feature, the Company recognized deemed
interest expense of $45,000, with contribution to paid-in capital. As of January
7, 2005, no debentures have been converted.

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

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

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

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



                                       19
<PAGE>

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

         In December 2003, the Company issued a debenture in the amount of
$30,000 to a third party. The Company received net proceeds of $26,000 for the
debenture. The debt accrues interest at 5% per annum and is due December 2005.
The holder may convert the debenture into shares of common stock at 100% of the
lowest closing price for the 5 trading days prior to the conversion. As of
January 7, 2005, no conversions have taken place. In connection with the
issuance of a $30,000 debenture to the third party and the Company's agreement
to redeem the debenture by February 1, 2004, the payments due under a note
payable to the third party in the amount of $239,004, bearing interest at 13%
per annum, were extended. Pursuant to the extension, the Company is required to
make monthly installment payments of $7500, beginning on February 1, 2004, until
the balance under the note has been paid. The note is currently in default and
the debenture has not been redeemed.

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

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

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

         For additional Unregistered Sales of Securities after December 31, 2003
that have occurred in 2004, please see Subsequent Events set forth in Note 16
under the Consolidated Financial Statements in Item 8.

         Unless otherwise noted, the sales set forth above involved no
underwriter's discounts or commissions and are claimed to be exempt from
registration with the Securities and Exchange Commission pursuant to Section 4
(2) of the Securities Act of 1933, as amended, as transactions by an issuer not
involving a public offering, the issuance and sale by the Company of shares of
its common stock to financially sophisticated individuals who are fully aware of
the Company's activities, as well as its business and financial condition, and
who acquired said securities for investment purposes and understood the
ramifications of same.


                                       20
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following information should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this filing. Statements in this Management's Discussion and
Analysis or Plan of Operation and elsewhere in this prospectus that are not
statements of historical or current fact constitute "forward-looking
statements."

         OVERVIEW

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

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

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


         ADMINISTRATIVE SOFTWARE

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

         INTERNET CORE TECHNOLOGIES

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

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



                                       21
<PAGE>

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

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


                                       22
<PAGE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

         TOTAL REVENUES. The Company had total revenues of $6,656,572 and
$8,058,312 for the years ended December 31, 2003 and 2002, respectively. The
decrease in total revenue was $1,401,740 the year ended December 31, 2003
representing approximately a 17% decrease compared to the total revenue for the
year ended December 31, 2002. Of the $6,656,572 for the year ended December 31,
2003 and the $8,058,312 for the year ended December 31, 2002, $6,599,604 and
$7,909,272, respectively, was related to the business operations of Now
Solutions, a subsidiary in which the Company owns a 100% interest since February
2004. The Company acquired a 60% interest in Now Solutions in February 2001 and
the remaining 40% interest in January and February 2004. The total revenues
primarily consist of software licenses, consulting and maintenance fees. The
revenue from license and maintenance for the year ended December 31, 2003
decreased by $1,229,564 from the same period in the prior year, representing
approximately 20% decrease, due to selling less new or upgraded software
licenses. Consulting revenue for the year ended December 31, 2003, decreased by
$31,433, from the same period in the prior year, which represented approximately
a 2% decrease, due to less implementation consulting services as a result of
decreasing software license sales. Other revenue, with consist primarily of
reimbursable travel expenses, for the year ended December 31, 2003 , decreased
by approximately $90,543 from the prior year, which represented approximately a
32% decrease.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company had selling,
general and administrative expenses of $10,124,809 and $9,748,788 for the years
ended December 31, 2003 and 2002, respectively. The total selling, general and
administrative expenses for the year ended December 31, 2003 increased by
$376,021 compared to the selling, general and administrative expenses for the
year ended December 31, representing approximately a 4% increase. Of the
$10,124,809 for the year ended December 31, 2003 and the $9,748,788 for the year
ended December 31, 2002, Now Solutions accounted for $6,943,860, and $6,471,577,
respectively. The increase of $376,021 was primarily attributed to increases in
outside consulting, legal and other professional fees at Now Solutions which was
partially offset by reduced labor cost at Vertical Computer Systems.

         GOODWILL IMPAIRMENT. The Company assessed the carrying value of its
goodwill for impairment at December 31, 2003 in accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") and in connection with this assessment determined its goodwill
was fully impaired. As a result, the Company wrote-off the entire carrying value
of the recorded goodwill totaling $2,873,997 in 2003 relating to Vertical and
Now Solutions and $638,000 in 2002 relating to Enfacet .

         OPERATING LOSS. The Company had an operating loss of $6,342,234 and
$2,328,476 for the years ended December 31, 2003 and 2002, respectively. The
operating loss increased by $4,013,758 compared to the operating loss for the
year ended December 31, 2002, representing an increase of approximately 172%.
The increase was primarily attributable to the combination of a decrease in
revenue of $1,401,740 and the increase in impairment of goodwill of $2,235,997.

         INTEREST EXPENSE. The Company had interest expense of $510,050 and
$650,507 for the years ended December 31, 2003 and 2002, respectively. Interest
expense decreased for the year ended December 31, 2003 by $140,457, representing
a decrease of approximately 22%, compared to the same type of expense for the
year ended December 31, 2002. The decrease was primarily related to the
reduction of the Now Solutions loan from WAMCO 32, Ltd.

         MINORITY INTEREST. The minority interest in the net loss of Now
Solutions for the year ended December 31, 2003 was $299,283 compared to a
minority interest in the net income of Now Solutions of $299,283 for the year
ended December 31, 2002. The minority interest in 2002 was based upon 40%
minority ownership in Now Solutions on net income of Now Solutions. In 2003, the
Company recognized as minority interest Now Solutions net loss only to the
extent that it had previously recognized its net income.

         NET LOSS. The Company had a net loss of $6,518,407 and $3,324,210 for
the years ended December 31, 2003 and 2002, respectively. Net loss for the year
ended December 31, 2003 increased by $3,194,197 representing an increase of
approximately 96%. The increase in the net loss of $3,194,197 was primarily
attributable to the combination of a decrease in revenue of $1,401,740 and the
increase in impairment of goodwill of $2,235,997.

         DIVIDENDS APPLICABLE TO PREFERRED STOCK. The Company has outstanding
Series A 4% convertible cumulative preferred stock that accrues dividends at a
rate of 4% on a semi-annual basis. The Company also has outstanding Series C 4%
convertible cumulated preferred stock that accrues dividends at a rate of 4% on
a quarterly basis. The total dividends applicable to Series A and Series C
preferred stock were $600,000 and $600,000 for the years ended December 31, 2003
and 2002, respectively. The Company did not pay any dividends in 2002 and 2003.



                                       23
<PAGE>

         NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. The Company had a net loss
attributed to common stockholders of $7,118,407 and $3,924,210 for the years
ended December 31, 2003 and 2002, respectively. Net loss applicable to common
stockholders for the year ended December 31, 2003 increased by $3,194,197
representing an increase of approximately 81%, compared to the net loss
applicable to common stockholders for the year ended December 31, 2002. The
increase in the net loss of $3,194,197 was primarily attributable to the
combination of a decrease in revenue of $1,401,740 and the increase in
impairment of goodwill of $2,235,997.

         NET LOSS PER SHARE. The Company had a net loss per share of $0.01 and
$0.01 for the years ended December 31, 2003 and 2002, respectively.

FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES AND RECENT DEVELOPMENTS

         Net cash generated from operating activities for the year ended
December 31, 2003 was approximately $119,000. This positive cash flow was
primarily related to a net loss of $6,518,407 adjusted by total non-cash items
of approximately $4,535,000 (including depreciation and amortization of
approximately $1,289,000 and the impairment of goodwill of $2,874,000), a
decrease in all receivables of approximately $1,255,000 and increases in all
liabilities items of approximately $988,000.

         At December 31, 2003, the Company had non-restricted cash-on-hand of
$962,454. Now Solutions' non-restricted cash-on-hand of $954,720 was not
available to fund the Company's operations due to a court order obtained by
Arglen and bank covenants in connection with legal proceedings concerning Now
Solutions. The Company settled with Arglen in December 2003. The settlement
closed in February 2004, and the Company and Arglen dismissed all claims with
respect to one another. As a result, the cash-on-hand of Now Solutions became
available to fund the Company's operations.

         Net cash used in investing activities for the year ended December 31,
2001 was approximately $42,000, which consisted of the purchase of equipment and
software.

Net cash used in financing activities for the year ended December 31, 2003 was
approximately $194,000, consisting primarily of proceeds from issuing notes
payable of approximately $393,000, issuing convertible debentures of $420,000,
and the release of restricted and pledged cash of approximately $182,000 and
offset by repayments of note payable of approximately $1,819,000. The $650,000
that was pledged at December 31, 2002 was applied to the outstanding debt of the
Coast loan to Now Solutions to reduce the monthly interest and loan balance. In
September 2003, Now Solutions issued two notes payable to the Company with
principal amounts of $215,000 and $435,000, respectively to replace the previous
$650,000 note payable. The $435,000 note has been paid down by Now Solutions and
the Company pledged its interest in the $215,000 note issued by Now Solutions to
the Company to secure $190,000 in loans made by Victor Weber to the Company in
2003 and $25,000 in expenses paid by Weber on the behalf of the Company that
were included in Trade Accounts Payable. Weber had the option to have the
Company assign the $215,000 note to Weber provided that Weber cancelled all
other notes and the outstanding $25,000 in accounts payable. Weber elected to
make this assignment in January 2004. At that time, all other notes and debts
owed to Weber were cancelled.

         The total change in cash and cash equivalents for the year ended
December 31, 2003 when compared to year ended December 31, 2002 was an increase
of approximately $16,000.

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

         Since December 31, 2003, the Company has received gross proceeds from
loans in the amount of approximately $500,000. As of the date of this filing,
the Company believes that it had sufficient funds available to fund its
operations only for one month, should the Company be unable to obtain any relief
on its debt structure during such time. Therefore, the Company needs to raise
additional funds through selling securities, obtaining loans and/or
renegotiating the terms of its existing debt. The Company's inability to raise
such funds will significantly jeopardize its ability to continue operations.


                                       24
<PAGE>

<TABLE>
<CAPTION>
       Contractual Obligations      Balance at                Due in Next Five Years
       Including Now Solutions      12/31/03      2004         2005        2006       2007        2008
       --------------------------   ---------   ---------   ---------   ---------   ---------   ---------
<S>                                 <C>         <C>           <C>         <C>          <C>         <C>
                Notes payable       4,226,482   4,226,482

                Convertible debts     460,000      40,000      30,000     390,000

                Operating lease       634,443     203,773     134,576     141,443      60,928      93,723
                                    ---------   ---------   ---------   ---------   ---------   ---------

                Total               5,320,925   4,470,255     164,576     531,443      60,928      93,723
                                    =========   =========   =========   =========   =========   =========
</TABLE>

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

         The Company does not have sufficient funds available to meet these
obligations. The Company will need to raise significant funds to meet these
obligations or make significant sales of its products. The Company does not have
any commitments for funding. The Company continues to explore financing options.
The Company's independent accountants have issued a going concern opinion in its
financial statements that raise substantial doubt about the Company's ability to
continue as a going concern. This going concern opinion was issued due to the
Company's significant recurring operating losses, the substantial funds used in
its operations and the need to raise additional funds to meet its obligations.
The Company's ability to continue as a going concern is dependent on its ability
to raise additional funds and to establish profitable operations.

         In November 2001, Parker Mills & Patel, the former general counsel of
the Company, made advances of approximately $30,000 to third party venders on
behalf of the Company. In exchange, PMP received a 6% promissory note due
January 2002. At December 31, 2003, the outstanding balance under of $23,974 was
in default. These warrants expired in November 2004. William Mills, a partner at
the law firm, is also a director of the Company.

         In March 2003 the Company issued a note payable to a third party for
past due consulting services in the amount of $23,030 dated March 21, 2003
bearing an interest of 12% per annum, with principal and interest due on April
21, 2004. This note is in default.

         In April 2003, a new Equity Line of Credit Agreement was executed
between the Company and Cornell Capital Partners, L.P., whereby up to
$10,000,000 worth of the Company's common stock could have been purchased. The
Company is in default of this agreement. The Equity Line of Credit Agreement
contained a commitment fee of $190,000, payable in a convertible debenture,
which was issued to Cornell, and contained a placement fee of $10,000, payable
to the third party placement agent. In July 2003, the Company issued 2,049,180
shares of common stock as payment of the $10,000 placement fee. As of January 7,
2005, no debentures have been converted.

         In April 2003, the Company issued $200,000 of convertible debentures to
Cornell. The debt accrues interest at 5% per annum and is due April 2006. The
holder may convert the debenture into shares of common stock at either $0.03 or
80% of the lowest closing bid price for the 5 trading days prior to the
conversion. In accordance with the beneficial conversion feature, the Company
recognized deemed interest expense of $45,000, with contribution to paid-in
capital. As of January 7, 2005, no debentures have been converted.

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

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



                                       25
<PAGE>

         In August 2003, the Company obtained an extension and waiver of default
for a $50,000 note issued by the Company to a third party in June 2002. Pursuant
to the waiver, the Company's payment obligations were amended so that the
Company was required to begin making monthly installment payments of $7,500
beginning on November 15, 2003 until the balance under the note has been paid.
The note is in default.

         In August 2003, the Company obtained an extension until November 2003
and waivers of default for two notes of $50,000 and $25,000 issued by the
Company to a third party for loans in June and August 2002, respectively. The
notes are currently in default.

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

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

         In December 2003, the Company amended a note payable to a third party
lender in the amount of $239,004 bearing interest at 13% per annum and
unsecured, which was issued in 2002 to replace the note of $211,137 issued in
August 2001 to a third party lender. Pursuant to the extension in December 2003,
the Company is required to make monthly installment payments of $7,500,
beginning on February 1, 2004, until the balance under the note has been paid. A
$65,000 payment was made in December 2002. In March 2003, the note had been
amended whereby the Company agreed to pay the interest and expenses responsible
by the lender for a third party loan secured on the lender's behalf. The note is
in default .

         In December 2003, the Company issued a debenture in the amount of
$30,000 to a third party. The Company received net proceeds of $26,000 for the
debenture. The debt accrues interest at 5% per annum and is due December 2005.
The holder may convert the debenture into shares of common stock at 100% of the
lowest closing price for the 5 trading days prior to the conversion. As of
January 7, 2005, no conversions have taken place. In connection with the
issuance of a $30,000 debenture to the third party and the Company's agreement
to redeem the debenture by February 1, 2004, the payments due under a note
payable to the third party in the amount of $239,004, bearing interest at 13%
per annum, were extended. Pursuant to the extension, the Company is required to
make monthly installment payments of $7,500, beginning on February 1, 2004,
until the balance under the note has been paid. The Company is currently in
default of its obligation to redeem the note.

         In connection with the purchase of the Human Resource Information
Application Software assets of Ross Systems, Inc., Now Solutions ("Now
Solutions") issued a promissory note to Ross Systems for $1 million and obtained
$5.5 million of notes payable. The $1 million note was due in two payments, the
first payment of $250,000 was due in February 2002 and the final payment of
$750,000 was due in February 2003. In February 2002, Now Solutions withheld its
payments on the remaining $750,000 note due in February 2003 against the unpaid
maintenance fees and gave notice in February 2003 to Ross Systems, Inc. (Ross)
of Now Solutions' claim of offset. Now Solutions has claimed a total amount of
not less than $3,562,000 to offset against the note.



                                       26
<PAGE>

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

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

         In March 2004, Ross commenced an action in the Supreme Court, New York
County (New York State) by filing a motion for summary judgment in lieu of
complaint against Now Solutions to collect the note payable in the amount of
$750,000 plus 10% interest and attorneys fees. Now Solutions filed its
opposition to Ross' motion, which was submitted to the court for decision on May
20, 2004. Now Solutions opposed the Ross motion and, on October 7, 2004, the
Court ruled in favor of Now Solutions and denied the motion for summary
judgment. Pursuant to New York State law, in the event a motion for summary
judgment in lieu of complaint is denied, the action continues and the pleadings
supporting the motion are deemed to constitute the complaint. Accordingly, Now
Solutions has filed an answer containing affirmative defenses and nine (9)
counterclaims against Ross. The affirmative defenses asserted by Now Solutions
include the same grounds which comprise the causes of action against Ross in the
Derivative Action, namely Ross' breach of the Asset Purchase Agreement as a
result of its failure to credit Now Solutions with adjustments at closing in an
amount not less than $3,562,201.22. All of the counterclaims asserted by Now
Solutions against Ross relate to the Asset Purchase Agreement and Ross' breaches
thereof. The counterclaims include: (i) breach of the covenant not to compete,
whereby Now Solutions seeks damages in excess of $10,000,000.00; (ii) breach of
the covenant to deliver all Assets to Now Solutions at Closing, whereby Now
Solutions seeks damages in an amount not less than $300,000.00; (iii) breach of
a certain Transitional Services Agreement (executed in conjunction with the
Asset Purchase Agreement), whereby Now Solutions seeks damages in an amount not
less than $73,129.47; and (iv) reasonable attorney's fees. In December 2004,
Ross filed a motion to dismiss two counterclaims: one which alleges that Ross
and Chinadotcom used Ross to breach a covenant not to compete and the second
which requested that Ross be enjoined from further competition with NOW in
violation of the covenant. Now Solutions intends to vigorously oppose any such
motion.

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



                                       27
<PAGE>

         The $5.5 million note payable, issued by Now Solutions to Coast and
purchased by WAMCO 32, Ltd., was amended in June 2004. Pursuant to the
amendment, the interest was changed to 9% per annum and the $1,304,766
outstanding principal balance shall be payable as follows: (a) $91,667 principal
per month, plus interest commencing on June 30, 2004 and continuing on each
succeeding month through September 30, 2004; (b) $7,500 principal per month,
plus interest, commencing on October 31, 2004 and continuing on each succeeding
month through January 31, 2005; (c) providing that Now Solutions has achieved
revenues of $7.5 million and EBITDA (Earnings Before Interest, Taxes,
Depreciation & Amortization) of not less than $2,200,000 for the fiscal year
2004, $7,500 principal per month, plus interest, commencing on February 28, 2005
and continuing on the last day of each succeeding month until June 30, 2005; and
(d) $91,667 principal per month plus interest, commencing on July 31, 2005 and
continuing on each succeeding month until the note is paid. In the event Now
Solutions does not qualify for reduced payments, the note will be payable in the
amount of $91,667 principal per month, plus interest, commencing on February 28,
2005 and continuing on the last day of each succeeding month until the note is
paid. As of January 7, 2005, the outstanding principal balance due on the $5.5
million note is $1,190,600 and Now Solutions is delinquent on the principal of
the note by $267,500. Now Solutions has made all interest payments as of
December 31, 2004.

The Company had pledged a $1.5 million deposit as collateral pursuant to a
deposit pledge agreement to guarantee the first 24 payments of the loan to
finance the purchase of HRIS. In February 2003, the Company was notified that
Southern Pacific Bank went into FDIC receivership. Coast Business Credit is a
division of Southern Pacific Bank. The FDIC froze $750,000, which was the
remaining amount of the Company's deposit account pledged on behalf of Now
Solutions on the date of the notice. Of the remaining $750,000, the Company
received $100,000, which is that portion which was insured by the FDIC. The
uninsured portion of the remaining balance of the deposit pledge account, which
is $650,000, was applied to the outstanding debt of the Coast loan to Now
Solutions to reduce the monthly interest and loan balance. In September 2003,
Now Solutions issued two notes payable to the Company with principal amounts of
$215,000 and $435,000, respectively to replace the previous $650,000 note
payable. The interest on the notes for each month is the highest Prime Rate in
effect during said month, but in no event shall the rate of interest charged on
the balance due under the notes in any month be less than 8.5% per annum.
Pursuant to the terms of the notes, beginning on October 1, 2003 and continuing
on the first day of every month thereafter, Now Solutions was required to pay
the previous month(s) accrued interest. The principal and all amounts owing
under the notes shall be due and payable no later than December 31, 2004;
however the outstanding balance on the notes shall become due if either the
balance due under the original loan from Coast Business Credit is refinanced by
Now Solutions or the successor-in-interest bank to Coast Business Credit permits
earlier terms of payment by Now Solutions and agrees to waive any potential
default of any of Now Solutions` covenants under the Loan and Security Agreement
(the "Coast Loan") between Now Solutions and Coast Business Credit, dated
February 28, 2001. The $435,000 note has been paid down by Now Solutions and the
Company pledged its interest in the $215,000 note issued by Now Solutions to the
Company to secure $190,000 in loans made by Victor Weber to the Company in 2003
and $25,000 in expenses paid by Weber on the behalf of the Company that were
included in Trade Accounts Payable. Weber had the option to have the Company
assign the $215,000 note to Weber provided that Weber forgives all of the
Company's outstanding debt and cancels all underlying notes in connection with
the debt. Weber elected to make this assignment in January 2004. At that time,
all other notes and debts due Weber were cancelled. Now Solutions has made all
interest payments as of December 31, 2004.

         In December 2003, the Company settled its dispute with Arglen regarding
issues related to Now Solutions. The settlement resolved various allegations by
the Company and Arglen concerning violations of Now Solutions' Operating
Agreement. In February 2004, the parties completed the closing of the
settlement. The arbitration has been dismissed and any actions with respect to
Arglen and Gary Gyselen and the Company and its related parties, including Now
Solutions, were also dismissed, except that the California Superior Court, Los
Angeles County retained jurisdiction regarding the terms of the settlement
between the parties. In February 2004, the Company completed the closing of its
settlement with Arglen. Pursuant to the terms of the settlement, the Company
purchased Arglen's interest in Now Solutions for $1.4 million as follows: (a)
$800,000, which was paid at the closing and (b) $600,000, pursuant to a
non-interest bearing secured promissory note providing for payments of $200,000
in April 2004, $100,000 in June 2004, and $300,000 in September 2004, which was
issued at closing. The security interest of Now Solutions' assets on the secured
promissory note will be junior to Now Solutions' present indebtedness to WAMCO
31, Ltd. In addition, at closing, the Company cancelled 80,763,943 warrants held
by Arglen and issued to Arglen 20,000,000 unregistered restricted shares of its
the common stock of the Company (at a fair market value of $280,000), which is
subject to a "lock up" provision. This transaction resulted in the Company
recognizing $1,680,000 of goodwill which was written off in 2004. The note is in
default. In August 2004, Arglen obtained a default judgment in Los Angeles court
for the outstanding principal, plus attorney's fees and interest at the rate of
10% per annum. The Company has filed a motion in the Delaware court to stay the
enforcement of the judgment pending resolution of the Delaware action. Pursuant
to the settlement agreement, the Company is also obligated to issue 5,000,000
unregistered shares of common stock of the Company to Arglen, due to its failure
to file a SB-2 registration statement within 180 days from the settlement date.



                                       28
<PAGE>

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

         In February 2004, Robert Farias loaned $500,000 to Now Solutions, the
Company's wholly-owned subsidiary and received a $500,000 promissory note from
Now Solutions, secured by its assets and a 5% royalty on any sales by Now
Solutions of over $8,000,000 up to $500,000. The note bears interest at 10% per
annum and Now Solutions is required to make monthly interest payments for all
interest accrued in the previous month on the first day of each month beginning
April 1, 2004 and beginning on October 1, 2004 and continuing on the first day
of every month thereafter, monthly principal payments of $91,500 plus interest
until the note has been paid in full. In the event Now Solutions receives cash
proceeds due to a capital infusion or upfront licensing fees from a reseller
that is outside its normal scope of business (i.e., not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds remaining toward payment of the $500,000 note. In connection with the
loan, the Company issued (i) 5 year warrants to purchase 5,000,000 shares of
common stock at a $0.01 per share; (ii) 5 year warrants to purchase 5,000,000
shares of common stock of the Company at a $0.02 per share; (iii) 5 year
warrants to purchase 5,000,000 shares of common stock of the Company at a $0.03
per share, (iv) 5,000,000 unregistered shares of common stock of the Company (at
a fair market value of $75,000), and (v) an additional 5,000,000 shares of
common stock of the Company in the event that $250,000 was not paid toward the
loan on or before March 15, 2004, which were issued (at a fair market value of
$120,000). All of the foregoing warrants and stock are subject to "piggy-back"
registration rights. In addition, the Company also pledged a 30% ownership
interest in Now Solutions to ensure the making of the $500,000 loan to Now
Solutions. In connection with the amendment, Now Solutions entered into a
security agreement with the lender to guarantee the note. The security interest
of Now Solutions' assets on the secured promissory note will be junior to Now
Solutions' present indebtedness to WAMCO 32, Ltd and Arglen. Robert Farias is a
director of Now Solutions, a 100% owned subsidiary of the Company. The note is
in default. As of January 17, 2005, Now Solutions had made principal payments
totaling $183,000 to Robert Farias. In January 2005, Now Solutions was informed
by WAMCO 32 that these payments were not in compliance with the loan agreement
with WAMCO 32 and WAMCO 32 would be issuing a demand letter to Farias for the
$183,000.

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



                                       29
<PAGE>

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

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

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

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



                                       30
<PAGE>

CRITICAL ACCOUNTING POLICIES

         USE OF ESTIMATES

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

         CAPITALIZED SOFTWARE COSTS

         Software costs incurred internally in creating computer software
products are expensed until technological feasibility has been established upon
completion of a detailed program design. Thereafter, all software development
costs are capitalized until the point that the product is ready for sale and
subsequently reported at the lower of unamortized cost or net realizable value.
The Company considers annual amortization of capitalized software costs based on
the ratio of current year revenues by product to the total estimated revenues by
the product, subject to an annual minimum based on straight-line amortization
over the product's estimated economic useful life, not to exceed five years. The
Company periodically reviews capitalized software costs for impairment where the
fair value is less than the carrying value. During the year ended December 31,
2003 and 2002, no costs were capitalized.

         IMPAIRMENT OF LONG-LIVED ASSETS

         Effective January 1, 2002, the Company began applying the provisions of
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable through the estimated undiscounted cash flows expected to result
from the use and eventual disposition of the assets. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value. During 2002, the Company determined
that there was approximately $638,000 of impairment of goodwill, which was
located in EnFacet, Inc. During 2003, the Company determined that there was a
$2,873,997 of impairment in goodwill, of which $1,610,524 was located in Now
Solutions and $1,263,473 in the Company itself.

         REVENUE RECOGNITION

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

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

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



                                       31
<PAGE>

         STOCK-BASED COMPENSATION

         The Company has adopted the intrinsic value method of accounting for
employee stock options as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123) and
discloses the pro forma effect on net loss and loss per share as if the fair
value based method had been applied. For equity instruments, including stock
options, issued to non-employees, the fair value of the equity instruments or
the fair value of the consideration received, whichever is more readily
determinable, is used to determine the value of services or goods received and
the corresponding charge to operations.

         INVESTMENTS

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

In December 2004, the FASB issued FASB Staff Position No. FAS109-1 ("FSP FAS
109-1"), "Application of FASB Statement No. 109, Accounting for Income Taxes,
for the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004." FSP FAS 109-1 clarifies that the deduction
will be treated as a "special deduction" as described in Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." As such, the
special deduction has no effect on deferred tax assets and liabilities existing
at the date of enactment. The impact of the deduction will be reported in the
period in which the deduction is claimed. We are currently assessing the
financial impact of FSP FAS 109-1 on our consolidated financial statements.

FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION

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

         WE HAVE HISTORICALLY INCURRED LOSSES AND MAY CONTINUE TO DO SO IN THE
         FUTURE

         We have historically incurred losses. For the years ended December 31,
2003 and 2002, the Company had net losses applicable to common shareholders of
$(7,118,407) and $(3,924,210), respectively. Future losses are likely to occur.
Accordingly, we have and may continue to experience significant liquidity and
cash flow problems because our operations are not profitable. No assurances can
be given that we will be successful in reaching or maintaining profitable
operations.


                                       32
<PAGE>

         WE HAVE BEEN SUBJECT TO A GOING CONCERN OPINION FROM OUR INDEPENDENT
         AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS
         UNLESS WE OBTAIN ADDITIONAL FUNDING

         The report of our independent registered public accounting firm
included an explanatory paragraph in connection with our financial statements
for the year ended December 31, 2003. This paragraph states that our recurring
operating losses, negative working capital and accumulated deficit, the
substantial funds used in our operations and the need to raise additional funds
to accomplish our objectives raise substantial doubt about our ability to
continue as a going concern. Our ability to develop our business plan and to
continue as a going concern depends upon our ability to raise capital and to
achieve improved operating results. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

         THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT ON
         ITS ABILITY TO RAISE ADDITIONAL FUNDS AND TO ESTABLISH PROFITABLE
         OPERATIONS.

         The accompanying consolidated financial statements for the twelve
months ended December 31, 2003 and 2002, have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.

         The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. The Company has suffered significant recurring operating losses, used
substantial funds in its operations, and needs to raise additional funds to
accomplish its objectives. Negative shareholders' equity at December 31, 2003
was $9.3 million. Additionally, at December 31, 2003, the Company had negative
working capital of approximately $9.4 million (although it includes deferred
revenue of approximately $2.5 million) and has defaulted on several of its debt
obligations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.

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

         OUR SUCCESS DEPENDS ON OUR ABILITY TO GENERATE SUFFICIENT REVENUES
         TO PAY FOR THE EXPENSES OF OUR OPERATIONS

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

         OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL

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


                                       33
<PAGE>

         WE HAVE A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS
         ON DECEMBER 31, 2003 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT
         LIABILITIES ON THAT DATE

         We had a working capital deficit of approximately $9.4 million at
December 31, 2003, which means that our current liabilities exceeded our current
assets by approximately $9.4 million. Current assets are assets that are
expected to be converted into cash within one year and, therefore, may be used
to pay current liabilities as they become due. Our working capital deficit means
that our current assets on December 31, 2003 were not sufficient to satisfy all
of our current liabilities on that date.

         OUR OPERATING RESULTS MAY FLUCTUATE BECAUSE OF A NUMBER OF FACTORS,
         MANY OF WHICH ARE OUTSIDE OF OUR CONTROL

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

         o  the demand for our SiteFlash and Emily technology;

         o  the demands for Now Solutions' emPath product;

         o  the level of usage of the Internet;

         o  the level of user traffic on our Web sites;

         o  seasonal trends and budgeting cycles in sponsorship;

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

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

         o  costs incurred with respect to acquisitions;

         o  price competition or pricing changes in the industry;

         o  technical difficulties or system failures; and

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

         WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH AND INTEGRATING RECENTLY
         ACQUIRED COMPANIES

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

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

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

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

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

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

         o  unanticipated expenses related to technology integration;

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

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

         o  the potential unknown liabilities associated with acquired
            businesses.

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

         OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY
         TECHNOLOGY

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



                                       34
<PAGE>

         OUR STOCK PRICE HAS HISTORICALLY BEEN VOLATILE, WHICH MAY MAKE IT MORE
         DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU CHOOSE TO AT PRICES YOU
         FIND ATTRACTIVE

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

         OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
         DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY
         REQUIREMENTS

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

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

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

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

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

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

         THE COMPANY WILL LIKELY EXPERIENCE LOSSES FOR THE FORESEEABLE FUTURE

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


                                       35
<PAGE>

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS





                                       36
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm                     F-2

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

Notes to Consolidated Financial Statements                                  F-9


                                      F-1
<PAGE>

Report of Independent Registered Public Accounting Firm

Board of Directors
Vertical Computer Systems, Inc. and Subsidiaries
Los Angeles, California

We have audited the accompanying consolidated balance sheets of Vertical
Computer Systems, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the
related consolidated statements of operations and other comprehensive loss,
stockholders' deficit and cash flows for each of the two years in the period
ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
these financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vertical Computer
Systems, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the results
of their operations and cash flows for each of the two years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring
significant operating losses and at December 31, 2003, the Company had negative
working capital of approximately $9.4 million, a stockholders' deficit of $9.3
million, and had defaulted on several of its debt obligations. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


                                                /s/ BDO Seidman, LLP

Los Angeles, California
December 31, 2004


                                      F-2
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                             December 31,
                                                                     ---------------------------
                                                                         2003           2002
                                                                     ------------   ------------
Assets

Current assets:
<S>                                                                  <C>            <C>
   Cash                                                              $    962,454   $    946,035
   Restricted cash                                                        102,655        284,357
   Pledged cash                                                                --        650,000
   Securities available for sale                                            9,128          2,812
   Accounts receivable, net of allowance for bad debts
     of $121,004 and $129,252                                             982,281      2,058,306
   Other receivable                                                        75,085         98,505
   Employee receivables                                                    10,912        158,264
   Deferred tax asset - current portion                                        --         70,000
   Prepaid expenses and other assets                                      220,784         76,855
                                                                     ------------   ------------

Total current assets                                                    2,363,299      4,345,134
                                                                     ------------   ------------

Property and equipment, net of accumulated depreciation                   197,502        367,858
Goodwill and other intangibles, net                                     2,051,355      6,002,683
Deferred tax asset - long-term                                                 --        366,000
Deposits and other                                                            600          4,000
                                                                     ------------   ------------

Total assets                                                         $  4,612,756   $ 11,085,675
                                                                     ============   ============

Liabilities, Convertible Preferred Stock and Stockholder's Deficit

Current liabilities:
   Accounts payable and accrued liabilities                          $  4,993,437   $  3,416,027
   Deferred revenue                                                     2,491,685      2,568,840
   Payables to officers                                                        --         50,464
   Accrued income taxes                                                    18,000        480,000
   Current portion-convertible debentures                                  40,000             --
   Current portion-notes payable                                        4,226,482      2,650,971
                                                                     ------------   ------------

Total current liabilities                                              11,769,604      9,166,302

Convertible debentures                                                    420,000        205,000
Notes payable, net of discount and current portion                             --      3,001,712
Accrued dividends                                                       1,713,712      1,113,712
                                                                     ------------   ------------

Total liabilities                                                      13,903,316     13,486,726
                                                                     ------------   ------------

Contingency and commitments                                                    --             --
</TABLE>


                                      F-3
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (Continued)

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                           ----------------------------
                                                                               2003            2002
                                                                           ------------    ------------
<S>                                                                        <C>             <C>
Minority interest                                                                    --         299,283

Stockholders' Equity (Deficit)
   Series A 4% Convertible Cumulative Preferred stock; $0.001 par value;
     250,000 shares authorized; 50,000 shares issued and outstanding                 50              50
   Series B 10% Convertible Preferred stock; $0.001 par value; 375,000
     shares authorized; 7,200 shares issued and outstanding                      45,000          45,000
   Series C 4% Convertible Preferred stock; $100.00 par value; 200,000
     shares authorized; 50,000 shares issued and outstanding                    350,000         350,000
   Series D 15% Convertible Preferred stock; $0.001 par value; 300,000
     shares authorized; 25,000 shares issued and outstanding                    156,250         156,250

Common stock: $00001 par value, 1,000,000,000 shares authorized
   799,272,301 and 726,884,934 issued and outstanding                             7,993           7,270

   Additional paid-in capital                                                26,075,405      25,687,963
   Accumulated deficit                                                      (36,065,274)    (28,946,867)
   Accumulated other comprehensive income                                       140,016              --
                                                                           ------------    ------------

Total stockholders' deficit                                                  (9,290,560)     (2,700,334)
                                                                           ------------    ------------

Total liabilities and stockholders' deficit                                $  4,612,756    $ 11,085,675
                                                                           ------------    ------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                                  --------------------------------
                                                                       2003              2002
                                                                  --------------    --------------
Revenues:
<S>                                                               <C>               <C>
   Licensing and maintenance                                      $    5,047,800    $    6,277,364
   Software Development                                                       --            50,200
   Consulting Services                                                 1,419,257         1,450,690
   Other                                                                 189,515           280,058
                                                                  --------------    --------------

Total revenues                                                         6,656,572         8,058,312

Selling, general and administrative expenses                          10,124,809         9,748,788

Goodwill impairment                                                    2,873,997           638,000
                                                                  --------------    --------------

Operating loss                                                        (6,342,234)       (2,328,476)

Other expense                                                                 --           (38,487)

Interest income                                                            8,594            36,543

Interest expense                                                        (510,050)         (650,507)
                                                                  --------------    --------------

Net loss before minority interest and income taxes                    (6,843,690)       (2,980,927)

Income tax provision (benefit)                                           (26,000)           44,000
                                                                  --------------    --------------

Net loss before minority interest                                     (6,817,690)       (3,024,927)

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

Net loss                                                              (6,518,407)       (3,324,210)

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

Net loss applicable to common stockholders                            (7,118,407)       (3,924,210)
                                                                  ==============    ==============

Basic and diluted loss per share                                           (0.01)            (0.01)
                                                                  ==============    ==============

Basic and diluted weighted average of common shares outstanding      779,926,227       625,499,641
                                                                  ==============    ==============

Comprehensive loss and its components consist of the following:
   Net loss                                                       $   (6,518,407)   $   (3,324,210)
   Unrealized gain (loss) on securities available for sale                 6,316                --
   Translation adjustments                                               133,700                --
                                                                  --------------    --------------

Comprehensive loss                                                $   (6,378,391)   $   (3,324,210)
                                                                  ==============    ==============
</TABLE>

See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                                         Notes
                                                Common Stock                  Preferred Stock           Payable
                                          ---------------------------   --------------------------         To
                                             Shares         Amount         Shares         Amount        Officers
                                          ------------   ------------   ------------   ------------   ------------
<S>                                       <C>            <C>            <C>            <C>            <C>
Balance, December 31, 2001                 615,191,422   $      6,153        132,200   $    551,300   $         --

Shares issued for financing fee to
   Cornell Capital                          12,500,000            125             --             --             --

Proceeds from sales of Officers' shares
   collateralizing a note payable, to
   be repaid by issuing replacement
   shares                                           --             --             --             --        450,000

Issuance of replacement shares to
   Officers for note payable                51,303,932            513             --             --       (450,000)

Proceeds from sales of shares to
   Equilink                                  3,000,000             30             --             --             --

Conversion of debentures                    37,889,580            379             --             --             --

Issuance of shares for investor
   relations                                 5,000,000             50             --             --             --

Shares issued for financing fee on
   Webber note payable                       2,000,000             20             --             --             --

Issuance of warrants for officers and
   directors of GIS                                 --             --             --             --             --

Issuance of warrants for consulting
   services                                         --             --             --             --             --

Issuance of warrants for iNet option
   agreement                                        --             --             --             --             --

Issuance of warrants for with notes
   payable                                          --             --             --             --             --

Issuance of warrants for employee
   retention                                        --             --             --             --             --

Write-off Subscriptions Receivable                  --             --             --             --             --

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

Preferred stock dividends                           --             --             --             --             --

Net loss                                            --             --             --             --             --
                                          ------------   ------------   ------------   ------------   ------------

Balance, December 31, 2002                 726,884,934   $      7,270        132,200   $    551,300   $         --
                                          ============   ============   ============   ============   ============


<CAPTION>
                                                                                       Accumulated
                                                          Accumulated                     Other
                                          Subscription      Paid-In      Accumulated  Comprehensive
                                           Receivable       Capital        Deficit        Income          Total
                                          ------------   ------------   ------------   ------------   ------------
<S>                                       <C>            <C>            <C>            <C>            <C>
Balance, December 31, 2001                $     (2,000)  $ 24,670,149   $(25,022,657)  $         --   $    202,945

Shares issued for financing fee to
   Cornell Capital                                  --        199,875             --             --        200,000

Proceeds from sales of Officers' shares
   collateralizing a note payable, to
   be repaid by issuing replacement
   shares                                           --             --             --             --        450,000

Issuance of replacement shares to
   Officers for note payable                        --        449,487             --             --             --

Proceeds from sales of shares to
   Equilink                                         --         17,070             --             --         17,100

Conversion of debentures                            --        161,616             --             --        161,995

Issuance of shares for investor
   relations                                        --         23,450             --             --         23,500

Shares issued for financing fee on
   Webber note payable                              --         11,980             --             --         12,000

Issuance of warrants for officers and
   directors of GIS                                 --         23,467             --             --         23,467

Issuance of warrants for consulting
   services                                         --         42,419             --             --         42,419

Issuance of warrants for iNet option
   agreement                                        --         35,712             --             --         35,712

Issuance of warrants for with notes
   payable                                          --         13,640             --             --         13,640

Issuance of warrants for employee
   retention                                        --         16,098             --             --         16,098

Write-off Subscriptions Receivable               2,000         (2,000)            --             --             --

Beneficial conversion feature for
   convertible debentures                           --         25,000             --             --         25,000

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

Net loss                                            --             --     (3,324,210)            --     (3,324,210)
                                          ------------   ------------   ------------   ------------   ------------

Balance, December 31, 2002                $         --   $ 25,687,964   $(28,946,867)  $         --   $ (2,700,334)
                                          ============   ============   ============   ============   ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Preferred stock dividends                             --             --             --             --             --

Net loss                                              --             --             --             --             --

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

Translation adjustment                                --             --             --             --             --
                                            ------------   ------------   ------------   ------------   ------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Translation adjustment                                --             --             --        133,700        133,700
                                            ------------   ------------   ------------   ------------   ------------

Balance, December 31, 2003                  $         --   $ 26,075,405   $(36,065,274)  $    140,016   $ (9,290,560)
                                            ============   ============   ============   ============   ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>

                VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                Increase (Decrease) in Cash and Cash Equivalents


<TABLE>
<CAPTION>
                                                                                    Years ended December 31,
                                                                                 ----------------------------
                                                                                     2003            2002
                                                                                 ------------    ------------

Cash flows from operating activities:
<S>                                                                              <C>             <C>
   Net loss                                                                      $ (6,518,407)   $ (3,324,210)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Minority interest in net income (loss) of Subsidiary                            (299,283)        299,283
     Depreciation and amortization                                                  1,289,312       1,317,644
     Goodwill Impairment                                                            2,873,997         638,000
     Amortization of note discount                                                         --          51,976
     Stock compensation for warrants granted                                           38,982         156,336
     Issuing shares for services rendered                                             204,183         235,500
     Deferred tax assets                                                              436,000        (436,000)
     Allowance for bad debts                                                           (8,248)         55,602
     Write down marketable securities                                                      --          91,922
     Changes in operating assets and liabilities:
       Accounts receivable                                                          1,084,273      (1,072,307)
       Other receivable                                                                23,420         320,984
       Receivable from officers and employees                                         147,352        (113,377)
       Prepaid expenses                                                              (140,529)         17,535
       Accounts payable and accrued liabilities                                     1,577,410       1,492,129
       Deferred Revenue                                                               (77,155)        325,465
       Accrued income tax payable                                                    (462,000)        480,000
       Payable to officers                                                            (50,464)         50,464
                                                                                 ------------    ------------

Net cash provided by operating activities                                             118,843         586,946

Cash flows from investing activities:
   Proceeds from selling of marketable security                                            --          81,266
   Purchase of fixed assets                                                           (41,625)        (87,424)
                                                                                 ------------    ------------

Net cash used in investing activities                                                 (41,625)         (6,158)

Cash flows from financing activities:
   Pledge of cash deposit for bank Loan                                               650,000        (650,000)
   Proceeds from issuance of convertible debentures                                   420,000         100,000
   Payment of convertible debentures                                                  (20,000)        (10,000)
   Repayment of note payable                                                       (1,819,052)     (1,652,955)
   Proceeds from issuance of notes payable                                            392,851         500,000
   Release of restricted cash                                                         181,702       1,215,643
   Proceeds from sale of common stock                                                      --          17,100
                                                                                 ------------    ------------

Net cash used in financing activities                                                (194,499)       (480,212)

Effect of changes in exchange rates                                                   133,700              --

Net increase in cash and cash equivalents,                                             16,419         100,576

Cash and cash equivalents, beginning of period                                        946,035         845,459
                                                                                 ------------    ------------

Cash and cash equivalents, end of period                                         $    962,454    $    946,035
                                                                                 ============    ============

Supplemental disclosures of cash flow information:
   Cash paid during the year for interest
     Interest                                                                    $    218,556    $    402,353
                                                                                 ============    ============
</TABLE>

           See accompanying notes to consolidated financial statements


                                      F-8
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Organization and Basis of Presentation

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

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

Going Concern Uncertainty

The accompanying consolidated financial statements for the years ended December
31, 2003 and 2002, have been prepared assuming that the Company will continue as
a going concern which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.

The carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company has suffered significant recurring operating losses, used substantial
funds in its operations, and needs to raise additional funds to accomplish its
objectives. Negative stockholders' equity at December 31, 2003 was $9.3 million.
Additionally, at December 31, 2003, the Company negative working capital of
approximately $9.4 million (although it includes deferred revenue of
approximately $2.5 million) and has defaulted on several of its debt
obligations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.

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

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

Principles of Consolidation

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

Note 2.  Summary of Significant Accounting Policies

Cash and Cash Equivalents

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


                                      F-9
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

Revenue Recognition

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

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

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

Concentration of Credit Risk

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

Property and Equipment

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

Impairment of Long-Lived Assets

Effective January 1, 2002, the Company began applying the provisions of
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable through the estimated undiscounted cash flows expected to result
from the use and eventual disposition of the assets. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value. During 2002, the Company determined
that there was approximately $638,000 of impairment in goodwill, which was
located in Enfacet, Inc. During 2003, the Company determined that there was
approximately $2,873,000 of impairment in goodwill, which was located in Now
Solutions and Vertical.

Capitalized Software Costs

Software costs incurred internally in creating computer software products are
expensed until technological feasibility has been established upon completion of
a detailed program design. Thereafter, all software development costs are
capitalized until the point that the product is ready for sale and subsequently
reported at the lower of unamortized cost or net realizable value. The Company
considers annual amortization of capitalized software costs based on the ratio
of current year revenues by product to the total estimated revenues by the
product, subject to an annual minimum based on straight-line amortization over
the product's estimated economic useful life, not to exceed five years. The
Company periodically reviews capitalized software costs for impairment where the
fair value is less than the carrying value. During 2003 and 2002, no costs were
capitalized.


                                      F-10
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

Stock-based Compensation

The Company has adopted the intrinsic value method of accounting for employee
stock options as permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" (SFAS No. 123) and discloses the
pro forma effect on net loss and loss per share as if the fair value based
method had been applied. For equity instruments, including stock options, issued
to non-employees, the fair value of the equity instruments or the fair value of
the consideration received, whichever is more readily determinable, is used to
determine the value of services or goods received and the corresponding charge
to operations.

The following table illustrates the effect on net loss and loss per share as if
the Company had applied the fair value recognition provision of SFAS No. 123 to
stock-based employee compensation.

All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of the grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's consolidated
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value of the grant dates consistent with the method
of FASB 123, the Company's net loss and loss per share for the years ended
December 31, 2003 and 2002 would have been increased to the pro forma amounts
presented:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                           ----------------------------
                                                               2003            2002
                                                           ------------    ------------

<S>                                                        <C>             <C>
Net loss: as reported                                      $ (7,118,407)   $ (3,924,210)
   Add:  Total stock based employee compensation expense
     determined under fair  value method for all awards              --        (277,217)
                                                           ------------    ------------


Pro forma                                                  $ (7,118,407)   $ (4,201,427)
                                                           ------------    ------------


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

Pro forma                                                  $      (0.01)   $      (0.01)
</TABLE>

Investments

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

Income Taxes

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

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


                                      F-11
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

Earnings Per Share

Statement of Financial Accounting Standards FASB No. 128, "Earnings per Share",
which replaces the calculation of primary and fully diluted earnings (loss) per
share with basic and diluted earnings (loss) per share, is used to calculate
earnings per share. Basic earnings (loss) per share includes no dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted average number of shares outstanding during the period. Diluted
earnings (loss) per share reflect the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings
(loss) per share. As of December 31, 2003 and 2002, the Company had 372,487,684
and 296,274,805 potentially dilutive shares, respectively, which were not
included in the calculation of diluted loss per share because they were
anti-dilutive.

Fair Value of Financial Instruments

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

Use of Estimates

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

Advertising and Tradeshow Costs

The Company expenses advertising and tradeshow costs when incurred. Advertising
and tradeshow costs for the year ended December 31, 2003 and 2002, were
approximately $225,000 and $222,000, respectively. Now Solutions accounted for
100% of such costs.

Cash Reimbursements

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

Goodwill and Other Intangible Assets

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


                                      F-12
<PAGE>

Note 2.  Summary of Significant Accounting Policies (Continued)

Adoption of FIN No. 45

In November 2002, FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 expands on the accounting
guidance of Statements No. 5, 57, and 107 and incorporates without change the
provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45
will affect leasing transactions involving residual guarantees, vendor and
manufacturer guarantees, and tax and environmental indemnities. All such
guarantees will need to be disclosed in the notes to the financial statements
starting with the period ending after

December 15, 2002. For guarantees issued after December 31, 2002, the fair value
of the obligation must be reported on the balance sheet. Existing guarantees
will be grandfathered and will not be recognized on the balance sheet. The
adoption of this standard had no effect.

Adoption of SFAS No. 150

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


New Accounting Announcements Not Adopted Yet

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

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

Reclassifications

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


                                      F-13
<PAGE>

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

On February 28, 2001, the Company acquired 60% of equity interest in Now
Solutions, LLC (Now Solutions), a company that develops and maintains human
resource software, in exchange for $1 million in cash, which was paid to Now
Solutions, and warrants to purchase 80,763,943 shares of the Company's common
stock at a purchase price of $0.08 per share were granted to Arglen
Acquisitions, LLC ("Arglen"). Arglen negotiated Now Solutions' purchase of Ross
Systems assets related to its Payroll/Human Resources product including all
equipment, software and maintenance agreements. Based on the Black Scholes
option pricing model, the Company determined that the fair value of these
warrants was approximately $798,500 and recorded as goodwill accordingly. In
addition, Arglen and Stephen Parnes received a 40% interest in Now Solutions as
compensation for their services rendered in the process of consummating this
transaction. Consequently, the Company recognized additional goodwill of
$666,667 based on the valuation of $1 million accounting only for 60% equity
interest in Now Solutions. In January 2004, the Company purchased the remaining
5% minority interest in Now Solutions held by Stephen Parnes for $77,000 and
1,000,000 unregistered shares of Company common stock, subject to terms and a
"lock-up" provision. This transaction resulted in the Company recognizing
$80,000 of goodwill, which was written off in 2004. The Company and Arglen
settled their arbitration and litigation in December 2003. In February 2004, in
connection with the settlement, the Company purchased Arglen's 35% interest in
Now Solutions for $1,400,000 and 20,000,000 unregistered shares of common stock
of the Company, subject to terms and a "lock-up" provision. The Company's
purchase of Arglen's interest resulted in the Company recognizing $1,680,000 of
goodwill which was written off in 2004. Pursuant to the settlement agreement,
the Company also cancelled warrants to purchase 80,763,943 common shares of the
Company that were originally granted to Arglen in connection with the Company's
acquisition 60% of equity interest in Now Solutions. The Company currently owes
Arglen $600,000 under a promissory note issued to Arglen as part of the purchase
price of its 35% interest. This note is currently delinquent. Pursuant to the
settlement agreement, the Company was also obligated to issue 5,000,000
unregistered shares of common stock of the Company to Arglen. The Company is
awaiting the results of the pending Delaware action involving the Company,
Arglen and Ross before it issues these shares.

During 2001, the goodwill on Now Solutions' book was amortized on a
straight-line method over a period of five years. The amortization of goodwill
in Now Solutions for the year ended December 31, 2001 was $322,104. On the
consolidated basis, the Company recorded a total goodwill of $3,448,795
($1,932,628 + $666,667 + $798,500 + $51,000, which is the transaction cost
incurred by the Company) during 2001. The consolidated amortization of goodwill
in the year ended December 31, 2001 was $574,798, which was calculated on a
straight-line basis over a period of five years. During the year ended December
31, 2003, the Company determined that the goodwill resulting for the 60% equity
interest was impaired and all goodwill was written off as of December 31, 2003
resulting in a impairment charge of $2,873,397.

The note payable to Ross issued by Now Solutions in the amount of $1,000,000, is
unsecured and non-interest bearing. The note was recorded at a discount (which
will be amortized over the life of the note), and payments of $250,000 and
$750,000 were due in February 2002 and 2003, respectively. Since payments were
not received within three days from the due date, the note now bears interest at
10% per annum. In 2002, Now Solutions offset $250,000 payment through its
receivable from Ross. See Notes 15 and subsequent events section for details. At
December 31, 2003, the past due balance of the note outstanding was $750,000 and
the unamortized discount was zero.

Now Solutions obtained proceeds of $5,500,000 through a note payable to Coast
Business Credit ("Coast") to finance the purchase of HRIS from Ross and used the
excess amount for its working capital. The note payable to Coast Business Credit
("Coast"), issued by Now Solutions, Inc., in the principal amount of $5,500,000
bearing interest at prime plus 1.5% with a minimum interest of 8.5% per annum,
monthly payment of $91,500 of principal, plus interest, due April 28, 2006 (as
amended below), is secured with all of the assets of Now Solutions and a
$1,500,000 security deposit by the Company to guarantee the first 36 payments of
the loan and is subject to various loan covenants. In March 2003, Coast was
taken over by the FDIC and WAMCO 32, Ltd., purchased the loan. As of December
31,2004, the outstanding principal balance due on the $5.5 million note is
$1,198,100. In August 2003, WAMCO 32, Ltd. agreed to extend the due date of the
note from February 28, 2004 to August 28, 2004. In June 2004, the parties agreed
to amend the terms of the note and the loan. Pursuant to the amendment, the
interest was changed to 9% per annum and the $1,304,766 outstanding principal
balance shall be payable as follows: (a) $91,667 principal per month, plus
interest commencing on June 30, 2004 and continuing on each succeeding month
through September 30, 2004; (b) $7,500 principal per month, plus interest,
commencing on October 31, 2004 and continuing on each succeeding month through
January 31, 2005; (c) providing that Now Solutions has achieved revenues of $7.5
million and EBITDA (Earnings Before Interest, Taxes, Depreciation &
Amortization) of not less than $2,200,000 for the fiscal year 2004, $7,500
principal per month, plus interest, commencing on February 28, 2005 and
continuing on the last day of each succeeding month until June 30, 2005; and (d)
$91,667 principal per month plus interest, commencing on July 31, 2005 and
continuing on each succeeding month until the note is paid. In the event Now
Solutions does not qualify for reduced payments, the note will be payable in the
amount of $91,667 principal per month, plus interest, commencing on


                                      F-14
<PAGE>

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

February 28, 2005 and continuing on the last day of each succeeding month until
the note is paid. In connection with the amendment, Now Solutions is required to
pay WAMCO 32 5% of Now Solutions' revenues in excess of $8 million up to a
maximum of $250,000, beginning in the fiscal year that commences January 1,
2005. Also in connection with the amendment, the Company issued warrants to
purchase 3,000,000 shares of the common stock Company at an exercise price of
$0.03 per share or by cashless exercise, at the holder's election. The warrants
are subject to "piggy back" registration rights and a "lock-up" provision. Now
Solutions has made all interest payments as of December 31, 2004 but it is
$267,501 delinquent in principle payments.

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

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

In December 2003, the Company settled its arbitration and litigation with
Arglen, the minority partner of Now Solutions, regarding issues related to Now
Solutions. The settlement resolved various allegations by the Company and Arglen
concerning violations of Now Solutions' Operating Agreement. In February 2004,
the Company completed the settlement with Arglen. Pursuant to the terms of the
settlement, the Company purchased Arglen's interest in Now Solutions for $1.4
million as follows: (a) $800,000, which was paid at the closing and (b)
$600,000, pursuant to a non-interest bearing secured promissory note providing
for payments of $200,000 in April 2004, $100,000 in June 2004, and $300,000 in
September 2004, which was issued at closing. The security interest of Now
Solutions' assets on the secured promissory note will be junior to Now
Solutions' present indebtedness to WAMCO 32, Ltd. In addition, at closing, the
Company cancelled 80,763,943 warrants held by Arglen and issued to Arglen
20,000,000 shares of its the common stock of the Company (at a fair market value
of $280,000), which is subject to a "lock-up" provision . Pursuant to the
settlement agreement, the Company was also obligated to issue an additional
5,000,000 unregistered shares of common stock of the Company to Arglen. The note
is in default. In August 2004, Arglen obtained a default judgment in Los Angeles
court. The Company has filed a motion in the Delaware court to stay the
enforcement of the judgment pending resolution of the Delaware action.

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

Note 4.  Investments

During 2002, the Company sold 766,733 eResource Capital Group (RCG) shares for
$81,266 and recorded a realized loss of $91,922. The remaining 33,267 RCG shares
were adjusted into 4,610 shares for the 7-1 reverse stock split by RCG in 2002.
The value of 4,610 shares represented the fair market value of $9,128 at
December 31, 2003.


                                      F-15
<PAGE>

Note 4.  Investments (Continued)

During 2000, the Company paid $250,000 to acquire a 30% interest in TranStar
Systems, Inc. (TranStar), formerly Apollo Industries, Inc., a company that is in
the process of developing smart card technology. The Company accounted for the
investment under the equity method of accounting and recognized a $31,453 equity
loss in the unconsolidated affiliate for the year ended December 31, 2000. In
2001, the Company paid $25,000 to receive a royalty of 2% on all Apollo sales
until the original investment is recouped. After the original investment is
recouped, the Company shall receive 1% of all Apollo sales, up to a maximum of
$30,000 per year. The royalty agreement expires October 2020. At December 31,
2001, due to the uncertainty regarding the recovery of the royalty, the Company
wrote off the $25,000. In 2001, the Company loaned Apollo $24,000, which was due
on June 30, 2001 and an additional $24,000, which was due on July 16, 2001. The
loans are secured pursuant to a stock pledge in the amount of 500,000 shares of
Apollo for each of the two loans. Apollo is in default of the two loans and
since repayment is uncertain the Company has fully reserved the investment and
advances to Apollo at December 31, 2003 and 2002. In April 2003, the Company and
TranStar Systems, Inc. (TranStar) agreed to amend two $24,000 promissory notes
bearing interest at 10%, dated April 19 and May 8, 2001, and a royalty
agreement, dated October 14, 2000 whereby TranStar had agreed to pay a royalty
of 2% of all transaction fees up to $275,000 and 1% up to $3,000,000. Pursuant
to the agreement, the due date for the two $24,000 notes was extended to April
5, 2006 in exchange for increasing the royalty rate in the royalty agreement to
3% of any transaction fees and any other revenues generated in perpetuity. The
collateral to secure the note, consisting of 1,000,000 shares of TranStar common
stock, and the underlying security agreements remain in full force and effect.
In connection with the agreement, TranStar also released and indemnified the
Company from any obligations owed to TranStar or any third party. Also in April
2003, the Company and Mike Radlovic (Radlovic) entered into an agreement whereby
Radlovic would purchase the Company's interest in TranStar Systems, Inc.
(TranStar), formerly Apollo Industries, Inc. Pursuant to the agreement, the
Company transferred all of its ownership representing 3,000,000 shares of
TranStar common stock to Radlovic. In consideration of the sale, Radlovic issued
a $250,000 note bearing interest at 10% per annum due in April 2007. The note is
secured by 5,000,000 shares of TranStar common stock owned by Radlovic. Radlovic
is the President, CEO, and a major stockholder of TranStar. As of December 31,
2003, the investment in notes receivable and all advances to Transtar have been
fully reserved.

Note 5.  Related Party Transactions

During the years ended December 31, 2002 and 2001, the Company paid Parker,
Mills & Patel LLP ("PMP"), its former general legal counsel, approximately
$4,000 and $133,371 in exchange for consideration for legal services rendered.
William Mills, a partner at PMP, is also a director of the Company. The Company
issued 2,621,622 shares of common stock in July 2001 and 1,560,000 shares of
common stock in November 2001 with an aggregate value of $121,000 to William
Mills, a director of the Company, of Parker, Mills & Patel LLP for partial
payment of legal services. The 2,612,622 shares and 1,560,000 shares were
pursuant to an S-8 registration statement filed on November 8, 2001.

During 2001, PMP made advances of approximately $30,000 to third party vendors
on behalf of the Company. In exchange, PMP received a 6% promissory note due
January 2002 and three-year warrants to purchase 300,000 shares of common stock
at a purchase price of $0.014 per share. The warrants vested upon issuance. At
December 31, 2003, the outstanding balance under of $23,974 was in default.
These warrants expired in November 2004.

In December 2001, the Company executed a $425,000 note payable to Brighton
Opportunity Fund, LP, a third party. The Company received proceeds of $300,000
and paid a commitment fee of $125,000. The note accrues interest at 12% per
annum and was due January 31, 2002. The note was secured by 36,303,932 shares of
the Company's common stock that were owned by Mountain Reservoir Corporation,
and 15,000,000 shares that are owned by Mr. Luiz Valdetaro, Chief Technology
Officer of the Company, to cover any shortfall in the event of default. Mountain
Reservoir Corp. is a corporation controlled by the W5 Family Trust. Mr. Wade,
the President and CEO of the Company, is the trustee of the W5 Family Trust. In
January 2001, the Company executed separate indemnity and reimbursement
agreements with Mountain Reservoir Corporation and Mr. Luiz Valdetaro to cover
their pledges of 36,303,932 and 15,000,000 shares of common stock, respectively.
Pursuant to these agreements, the Company agreed to reimburse Mountain Reservoir
and Mr. Luiz Valdetaro for any shares sold as collateral to cover the default of
any loan. On January 31, 2002, the note was in default. The lender disposed of
19,751,000 shares of the above totaling 51,303,932 shares for $254,382. In
September 2002, the lender informed the Company that the remaining 31,552,932
shares were transferred to these two third parties and that the debt was
satisfied as of April 1, 2002. Consequently, the note payable has been
cancelled. Accordingly, the Company reclassified the note payable to the third
party including accrued interest to the note payable to officers as these two
officers loaned their shares of common stock to the Company.


                                      F-16
<PAGE>

Note 5.  Related Party Transactions (Continued)

In September and October 2002, the Company issued 36,303,932 and 15,000,000
shares of its common stock to Mountain Reservoir Corporation and Mr. Luiz
Valdetaro, respectively, in accordance with the executed indemnity and
reimbursement agreements concerning a $425,000 note payable issued by the
Company to Brighton Opportunity Fund, LP, a third party in December 2001. At the
time of issuing common stock, the value of the note payable plus accrued
interest was approximately $450,000. The Company reclassified from note payable
to officers to common stock and additional paid in capital. In November 2002,
Mountain Reservoir Corporation and Mr. Luiz Valdetaro assigned their rights to
obtain the necessary accounting information from these two third parties to the
Company.

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

For the year ended 31, 2002, the Company had borrowed an aggregate of $49,085
from Richard Wade, the Company's President and Chief Executive Officer of the
Company, of which none was still outstanding as of December 31, 2003. Mr. Wade
is also a director of the Company.

In July 2001, the Company agreed to pay $4,500 per month to Stephen Rossetti to
provide government business consultation services on a month-to-month basis. In
addition, the consultant is entitled to receive 3-year warrants to purchase
common stock equal to $5,500 per month based on a strike price of the previous
average five day market price on the date of issuance. In May 2003, the Company
issued a $7,500 promissory note bearing interest at twelve percent (12%), due in
June 2003, to Stephen Rossetti in connection with a loan in the same amount. Mr.
Rossetti is the CEO and a Director of Government Internet Systems, Inc., and a
director of Now Solutions, Inc., which are both subsidiaries of the Company. In
September 2002, the Company amended the consulting agreement of Stephen Rossetti
to provide services in the capacity of Executive V.P. Governmental Affairs, in
consideration for 3 year warrants to purchase 1,000,000 shares of its common
stock at a share price of $0.012, $30,000 for services rendered through August
31, 2002, and $5,000 per month for a period of one year. The warrants were
issued at a fair market value of $6,191 (valued using the Black-Scholes
valuation model). In October 2004, the Company and Stephen Rossetti agreed to
amend the terms of the $7,500 note payable issued in May 2003 and the agreement
for consulting services. In consideration for canceling outstanding debt under
the note payable and the consulting agreement, the Company issued 6,500,000
shares of the common stock of the Company at a fair market value of $84,500. As
of January 7 2005, of the 4,150,145 warrants issued for consulting services for
the Company and GIS, 2,232,288 warrants have expired.

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


                                      F-17
<PAGE>

Note 5.  Related Party Transactions (Continued)

In January 2004, Victor Weber elected to make the assignment of a $215,000
promissory note due December 31, 2004, issued by Now Solutions to the Company in
September 2003. In connection with the assignment, the notes payable for
$100,000, $50,000 and $40,000 issued to Mr. Weber as well as the $25,000
outstanding in accounts payable owed to Weber were cancelled. The interest on
the $215,000 note for each month is the highest Prime Rate in effect during said
month, but in no event shall the rate of interest charged on the balance due
under the notes in any month be less than 8.5% per annum. In September 2004, the
Company and Victor Weber agreed to amend the terms of the $215,000 note issued
by Now Solutions to the Company and assigned to Weber. Pursuant to the terms of
the amendment, the Company agreed to issue 2,000,000 unregistered shares of
common stock of the Company (at a fair market value of $24,000), in exchange for
amending the note. In the event the Company does not make full payment by
December 31, 2004, the Company shall issue to Weber an additional 2,000,000
unregistered shares of common stock of the Company and the Note will
automatically be amended as follows: (a) the maturity date of the Note shall be
extended to December 31, 2005; (b) the payment terms of the Note shall be
amended so that, beginning in 2005, Now Solutions shall make (i) monthly
interest payments for all accrued interest during the previous month, (ii)
$50,000 in principal payments which will be due the end of each quarter
beginning March 31, 2005 and (iii) a final payment of all accrued interest and
principal which will be due no later than December 31, 2005. In addition, if the
Note is amended as set forth above Weber shall receive 2.5% royalty of sales by
Now Solutions of its software that exceed $8,000,000 per year up to $200,000.
The Company is delinquent for the December 2004 interest payment as of January
7, 2005. Victor Weber is a Director and President of Government Internet
Systems, Inc., a subsidiary of the Company.

In February 2004, Robert Farias loaned $500,000 to Now Solutions, the Company's
wholly-owned subsidiary and received a $500,000 promissory note from Now
Solutions, secured by its assets and a 5% royalty on any sales by Now Solutions
of over $8,000,000 up to $500,000. The note bears interest at 10% per annum and
Now Solutions is required to make monthly interest payments for all interest
accrued in the previous month on the first day of each month beginning April 1,
2004 and beginning on October 1, 2004 and continuing on the first day of every
month thereafter, monthly principal payments of $91,500 plus interest until the
note has been paid in full. In the event Now Solutions receives cash proceeds
due to a capital infusion or upfront licensing fees from a reseller that is
outside its normal scope of business (i.e., not part of software sales in the
regular course of business), Now Solutions is required to pay 50% of such
proceeds remaining toward payment of the $500,000 note. In connection with the
loan, the Company issued (i) 5 year warrants to purchase 5,000,000 shares of
common stock at a $0.01 per share; (ii) 5 year warrants to purchase 5,000,000
shares of common stock of the Company at a $0.02 per share; (iii) 5 year
warrants to purchase 5,000,000 shares of common stock of the Company at a $0.03
per share, (iv) 5,000,000 unregistered shares of common stock of the Company (at
a fair market value of $75,000), and (v) an additional 5,000,000 shares of
common stock of the Company in the event that $250,000 was not paid toward the
loan on or before March 15, 2004, which were issued (at a fair market value of
$120,000). All of the foregoing warrants and stock are subject to "piggy-back"
registration rights. In addition, the Company also pledged a 30% ownership
interest in Now Solutions to ensure the making of the $500,000 loan to Now
Solutions. In connection with the amendment, Now Solutions entered into a
security agreement with the lender to guarantee the note. The security interest
of Now Solutions' assets on the secured promissory note will be junior to Now
Solutions' present indebtedness to WAMCO 32, Ltd and Arglen. Robert Farias is a
director of Now Solutions, a 100% owned subsidiary of the Company. The note is
in default. As of January 17, 2005, Now Solutions had made principal payments
totaling $183,000 to Robert Farias. In January 2005, Now Solutions was informed
by WAMCO 32 that these payments were not in compliance with the loan agreement
with WAMCO 32 and WAMCO 32 would be issuing a demand letter to Farias for the
$183,000.

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


                                      F-18
<PAGE>

Note 5.  Related Party Transactions (Continued)

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

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

In February 2004, the Company purchased a 21% ownership interest in MedData
Solutions, Inc. from Robert Farias. In exchange, the Company issued 9,000,000
unregistered shares of the common stock of the Company (at a fair market value
of $135,000), which shall be subject to "piggy-back" registration rights. Robert
Farias is a director of Now Solutions, a 100% owned subsidiary of the Company.


                                      F-19
<PAGE>

Note 6.  Goodwill and Other Intangible Assets

Goodwill and other intangible assets are as follows:

                                               Years ending December 31,
                                             ----------------------------
                                                2003            2002
                                             ------------    ------------


Goodwill                                     $         --    $  3,448,795
Accumulated amortization                               --        (574,798)

Net                                                    --       2,873,997

Purchased software source code                  4,753,972       4,753,972
Other amortizable intangible assets               305,337         269,358
Accumulated amortization                       (3,007,974)     (1,894,644)
                                             ------------    ------------

Net                                             2,051,355       3,128,686
                                             ------------    ------------

Total goodwill and other intangible assets   $  2,051,355    $  6,002,683
                                             ============    ============

At December 31, 2002, the Company determined that the goodwill of approximately
$638,000 in Enfacet (one of the Company's subsidiaries) was impaired in
accordance with SFAS No 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" and that the goodwill in Now Solutions and Vertical
(consisting of a report unit) was not impaired based on a valuation report
rendered by a third party valuation specialist. At December 31, 2003, due to the
deteriorated operating and financial situations in Now Solutions the Company
determined that the remaining outstanding balances of goodwill in Now Solution
($1,610,524) and Vertical ($1,263,473) were impaired in accordance with SFAS No
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

In accordance with SFAS No 142, the Company amortized intangible assets other
than goodwill on a straight-line basis over their estimated useful lives of five
years. For the years ended December 31, 2003 and 2002, respectively,
amortization expense consists of the following:

Years ending December 31               2003         2002
                                    ----------   ----------

Software sources code               $1,043,607   $1,043,108
Other purchased intangible assets       33,724       73,309
                                    ----------   ----------

Total                               $1,077,331   $1,116,147
                                    ==========   ==========

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

Years ending December 31                            2003
                                                 ----------
      2004                                       $1,061,729
      2005                                          829,461
      2006                                          160,165
                                                 ----------

Total                                            $2,051,355
                                                 ==========

                                      F-20
<PAGE>

Note 7.  Property and Equipment

Property and equipment consist of the following:

                                                     Years ending December 31,
                                                  -----------------------------
                                                       2003             2002
                                                  ------------     ------------
Equipment                                         $    724,408     $    677,518
Leasehold improvements                                  73,880           73,849
Furniture and fixtures                                  33,287           34,624
                                                  ------------     ------------

Total                                                  831,575          785,991

Accumulated depreciation                              (634,073)        (418,133)
                                                  ------------     ------------

                                                  $    197,502     $    367,858
                                                  ============     ============

Depreciation expense for the year ended December 31, 2003 and 2002 was $211,981
and $201,497, respectively.

Note 8. Accounts Payable and Accrued Expenses

Accounts payable and accrued liabilities consist of the following:

                                                      Years ending December 31,
                                                     ---------------------------
                                                         2003           2002
                                                     ------------   ------------

Accounts payable                                     $  1,498,766   $  1,493,561
Accrued payroll                                         1,353,457        844,292
Accrued payroll tax and penalties                         503,923        342,600
Accrued liabilities                                     1,637,291        735,573
                                                     ------------   ------------

                                                     $  4,993,437   $  3,416,026
                                                     ============   ============

Note 9.  Other Receivable

Other receivable of $75,085 and $98,505 at December 31, 2003 and 2002
represented the amounts due from Ross Systems, Inc. ("Ross") for Now Solutions
customer prepayments on maintenance contracts for the period subsequent to the
acquisition. Now Solutions and Ross reached a mutual agreement to offset a
$250,000 note payable due to Ross in 2002 against the other receivable of
$419,489 due from Ross at the end of 2001. In addition, Now Solutions is
withholding payment on its $750,000 (the remaining note payable to Ross until
the resolution of the derivative lawsuit filed by the Company on behalf of Now
Solutions and the resolution of Ross' motion (filed in March 2003) for summary
judgment in lieu of a complaint against Now Solutions to collect the $750,000
could be reached.


                                      F-21
<PAGE>

Note 10.  Notes Payable and Convertible Debts

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2003            2002
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>
Note payable to Coast issued by Now Solutions in principal of $5,500,000 bearing
interest at prime (4.25% and 4.75% at December 31, 2003 and 2003) plus 1.5% with
a minimum interest of 8.5% per annum, monthly payment of $91,500 of principal,
plus interest, due February 2004. The note is secured with all of the assets of
Now Solutions, LLC and a $1,500,000 security deposit by the Company to guarantee
the first 36 payments of the loan and is subject to various loan covenants. At
December 31, 2003, Now Solutions was not in compliance with the loan covenants
Also see Note 3, under Now Solutions, for subsequent event. Now Solutions has
made all interest payments as of December 31, 2004 but it is $267,501 delinquent
in principle payments. As of December 31, 2004, Now Solutions owed $1,190,600 of
which $267,500 is delinquent                                                           $  1,829,183    $  3,578,538

Note payable to Ross issued by Now Solutions in the amount of $1,000,000. The
note is unsecured and non-interest bearing. The note was recorded at a discount
(which will be amortized over the life of the note), payments of $250,000 and
$750,000 to be due in February 2002 and 2003, respectively. If a payment is not
received within three days from the due date, the note will begin to bear
interest at 10% per annum. In 2002 Now Solutions offset $250,000 payment through
its receivable from Ross (See Notes 3 and 9) in terms of the agreement between
Now Solutions and Ross. See also Note 15, litigation, for subsequent event. At
December 31, 2003 and 2002, the unamortized discount was $0 and $11,291,
respectively                                                                                750,000         738,709

Note payable in the amount of $27,558 to a law firm, a related party, bearing
interest at 6% per annum, unsecured, principal and interest due at January 2002
The note is delinquent                                                                       23,974          23,974

Note payable in the amount of $28,190 to Mr. Luiz Valdetaro, an officer of the
Company, bearing interest at 10% per annum, unsecured, principal and interest
due on demand                                                                                    --          21,039

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

Note payable in the amount of $27,000 to a third party, payable upon demand                  27,000          12,000

Note payable to a third party lender in the amount of a $239,004 bearing
interest at 13% per annum and unsecured, with a $65,000 payment made in December
2002, commencing with monthly payment of $75,00 beginning in March 2003. This
note was issued in 2002 to replace the note of $211,137 issued in August 2001 to
a third party lender, bearing interest at 12% per annum. In March 2003, the note
was amended that the Company agreed to pay the interest and expenses responsible
by the lender for a third party loan secured on the lender's behalf instead of
paying to the lender and the Company agreed to begin making monthly payment of
$7,500, beginning on June 1, 2003. Pursuant to the extension in December 2003,
the Company is required to make monthly installment payments of $7,500,
beginning on February 1, 2004, until the balance under the note has been paid
The note is in default subsequent to February 1, 2004                                       167,141         167,141

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


                                      F-22
<PAGE>

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2003            2002
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>
Note payable in the amount of $50,000 to a third party lender, bearing interest
at the rate of 12% per annum. In March 2003, the parties entered into an
amendment, whereby the parties agreed to pay accrued interest in the amount of
$4,200 for this note and to extend the maturity date to June 1, 2004. Beginning
in July 2003, the above interest payments shall be replaced with a monthly
installment payment of $5,000, with the initial payments applied first to the
$25,000 note (issued below) and then to the $50,000 note. In connection with the
amendment, the Company issued three-year warrants to purchase 1,500,000 shares
of its common stock at a price of $0.004 per share.  The Company is in default
subsequent to April 1, 2003                                                                  50,000          50,000

Note payable in the amount of $25,000 to a third party lender, bearing interest
at 12% per annum, secured by 10,000,000 shares of the Company's common stock
that are owned by Mountain Reservoir Corporation, controlled by W5 Family Trust,
of which Richard Wade (CEO of the Company) is trustee, due in December 2002. In
March 2003, the parties entered into an amendment. Pursuant to the amendment,
the Company agreed to pay accrued interest in the amount of $1,170 for this
$25,000 note. Beginning in July 2003, the above interest payments shall be
replaced with monthly payments of $5,000 with the initial payments applied first
to the $25,000 note and then to the $50,000 (the above) note issued. The Company
is in default subsequent to April 1, 2003                                                    12,583         12,5583


Note payable in the amount of $280,000, bearing interest at 4% per annum and
issued to Robert Farias on October 31, 2001, was amended by the parties in March
2003. Pursuant to the amendment, the payment of principal would be paid in
monthly installment in the amount of $5,000, which were to be replaced with
monthly payments of $10,000 beginning in January 2004. All interest would be due
on the day the principal is paid in full. In exchange for the extensions, the
interest rate will accrue at the rate of 12% from the date the note was issued
In February 2004, the Company and Mr. Farias amended the $280,000 note issued to
Mr. Farias on October 31, 2001 and the $181,583 note issued to Mr. Farias on
October 17, 2002. Any default on these notes was waived, and the Company agreed
to make the following payments on these notes: (i) $20,000, which was paid
toward the $181,583 note on February 20, 2004; (ii) fifty percent (50%) of the
remaining past-due amounts by March 20, 2004; and (iii) the all remaining
past-due amounts to bring the notes current by April 20, 2004. In the event the
Company does not pay the amounts in a timely manner, then all amounts still
owing under these notes will be considered in default and the following shall
apply: (i) all such remaining amounts will be added to the secured loan amounts
and will be subject to the security interest and pledge agreements under the
$84,000 promissory note issued by the Company's subsidiary, Enfacet, to Mr.
Farias on June 1, 2001; (ii) the $14,640 monthly payments to be made under the
$84,000 note will be applied to the $280,000 and $181,583 notes until these
notes are paid in full; and (iii) with respect to cash proceeds Now Solutions
receives due to a capital infusion or upfront licensing fees from a reseller
that is outside its normal scope of business (i.e., not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds remaining after the $500,000 note payable issued by Now Solutions to
Mr. Farias on February 13, 2004 has been paid in full toward the $280,000 and
$181,583 notes if the Company is not current in its payments. The $280,000 note
is secured by SiteFlash technology owned by the Company. Robert Farias is a
director of Now Solutions, a 100% owned subsidiary of the Company.  The note is
in default                                                                                  237,626         252,626
</TABLE>


                                      F-23
<PAGE>

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2003            2002
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>
Note payable in the amount of $181,584 issued to Robert Farias, bearing interest
at 12% per annum, payable as follows: (i) an initial installment of $10,000
payable upon execution; (ii) monthly payment of $5,000 beginning November 5,
2002 and (iii) monthly $10,000 payment beginning May 15, 2003 until all amounts
under the note have been paid in full. The note is secured by 10,450,000 shares
of the Company's common stock that are owned by Mountain Reservoir Corp. to
cover any shortfall. Mountain Reservoir Corporation is a corporation controlled
by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the
trustee of the W5 Family Trust. This note was issued to replace two notes being
previously issued; each had outstanding balance of $100,000 at December 31,
2001. In February 2004, the Company and Mr. Farias amended the $280,000 note
issued to Mr. Farias on October 31, 2001 and the $181,583 note issued to Mr.
Farias on October 17, 2002. Any default on these notes was waived, and the
Company agreed to make the following payments on these notes: (i) $20,000, which
was paid toward the $181,583 note on February 20, 2004; (ii) fifty percent (50%)
of the remaining past-due amounts by March 20, 2004; and (iii) the all remaining
past-due amounts to bring the notes current by April 20, 2004. In the event the
Company does not pay the amounts in a timely manner, then all amounts still
owing under these notes will be considered in default and the following shall
apply: (i) all such remaining amounts will be added to the secured loan amounts
and will be subject to the security interest and pledge agreements under the
$84,000 promissory note issued by the Company's subsidiary, Enfacet, to Mr.
Farias on June 1, 2001; (ii) the $14,640 monthly payments to be made under the
$84,000 note will be applied to the $280,000 and $181,583 notes until these
notes are paid in full; and (iii) with respect to cash proceeds Now Solutions
receives due to a capital infusion or upfront licensing fees from a reseller
that is outside its normal scope of business (i.e., not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds remaining after the $500,000 note payable issued by Now Solutions to
Mr. Farias on February 13, 2004 has been paid in full toward the $280,000 and
$181,583 notes if the Company is not current in its payments. The $280,000 note
is secured by SiteFlash technology owned by the Company. Robert Farias is a
director of Now Solutions, a 100% owned subsidiary of the Company.  The note is
in default                                                                                  133,034         163,034

Note payable in the amount of $65,000 to Victor Weber, bearing interest at 13%
per annum, unsecured, due in March 2003, and requiring that the minimum accrued
interest payments will be no less than $2,500. Weber is a Director, President
and Treasurer of the Company's newly established subsidiary: Government Internet
Systems, Inc., a Nevada corporation. In March 2003, the due date for payment of
principal and interest on the note was extended to July 1, 2003. In July this
note and the $45,000 notes (see below) were cancelled and replaced with a
$100,000 note and a $50,000 note (see below)                                                     --          65,000

Note payable in the amount of $45,000 to Victor Weber, bearing interest at 13%
per annum, unsecured, with principal and interest due in March 2003, and also
provides that the minimum accrued interest payments will be no less than $2,500
The note is due in January 2003. Weber is a Director, President and Treasurer of
the Company's newly established subsidiary: Government Internet Systems, Inc., a
Nevada corporation. In March 2003, the due date for payment of principal and
interest on the note was extended to July 1, 2003                                                --          45,000
</TABLE>


                                      F-24
<PAGE>

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2003            2002
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>

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

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

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

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


                                      F-25
<PAGE>

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2003            2002
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>
Note payable in the amount $25,000 promissory note, bearing interest at 10% per
annum, was issued in April 2003 to a consultant of the Company's subsidiary,
EnFacet, Inc., for past services rendered. The note is payable in monthly $1,000
installments beginning in May 2003 to be replaced by $2,000 monthly installments
beginning in October 2003.  The note is currently delinquent                                 25,000              --

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

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

Note payable issued in May 2003 in the amount of $7,500 bearing interest at 12% per
annum, due in June 2003, to Stephen Rossetti in connection with a loan in the same
amount. Mr. Rossetti is the CEO and a Director of Government Internet Systems,
Inc., a subsidiary of the Company. This note was cancelled in October 2004 pursuant
to an agreement.  Please see Subsequent Event, Note 17                                        7,500              --

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


                                      F-26
<PAGE>

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2003            2002
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>
Note payable in the amount of $84,000 issued by EnFacet to Robert Farias, dated
June 1, 2001, bearing interest at 8% per annum, unsecured, with principal and
interest due on June 1, 2002. EnFacet was in default at December 31, 200. In
March 2003, both parties entered into an amendment. Pursuant to the amendment,
the due date was extended to March 17, 2004 in exchange for increasing the
interest rate from 8% to 12% at which interest will be accrued from the date the
note was issued. In addition, EnFacet shall make monthly payments of $1,000
commencing in April 2003. In February 2004, the Company and Robert Farias waived
any defaults on the note and agreed that the note will be payable as follows:
once Vertical's subsidiary, Now Solutions, has paid off the entire balance due
under the $500,000 note issued by Now Solutions to Farias on February 13, 2004,
sixteen percent (16%) of any remaining amounts from the final $91,500
installment payment on the $500,000 note shall be applied to the $84,000 note
Thereafter, Vertical or, at Vertical's option, Now Solutions, shall continue to
make monthly principal payments of $14,640 beginning on the first day of the
following month until all monies due under the $84,000 note has been paid. In
connection with the amendment, Now Solutions entered into a security agreement
with the lender to guarantee the note. The security interest of Now Solutions'
assets on the secured promissory note will be junior to Now Solutions' present
indebtedness to WAMCO 32, Ltd, Arglen Acquisitions, and Robert Farias in
connection with the $500,000 note. The $280,000 note is secured by SiteFlash
technology owned by the Company. Robert Farias is a director of Now Solutions, a
100% owned subsidiary of the Company.  The note is in default                                84,000          84,000

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

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

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

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


                                      F-27
<PAGE>

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2003            2002
                                                                                       ------------    ------------
<S>                                                                                    <C>             <C>
Note Payable in the amount of $40,000 issued by Government Internet Systems,
Inc. to a third party dated November 19, 2003, bearing an interest of 10% per
annum, with principal and interest due on November 19, 2004. The Company agreed
to issue a 1.5% ownership interest of its subsidiary, Government Internet
Systems, Inc. to the third party in connection with this note. In addition, the
lender will be entitled to receive a 1.5% royalty on net sales of products by
GIS in the United States up to $200,000 and the Company issued 1,000,000
unregistered shares of Company's common stock (with a fair market value of
$4,000). The Note is secured by 3,000,000 shares of common stock of the Company
that were owned by Mountain Reservoir Corporation. Mountain Reservoir Corp. is a
corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO
of the Company, is the trustee of the W5 Family Trust. The Company currently
owns 85% of Government Internet Systems, Inc., and will issue a 1.5% ownership
interest from share of stock in GIS. $5,000 of this note was not funded until
January 2004. This note is delinquent                                                        35,000              --
                                                                                       ------------    ------------

                                                             Total notes payable          4,226,482       5,652,683
                                                             Current maturities          (4,226,482)     (2,650,971)
                                                                                       ------------    ------------

                                              Long-Term portion of notes payable       $         --    $  3,001,712
                                                                                       ------------    ------------
</TABLE>


                                      F-28
<PAGE>

Note 10.  Notes Payable and Convertible Debts (Continued)

Convertible Debentures

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                   ---------------------------
                                                                                       2003           2002
                                                                                   ------------   ------------
<S>                                                                                <C>            <C>

Convertible debentures dated September 11, 2001, bearing interest at 6% per
annum, convertible into shares of the Company's common stock at either 120% of
the closing bid price on the date of agreement or 80% of the three lowest
closing bid prices 20 days prior to the conversion. The debentures are
convertible at the option of the holder at any time after the purchase
Principal and interest are due at maturity on September 1, 2006. In January
2003, the remaining $50,000 of principal was converted into 12,853,470 shares
of the Company's common stock                                                      $         --   $     50,000

Convertible debentures dated October 5, 2001, bearing interest at 6 % per annum,
convertible into shares of the Company's common stock at either 120% of the
closing bid price on the date of agreement or 80% of the three lowest closing
bid prices 20 days prior to conversion. The debentures are convertible at the
option of the holder at any time after the purchase. Principal and interest are
due at maturity on October 5, 2006. In January 2003, the remaining $55,000 of
principal was converted into 14,138,817 shares of the Company's common stock                 --         55,000

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

Convertible debentures dated April 14, 2003, bearing no interest, convertible
into shares of common stock at 100% of the lowest closing bid price 3 days prior
to conversion. The debenture may be redeemed for 100% of the any portion of the
principal that has not been converted by the holder as of the date of the notice
of redemption. Principal and interest are due at maturity on April 2006. As of
December 31, 2004 no debentures have been converted                                     190,000             --

Convertible debentures dated April 14, 2003, bearing interest at 5% per annum,
convertible into shares of common stock at either $0.03 or 80 % of the lowest
closing bid price for the 5 trading days prior to the conversion. Principal and
interest are due at maturity on April 2006. As of December 31, 2004, no
debentures have been converted                                                          200,000             --

In December 2003, the Company issued a debenture in the amount of $30,000 to a
third party. The Company received net proceeds of $26,000 for the debenture. The
debt accrues interest at 5% per annum and is due December 2005. The holder may
convert the debenture into shares of common stock at 100% of the closing price
for the preceding trading day after the Company receives notice of conversion
As of December 31, 2004, no conversions have taken place                                 30,000             --
                                                                                   ------------   ------------

                                                    Total convertible debentures        460,000        205,000
                                                              Current maturities         40,000             --
                                                                                   ------------   ------------
                                     Long-term portion of convertible debentures   $    420,000   $    205,000
                                                                                   ------------   ------------
</TABLE>


                                      F-29
<PAGE>

Note 11.  Income Taxes

From inception to September 30, 2001, Now Solutions was treated as a limited
liability company and was not subject to federal or state income taxes. The tax
attributes for federal and state income tax purposes are passed through to the
members of Now Solutions. Consequently, Now Solutions is subject to a minimum
franchise tax and fees, which are not material. As of October 1, 2001, Now
Solutions made an election to be treated as a corporation for tax purposes.
Accordingly, for the year ended December 31, 2002, Now Solutions for income
taxes in accordance with Statement of Financial Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"), as if it files as a corporation for tax
purposes. SFAS No. 109 requires a company to use the asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rate applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities and result primarily form differences in methods used to
amortize intangible assets. A valuation allowance is provided when management
cannot determine whether it is more likely than not that the deferred tax asset
will be realized. Under SFAS No. 109, the effect on deferred income taxes of the
change in tax rates is recognized in income in the period that includes the
enactment date. After additional research in 2003, Now Solutions reversed its
election to be treated as a corporation for tax purposes and filed its 2001,
2002 and 2003 tax returns as a pass-through entity. As a result of this election
reversal, Now Solutions will not be subject to federal income taxes and its
taxable income (loss) will be included in the federal income tax returns of its
members. Accordingly, the deferred tax assets and income taxes payable
established at December 31, 2002 were reversed in 2003. The following table
presents the income (loss) before income taxes as of December 31, 2003 and 2002.

                                                     Years ending December 31,
                                                   ----------------------------
                                                       2003            2002
                                                   ------------    ------------


Loss before income taxes in Vertical               $ (4,554,281)   $ (3,890,926)
Loss before income taxes in Now Solutions            (2,289,409)        909,999
                                                   ------------    ------------

                                                   $ (6,843,690)   $ (2,980,927)
                                                   ============    ============

The following table presents the income tax provision for the years ended
December 31, 2003 and 2002.

                                                     Years ending December 31,
                                                  -----------------------------
                                                      2003             2002
                                                  ------------     ------------

Current

Federal:
   Vertical Computer                              $         --     $         --
   Now Solutions                                            --          393,000
State:
   Vertical Computer                                        --               --
   Now Solutions                                        18,000           87,000
                                                  ------------     ------------

                                                        18,000          480,000
                                                  ------------     ------------
Deferred expense (benefit)
   Vertical Computer                                        --               --

   Now Solutions                                       (44,000)        (436,000)
                                                  ------------     ------------

                                                       (44,000)        (436,000)
                                                  ------------     ------------

Total income tax provision                        $    (26,000)    $     44,000
                                                  ============     ============


                                      F-30
<PAGE>

Note 11.  Income Taxes  (Continued)

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

                                                         December 31,
                                                 -----------------------------
                                                     2003             2002
                                                 ------------     ------------

Expected statutory rate                                 (34.0)%          (34.0)%
Change in valuation allowance                            21.4              1.8
Income tax from a subsidiary which
  filed a separate return                                 0.3             16.1
Change in valuation allowance in a subsidiary
  which filed a separate return                          13.3             17.0
Other                                                    (1.4)             0.6
                                                 ------------     ------------

                                                         (0.4)%             1.5%
                                                 ============     ============

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


                                                         December 31,
                                                 -----------------------------
                                                     2003             2002
                                                 ------------     ------------

Net operating loss carryforward                  $  5,281,000     $  3,599,000
Accrued vacation and allowance for
  doubtful accounts                                     7,000               --
Deferred revenue                                      729,000          596,000
Deferred salary                                       515,000          336,000
Other                                                 321,000          381,000
                                                 ------------     ------------

                                                    6,853,000        4,912,000

Valuation allowance                                (6,853,000)      (4,476,000)
                                                 ------------     ------------

Net deferred tax assets                          $         --     $    436,000
                                                 ------------     ------------

At December 31, 2003, the Company (Vertical only) had available net operating
loss carryforwards of approximately $13.2 million for federal tax purposes and
$7.2 million for state tax purposes, which expire in varying amounts through
2023 and 2008, respectively. At December 31, 2002, the Company (Vertical only)
had available net operating loss carryforwards of approximately $9 million for
federal tax purposes and $4.6 million for state tax purposes, which expire in
varying amounts through 2022 and 2007, respectively. However, the utilization of
net operating loss carryforwards may be subject to certain limitations as
prescribed by Section 382 of the Internal Revenue Code.

Without considering Now Solutions' operation, the Company's operations generate
permanent and temporary differences arising from non deductible expense,
depreciation, amortization, accrued liabilities and reserves for certain assets.
The Company has deferred tax assets of approximately $6.9 million and $4.5
million at December 31, 2003 and 2002, respectively, relating principally to tax
effects of net operating loss carryforwards. In assessing the recoverability of
deferred tax assets, management considers whether it is more likely than not
that the assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.

Management considers the projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
loss and projections for future taxable income over the periods in which the
deferred tax items are recognizable for tax reporting purposes, it is more
likely than not that the Company will not realize the benefits of these
differences at December 31, 2003 and 2002. As such, management has recorded a
valuation allowance for deferred tax assets at December 31, 2003 and 2002.


                                      F-31
<PAGE>

Note 12.  Stockholders' Equity

2003

Common Stock

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

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

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

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

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

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

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

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

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

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

Preferred Stock

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

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


                                      F-32
<PAGE>

Note 12.  Stockholders' Equity (Continued)

2002

Common Stock

During 2002, the Company issued 12,500,000 shares of its common stock to Cornell
Capital valued at approximately $199,875 complying the second installment
aforementioned, which is equal to the fair market value of the shares on the
dates of issuance.

In 2002, the Company issued a total of 51,303,932 shares of its common stock to
related parties to replace the shares owned by officers and were disposed by
lender to collect $450,000 owed by the Company in connection with a note
payable, which is equal to the fair market value of the shares on the dates of
issuance. See details in Note 5.

In November 2002, the Company issued 3,000,000 shares of its common stock at
$0.057 per share for net proceeds of $17,100.

In 2002, a total of 37,889,580 shares of the Company's common stock were issued
upon conversion in connection with the aforementioned $265,000 in 6% debentures
issued in 2001. At December 31, 2002, $160,000 of principal had been converted
into the Company's common stock.

During July 2002, the Company issued 5,000,000 shares of its common stock for
investor relation services rendered by Equilink, LLC valued at $23,500, which is
equal to the fair market value of the shares on the dates of issuance.

During December 2002, the Company issued 2,000,000 shares of its common stock
valued at $11,980 (which is equal to the fair market value of the shares on the
dates of issuance.) to Victor Weber, a directors and executive of Government
Internet Systems, Inc, an 85% owned subsidiary of the Company.

Preferred Stock

During 2002, the Company paid no cash dividends to the stockholders of Series A
and Series C preferred stock. During 2002, the Company had accrued $600,000 of
dividends payable to the stockholders of Series A and Series C preferred stock.

The Company recorded approximately $25,000 of beneficial conversion feature as
deemed interest as a result of issuing convertible debentures of $100,000 in
2002.

Note 13.  Stock Options and Warrants

2003

There were no incentive stock options granted in 2003.

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

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

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


                                      F-33
<PAGE>

Note 13.  Stock Options and Warrants (Continued)

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

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

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

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

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

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

2002

During 2002, the Company granted non-statutory stock warrants to purchase
8,688,312 shares of common stock to individuals for services provided. These
options are non-assignable and non-transferable, are exercisable over a three to
five year period from the date of grant, and vest in various increments through
2002 and 2003, as applicable. The Company recorded $42,419 as non-cash and
non-employee stock compensation based on Black-Scholes option pricing model.

During 2002, the Company granted non-statutory stock warrants to purchase an
aggregate of 6,250,000 shares of common stock to the people who provided
services to and would be the directors and officers of Government Internet
Systems, Inc, the Company's 89% owned subsidiary. These options are
non-assignable and non-transferable, are exercisable over a three to five year
period from the date of grant, and vest in various increments through 2002 and
2003, as applicable. The Company recorded stock compensation expense of $23,467
based on the Black-Scholes option-pricing model.

During 2002, the Company granted, but did not deliver three-year warrants to
purchase 1,500,000 shares each to Basil Nikas and Robin Mattern and 500,000
shares to Wayne Savage in January 2002. The warrants were granted in connection
with an option agreement whereby the Company could acquire a 56% ownership
interest in iNet. Mr. Nikas, Mr. Mattern, and Mr. Savage are executives of iNet.
The fair market value of these warrants at the date of grant was $35,712. In the
event that the Company does not acquire a majority interest in iNet, these
warrants will be automatically be cancelled. Under the terms of the option, iNet
is required to deliver certain financial and non-financial information. This
information was never delivered and the Company is holding the warrants issued
in January 2002 until a resolution is reached.

During 2002, the Company granted three-year warrants to purchase 3,700,000
shares of common stock at an exercise price ranging from $0.003 to $0.015 per
share to third party lenders in connection with securing funds of an aggregated
amount of $112,500 through issuing notes payable to these lenders. These
warrants vested immediately. The Company recorded $13,640 based on Black-Scholes
option pricing model.

During 2002, the Company granted three-year non-statutory warrants to purchase
4,000,000 shares of its common stock to three employees at an average exercise
price of $0.010 per share. These options are non-assignable and
non-transferable. The Company recorded stock compensation expense of $16,098
based on Black-Scholes option pricing model.


                                      F-34
<PAGE>

Note 13.  Stock Options and Warrants (Continued)

In December 2002, the Company granted three-year stock options to purchase to
6,600,000 shares of common stock at an exercise price of $0.010 per share to six
employees. The warrants vest in equal amounts per month over a one-year period.
These warrants are non-assignable and non-transferable. The Company did not
record any employee stock compensation by adopting APB No. 26 whereas the fair
value of these options on the grant date was $25,664 based on Black-Scholes
option pricing model.

Option and warrant activities in 2002 and 2003 were summarized is as follows:

<TABLE>
<CAPTION>
                                                                                                 Weighted
                                              Incentive    Non-Statutory                         Average
                                                Stock          Stock                             Exercise
                                               Options        Options         Warrants            Price
                                            ------------    ------------    ------------       ------------
<S>                                         <C>             <C>             <C>                <C>
Outstanding at 12/31/01                       16,790,000      29,800,000     129,066,186       $      0.113
                                            ============    ============    ============       ============

Options/Warrants granted with an exercise
   price of $0.003 to $0.11 per share                 --              --      32,738,312              0.006
Options/Warrants exercised                            --              --              --                 --
Options/Warrants expired                      (3,200,000)    (15,000,000)             --              0.025
                                            ------------    ------------    ------------       ------------

Outstanding at 12/31/02                       13,590,000      14,800,000     161,804,498       $      0.103
                                            ============    ============    ============       ============

Options/Warrants granted with an exercise
   price of $0.0075 to $0.01 per share                --       6,750,000                              0.010
Options/Warrants exercised                            --              --              --                 --
Options/Warrants expired                      (2,500,000)    (13,300,000)     (3,778,788)             0.098
                                            ------------    ------------    ------------       ------------

Outstanding at 12/31/03                       11,090,000       1,500,000     164,775,710(1)    $      0.100
                                            ============    ============    ============       ============
</TABLE>

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

Information relating to stock options/warrants at December 31, 2003, summarized
by exercise price, is as follows:

<TABLE>
<CAPTION>
                                                Outstanding                         Exercisable
                                             Weighted Average                     Weighted Average
                                ------------------------------------------   ---------------------------
Exercise Price Per Share           Shares          Life         Exercise        Shares        Exercise
                                                 (Months)         Price                         Price
-----------------------------   ------------   ------------   ------------   ------------   ------------

Incentive Stock Options:
<S>                             <C>            <C>           <C>             <C>           <C>
   $0.01 - $0.09                 11,090,000           9.11   $      0.025     11,090,000   $      0.025

Non-statutory Stock Options:
   $0.04 - $0.09                  1,500,000           3.25   $      0.063      1,500,000   $      0.063

Warrants (1):
   $0.003 - $0.100              156,872,424          25.71   $      0.094    125,005,757   $      0.097
   $0.101 - $0.350                7,903,286          14.20          0.324      7,903,286          0.324
                               ------------   ------------   ------------   ------------   ------------

                                164,775,710          25.16   $      0.105    132,909,403   $      0.110

Grand total                     177,365,710          23,97          0.100    145,499,043          0.103
                               ============   ============   ============   ============   ============
</TABLE>

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


                                      F-35
<PAGE>

Note 13.  Stock Options and Warrants (Continued)

The range of assumptions used in the Black Scholes option pricing model in 2003
and 2002 were as follows:

                                               December 31,
                                  -----------------------------------
                                        2003               2002
                                  ----------------   ----------------

Discount rate - bond yield rate     2.61 - 3.01%          4.00%
Volatility                           160 - 186%         83 - 187%
Expected life                         5 years        1.5 to 2.0 years
Expected dividend yield                  --                 --

Note 14.  Supplemental Disclosure of Cash Flow Information

Supplemental cash flow information for the years ended December 31, 2003 and
2002 are as follows:

                                                         December 31,
                                                 -----------------------------
                                                     2003              2002
                                                 ------------     ------------

Cash paid for interest                           $    218,556     $    402,353
                                                 ------------     ------------

Non-cash activities for the years ended December 31, 2003 and 2002 were as
follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                           ---------------------------
                                                                               2003           2002
                                                                           ------------   ------------
<S>                                                                        <C>            <C>
Series A cumulative stock dividends                                        $    400,000   $    400,000

Series C cumulative stock dividends                                             200,000        200,000

Replacement of 51,303,932 shares of common stock to officers for call of
   collateralization on delinquent note payable                                                450,000

Conversion of debentures to 37,889,580 shares of common stock                                  161,616

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

Issuance of warrants to officers and directors of GIS                            12,039         23,467

Issuance of warrants for consulting services                                                    42,419

Issuance of warrants for legal services                                          22,704

Issuance of warrants for iNet option agreement                                                  35,712

Issuance of warrants with notes payable                                           4,239         13,640

Issuance of warrants for employee retention                                                     16,098

Issuance of 6,000,000 shares in 2003 and 2,000,000 shares in 2002 of
   common stock for fees on notes payable                                        26,100         12,000

Issuance of 12,500,000 and 7,142,857 shares of the Company's common
   stock for the equity line of credit with Cornell Capital                                    200,000

Issuance of 29,149,180 shares in 2003 and 8,000,000 shares in 2002 of
   the Company's common stock for professional services                         130,090         46,100

Beneficial Conversion on convertible debentures issued                           45,000         25,000
</TABLE>


                                      F-36
<PAGE>

Note 15. Commitments and Contingencies

Commitments

The Company leases various office space that the leases expire starting February
2004 through September 2009. The Company had Future minimum rental payments are
as follows:

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

         2004                                 $    203,773
         2005                                      134,576
         2006                                      141,443
         2007                                       60,928
         2008                                       53,556
         Thereafter                                 40,167
                                              ------------

         Total                                $    634,443
                                              ============

Rental expense for the years ended December 31, 2003 and 2002 was approximately
$252,730 and $305,932, respectively.

Commitments Related to Now Solutions

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

Royalties

On December 16, 1999, the Company acquired the software rights to Emily, an XML
computer language, for $5,000. As part of the agreement, the Company agreed to
pay royalties every 6 months, based on the net sales of products sold that were
developed using the Emily computer language. Royalties range from 1% to 5% of
net sales. There were no sales for the years ended December 31, 2003 and 2002,
respectively.

Employment Contracts

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


                                      F-37
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

In January 2000, the Company executed an employment agreement with Luiz
Valdetaro pursuant to which Mr. Valdetaro serves as Chief Technology Officer of
the Company. Pursuant to the terms of the agreement, Mr. Valdetaro receives an
annual base salary of $150,000. Mr. Valdetaro is also entitled to an annual
bonus from a bonus pool for executives equal to 5% of the Company's taxable
income (without deduction for depreciation). Mr. Valdetaro's share of the bonus
pool is equal to the percentage of his annual base compensation to the total of
the combined annual base compensation of all executives in the pool. This
agreement expired on December 31, 2002. Mr. Valdetaro has deferred $135,000 of
his salary in 2002, and all of his salary in 2003.

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

In March 2004, the Company and Sheri Pantermuehl agreed to the terms of a 2-year
employment agreement, whereby Ms. Pantermuehl agreed to provide services as the
Chief Financial Officer for the Company and its subsidiary Now Solutions, LLC.
Pursuant to the employment agreement, the Company shall pay Ms. Pantermuehl a
base salary of $125,000 per annum. In connection with the agreement, the Company
agreed to grant 5 year incentive stock options to purchase 2,500,000 shares of
common stock of the Company within 45 business days at an exercise price on the
date of issuance. The stock options were issued in April 2004 at a strike price
of $0.014 per share. In addition, Now Solutions issued 1.5% of so-called
"phantom stock" of Now Solutions to Ms. Pantermuehl.

Litigation

The Company is are, from time to time, involved in various lawsuits generally
incidental to its business operations, consisting primarily of collection
actions and vendor disputes. In the opinion of management, the ultimate
resolution of these matters, if any, may have a significant effect on the
financial position, operations or cash flows of the Company.

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

In December 2003, the Company settled its dispute with Arglen Acquisitions, LLC
("Arglen"), a minority partner of Now Solutions, regarding issues related to Now
Solutions. The settlement resolved various allegations by the Company and Arglen
concerning violations of Now Solutions' Operating Agreement. In February 2004,
the parties completed the closing of the settlement. The arbitration has been
dismissed and any actions with respect to Arglen and Gary Gyselen and the
Company and its related parties, including Now Solutions, were also dismissed,
except that the California Superior Court, Los Angeles County retained
jurisdiction regarding the terms of the settlement between the parties. In
February 2004, the Company completed the closing of its settlement with Arglen.
Pursuant to the terms of the settlement, the Company purchased Arglen's interest
in Now Solutions for $1.4 million as follows: (a) $800,000, which was paid at
the closing and (b) $600,000, pursuant to a non-interest bearing secured
promissory note providing for payments of $200,000 in April 2004, $100,000 in
June 2004, and $300,000 in September 2004, which was issued at closing. The
security interest of Now Solutions' assets on the secured promissory note will
be junior to Now Solutions' present indebtedness to WAMCO 32, Ltd. In addition,
at closing, the Company cancelled 80,763,943 warrants held by Arglen and issued
to Arglen 20,000,000 unregistered shares of its the common stock of the Company
(at a fair market value of $280,000), which is subject to a "lock-up" provision.
This transaction resulted in the Company recognizing $1,680,000 of goodwill,
which was written off in 2004. The note is in default. In August 2004, Arglen
obtained a default judgment in Los Angeles court for the outstanding principal,
plus attorney's fees and interest at the rate of 10% per annum. The Company has
filed a motion in the Delaware court to stay the enforcement of the judgment
pending resolution of the Delaware action. Pursuant to the settlement agreement,
the Company is also obligated to issue 5,000,000 unregistered shares of common
stock of the Company to Arglen, due to its failure to file a SB-2 registration
statement within 180 days from the settlement date.


                                      F-38
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

At December 31, 2003, the Company had non-restricted cash-on-hand of $962,454.
Now Solutions' non-restricted cash-on-hand of $954,720 was not available to fund
the Company's operations due to a court order obtained by Arglen and bank
covenants in connection with legal proceedings concerning Now Solutions. The
Company settled with Arglen in December 2003. The settlement closed in February
2004, and the Company and Arglen dismissed all claims with respect to one
another. As a result, the cash-on-hand of Now Solutions became available to fund
the Company's operations.

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

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

In March 2004, Ross commenced an action in the Supreme Court, New York County
(New York State) by filing a motion for summary judgment in lieu of complaint
against Now Solutions to collect the note payable in the amount of $750,000 plus
10% interest and attorneys fees. Now Solutions filed its opposition to Ross'
motion, which was submitted to the court for decision on May 20, 2004. Now
Solutions opposed the Ross motion and, on October 7, 2004, the Court ruled in
favor of Now Solutions and denied the motion for summary judgment. Pursuant to
New York State law, in the event a motion for summary judgment in lieu of
complaint is denied, the action continues and the pleadings supporting the
motion are deemed to constitute the complaint. Accordingly, Now Solutions has
filed an answer containing affirmative defenses and nine (9) counterclaims
against Ross. The affirmative defenses asserted by Now Solutions include the
same grounds which comprise the causes of action against Ross in the Derivative
Action, namely Ross' breach of the Asset Purchase Agreement as a result of its
failure to credit Now Solutions with adjustments at closing in an amount not
less than $3,562,201.22. All of the counterclaims asserted by Now Solutions
against Ross relate to the Asset Purchase Agreement and Ross' breaches thereof.
The counterclaims include: (i) breach of the covenant not to compete, whereby
Now Solutions seeks damages in excess of $10,000,000.00; (ii) breach of the
covenant to deliver all Assets to Now Solutions at Closing, whereby Now
Solutions seeks damages in an amount not less than $300,000.00; (iii) breach of
a certain Transitional Services Agreement (executed in conjunction with the
Asset Purchase Agreement), whereby Now Solutions seeks damages in an amount not
less than $73,129.47; and (iv) reasonable attorney's fees. In December 2004,
Ross filed a motion to dismiss two counterclaims: one which alleges that Ross
and Chinadotcom used Ross to breach a covenant not to compete and the second
which requested that Ross be enjoined from further competition with NOW in
violation of the covenant. Now Solutions intends to vigorously oppose any such
motion.


                                      F-39
<PAGE>

Note 15.  Commitments and Contingencies (Continued)

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

In December 2004, the Company was notified by the Securities Exchanges
Commission ("SEC") that the SEC has suspended trading of VCSY common stock
pursuant to an Order Filed by the SEC because the Company has been delinquent in
its periodic filing obligations under Section 13(a) of the Securities Exchange
Act of 1934 since the period ending September 30, 2003. Also in December 2004,
the Company was notified by the SEC of an administrative proceeding pursuant to
the filing of an "Order Instituting Administrative Proceedings and Notice of
Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934" due to
the delinquency of filing of the Form 10-KSB for the year ended 2003 and the
Form 10-QSB for the first three quarters of 2004.


Note 16.  Subsequent Events (Unaudited)

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

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

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

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

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


                                      F-40
<PAGE>

Note 16.  Subsequent Events (Unaudited) (Continued)

In February 2004, Robert Farias loaned $500,000 to Now Solutions, the Company's
wholly-owned subsidiary and received a $500,000 promissory note from Now
Solutions, secured by its assets and a 5% royalty on any sales by Now Solutions
of over $8,000,000 up to $500,000. The note bears interest at 10% per annum and
Now Solutions is required to make monthly interest payments for all interest
accrued in the previous month on the first day of each month beginning April 1,
2004 and beginning on October 1, 2004 and continuing on the first day of every
month thereafter, monthly principal payments of $91,500 plus interest until the
note has been paid in full. In the event Now Solutions receives cash proceeds
due to a capital infusion or upfront licensing fees from a reseller that is
outside its normal scope of business (i.e., not part of software sales in the
regular course of business), Now Solutions is required to pay 50% of such
proceeds remaining toward payment of the $500,000 note. In connection with the
loan, the Company issued (i) 5 year warrants to purchase 5,000,000 shares of
common stock at a $0.01 per share; (ii) 5 year warrants to purchase 5,000,000
shares of common stock of the Company at a $0.02 per share; (iii) 5 year
warrants to purchase 5,000,000 shares of common stock of the Company at a $0.03
per share, (iv) 5,000,000 unregistered shares of common stock of the Company (at
a fair market value of $75,000), and (v) an additional 5,000,000 shares of
common stock of the Company in the event that $250,000 was not paid toward the
loan on or before March 15, 2004, which were issued (at a fair market value of
$120,000). All of the foregoing warrants and stock are subject to "piggy-back"
registration rights. In connection with the loan, Now Solutions entered into a
security agreement with the lender to guarantee the note. The security interest
of Now Solutions' assets on the secured promissory note will be junior to Now
Solutions' present indebtedness to WAMCO 32, Ltd and Arglen Acquisitions. Robert
Farias is a director of Now Solutions, a 100% owned subsidiary of the Company.
The note is currently in default. As of January 17, 2005, Now Solutions had made
principal payments totaling $183,000 to Robert Farias. In January 2005, Now
Solutions was informed by WAMCO 32 that these payments were not in compliance
with the loan agreement with WAMCO 32 and WAMCO 32 would be issuing a demand
letter to Farias for the $183,000.

In February 2004, the note payable in the amount of $84,000 issued by EnFacet to
Robert Farias, dated June 1, 2001, bearing interest at 12% per annum, unsecured,
with principal and interest due on June 1, 2002 was amended by the parties.
Pursuant to the amendment Robert Farias waived any defaults on the note and the
note was amended as follows: once Vertical's subsidiary, Now Solutions, has paid
off the entire balance due under the $500,000 note issued by Now Solutions to
Farias on February 13, 2004, sixteen percent (16%) of any remaining amounts from
the final $91,500 installment payment on the $500,000 note shall be applied to
the $84,000 note.

Thereafter, Vertical or, at Vertical's option, Now Solutions, shall continue to
make monthly principal payments of $14,640 beginning on the first day of the
following month until all monies due under the $84,000 note has been paid. In
connection with the amendment, Now Solutions entered into a security agreement
with the lender to guarantee the note. The security interest of Now Solutions'
assets on the secured promissory note will be junior to Now Solutions' present
indebtedness to WAMCO 32, Ltd, Arglen Acquisitions, and Robert Farias in
connection with the $500,000 note. In an amendment between the parties in March
2003, the interest rate was increased from 8% to 12% and accrued from the date
the note was issued in exchange for extending the note. Robert Farias is a
director of Now Solutions, a 100% owned subsidiary of the Company.

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


                                      F-41
<PAGE>

Note 16.  Subsequent Events (Unaudited) (Continued)

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

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

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

In February 2004, the Company purchased a 21% ownership interest in MedData
Solutions, Inc. from Robert Farias. In exchange, the Company issued 9,000,000
unregistered shares of the common stock of the Company (at a fair market value
of $135,000), which shall be subject to "piggy-back" registration rights. Robert
Farias is a director of Now Solutions, a 100% owned subsidiary of the Company.


                                      F-42
<PAGE>

Note 16.  Subsequent Events (Unaudited) (Continued)

In February 2004, the Company completed the closing of its settlement with
Arglen. Pursuant to the terms of the settlement, the Company purchased Arglen's
interest in Now Solutions for $1.4 million as follows: (a) $800,000, which was
paid at the closing and (b) $600,000, pursuant to a non-interest bearing secured
promissory note providing for payments of $200,000 in April 2004, $100,000 in
June 2004, and $300,000 in September 2004, which was issued at closing. The
security interest of Now Solutions' assets on the secured promissory note will
be junior to Now Solutions' present indebtedness to WAMCO 32, Ltd. In addition,
at closing, the Company cancelled 80,763,943 warrants held by Arglen and issued
to Arglen 20,000,000 shares of its the common stock of the Company (at a fair
market value of $280,000), which is subject to "lock-up" provisions . This
transaction resulted in the Company recognizing $1,680,000 of goodwill which was
written off in 2004. Pursuant to the settlement agreement, the Company was also
obligated to issue an additional 5,000,000 unregistered shares of common stock
of the Company to Arglen. The note is in default. In August 2004, Arglen
obtained a default judgment in Los Angeles court. The Company has filed a motion
in the Delaware court to stay the enforcement of the judgment pending resolution
of the Delaware action. Please see Item 3, Legal Proceedings for more details.

During March 2004, 2004, the Company granted five-year incentive stock options
to two employees of Now Solutions to purchase a total of 3,000,000 shares of
common stock of the Company at an exercise price of $0.01 per share, which are
subject to a "lock-up" provision. The stock options were issued in connection
with employment agreements executed in January 2004. In September 2004, one of
the employees resigned. Consequently, the Company cancelled options to purchase
1,500,000 shares of common stock of the Company.

During March 2004, two employees shall receive a total of 3% ownership interest
of "phantom" stock in Now Solutions in connection with employment agreements
executed in January 2004. In September 2004, one of the employees resigned.
Consequently, the Now Solutions cancelled 1.5% ownership interest of "phantom"
stock.

In April 2004, The United States Patent and Trademark Office granted a patent
(No. 6718103) for an invention for "Transmission of Images over a Single
Filament Fiber Optic Cable".

In June 2004, the Company and its subsidiary Now Solutions, agreed with a third
party consultant to provide governmental relations services concerning the state
and local governments of the state of Texas. In connection with the agreement,
the Company issued five-year warrants to purchase 250,000 shares of VCSY stock
at an exercise price of $0.025 per share.

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

In June 2004, the note payable to Coast Business Credit (issued by Now
Solutions, Inc., in the principal amount of $5,500,000 bearing interest at prime
plus 1.5% with a minimum interest of 8.5% per annum, monthly payment of $91,500
of principal, plus interest, due April 28, 2006, secured with all of the assets
of Now Solutions and a $1,500,000 security deposit by the Company to guarantee
the first 36 payments of the loan and is subject to various loan covenants) was
amended between the Company and the successor lender, AMCO 31, Ltd. As of

June 28, 2004, the outstanding principal balance due on the $5.5 million note is
$1,304,766. In August 2003, WAMCO 32, Ltd. agreed to extend the due date of the
note from February 28, 2004 to August 28, 2004. In June 2004, the parties agreed
to amend the terms of the note and the loan. Pursuant to the amendment, the
interest was changed to 9% per annum and the $1,304,766 outstanding principal
balance shall be payable as follows: (a) $91,667 principal per month, plus
interest commencing on June 30, 2004 and continuing on each succeeding month
through September 30, 2004; (b) $7,500 principal per month, plus interest,
commencing on October 31, 2004 and continuing on each succeeding month through
January 31, 2005; (c) providing that Now Solutions has achieved revenues of $7.5
million and EBITDA (Earnings Before Interest, Taxes, Depreciation &
Amortization) of not less than $2,200,000 for the fiscal year 2004, $7,500
principal per month, plus interest, commencing on February 28, 2005 and
continuing on the last day of each succeeding month until June 30, 2005; and (d)
$91,667 principal per month plus interest, commencing on July 31, 2005 and
continuing on each succeeding month until the note is paid. In the event Now
Solutions does not qualify for reduced payments, the note will be payable in the
amount of $91,667 principal per month, plus interest, commencing on February 28,
2005 and continuing on the last day of each


                                      F-43
<PAGE>

Note 16. Subsequent Events (Unaudited) (Continued)

succeeding month until the note is paid. As of January 7, 2005, the outstanding
principal balance due on the $5.5 million note is $1,190,600 and Now Solutions
is delinquent on the principal of the note by $267,500. Now Solutions has made
all interest payments as of December 31, 2004.

In connection with the amendment, Now Solutions is required to pay WAMCO 32 5%
of Now Solutions' revenues in excess of $8 million up to a maximum of $250,000,
beginning in the fiscal year that commences January 1, 2005. Also in connection
with the amendment, the Company issued warrants to purchase 3,000,000 shares of
the common stock Company at an exercise price of $0.03 per share or at the
holder's election, by surrendering an amount of common stock equal to or greater
than (but only if by a factional share) the required aggregate exercise price,
in which the holder would receive an amount of common stock to which it would
otherwise be entitled upon such exercise, less the surrendered shares. The
holder may also utilize a combination of either of the foregoing methods. The
warrants are subject to "piggy back" registration rights and a "lock-up"
provision.

The Company's remaining pledge balance of $650,000 was offset against the loan
balance in lieu of a $650,000 promissory note from Now Solutions to the Company.
In September 2003, the $650,000 note was split into two notes in the amounts of
$215,000 and $435,000. These notes are due on December 31, 2004 with the same
interest rate and terms as the $5,500,000 note, with monthly interest payments
commencing July 1, 2003. The $435,000 note has been paid down by Now Solutions
and the Company pledged its interest in the $215,000 note issued by Now
Solutions to the Company to secure $190,000 in loans made by Victor Weber to the
Company in December 2002 through September 2003 and $25,000 in expenses paid by
Weber on the behalf of the Company that were included in Accounts Payable. Weber
had the option to have the Company assign the $215,000 note to Weber provided
that Weber cancelled all other underlying notes and the $25,000 in accounts
payable in connection with the debt. Weber elected to make this assignment in
January 2004. At that time, all other notes and the $25,000 in accounts payable
owed to Weber were cancelled.

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

In July 2004, $20,000 of remaining principal from a convertible debenture and
$2,277 in interest was converted into 1,076,170 shares of common stock of the
Company. This conversion was in connection with a $100,000 debenture issued in
March 2002. As of January 7, 2005, $10,000 of remaining principal of the
debenture is outstanding.

In August 2004, TranStar made a payment of $8,000 in full satisfaction of one of
the $24,000 loan issued on April 19, 2001 and the Company cancelled the note and
returned 500,000 TranStar's shares held as collateral.

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

In September 2004, the Company and Victor Weber agreed to amend the terms of the
$215,000 note issued by Now Solutions to the Company and assigned to Weber.
Pursuant to the terms of the amendment, the Company agreed to issue 2,000,000
unregistered shares of common stock of the Company (at a fair market value of
$24,000), in exchange for amending the note. In the event the Company does not
make full payment by December 31, 2004, the Company shall issue to Weber an
additional 2,000,000 unregistered shares of common stock of the Company and the
note will automatically be amended as follows: (a) the maturity date of the Note
shall be extended to December 31, 2005; (b) the payment terms of the note shall
be amended so that, beginning in 2005, Now Solutions shall make (i) monthly
interest payments for all accrued interest during the previous month, (ii)
$50,000 in principal payments which will be due the end of each quarter
beginning March 31, 2005 and (iii) a final payment of all accrued interest and
principal which will be due no later than December 31, 2005. In addition, if the
note is amended as set forth above Weber shall receive 2.5% royalty of sales by
Now Solutions of its software that exceed $8,000,000 per year up to $200,000. As
of December 31, 2004, the Company is delinquent for the December 2004 interest
payment. Mr. Weber is the President and a Director of Government Internet
Systems, Inc.


                                      F-44
<PAGE>

Note 16.  Subsequent Events (Unaudited) (Continued)

In October 2004, the Company and Stephen Rossetti agreed to amend the terms of a
consulting agreement and the $7,500 promissory note issued in May 2003. Pursuant
to the terms of the amendment, the Company issued 6,500,000 unregistered shares
of common stock of the Company (at a fair market value of $84,500), as full
payment for services rendered under the consulting agreement and the $7,500
note, which has been cancelled. As of January 7, 2005, 2,232,288 of the
4,150,145 warrants issued for consulting services for the Company and GIS
expired. Mr. Rossetti is the CEO and a Director of GIS and a Director of Now
Solutions.

In October 2004, GIS and Grant Consultants of America ("GCA") entered into a
consulting agreement to provide services concerning government grants.

In November 2004, the United States Patent and Trademark Office granted a patent
(No. 6,826,744) for an invention for "System and Method for Generating Web Sites
In an Arbitrary Object Framework". This patent is the foundation of the
Company's SiteFlash and related technology, which are currently deployed in
ResponseFlash, NewsFlash, and UniversityFlash.

During the year ended December 31, 2004, incentive stock options to purchase
10,340,000 shares of common stock of the Company at a price of $0.010 to $0.086
per share expired.

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

During the year ended December 31, 2004, warrants to purchase 18,569,696 shares
of common stock of the Company at a price of $0.012 to $0.35 per share expired.

During the period of January 1 to January 7, 2005, warrants to purchase 45,455
shares of common stock of the Company at a price of $0.11 per share expired.

Note 17.  Concentration of Risk

During fiscal 2003, 99% of the Company's net sales were made up of Now
Solutions' client base. During fiscal 2002, 98% of the Company's net sales were
made up of Now Solutions' client base. Now Solutions had two clients who
accounted for approximately 8.7% of its total revenues.


                                      F-45
<PAGE>

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

         None.

ITEM 8A. CONTROLS AND PROCEDURES

         Based on their evaluation of the effectiveness of our disclosure
controls and procedures within 90 days of the filing date of this report, our
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's internal controls and procedures are effective for gathering,
analyzing and disclosing the information the Company required to disclose in the
reports filed under the Securities and Exchange Act of 1934. There have not been
significant changes in the Company's internal controls over financial reporting
that have materially affected or is reasonably likely to materially affect the
Company's internal controls over financial reporting as of the end of the
reporting period.

         Because the Company's 100% subsidiary, Now Solutions, Inc., generates
over 90% of the Company's revenues, the Company, through its representatives on
Now Solutions' executive committee, engaged Craig Hamilton and Company ("CHC")
to make a detailed review of Now Solution's complete financial functions in
order to more effectively evaluate internal controls and procedures. This report
was completed in February 2003. In March 2003 Now Solutions retained CHC to
implement the majority of its recommendations, including one to ensure a
standard charter of accounts for its Canadian subsidiary that will more
efficiently consolidate into the Company's financial statements.

         In June 2003 after Now Solutions and the mutually agreed separation
between Stephen Gunn, Now Solutions' former CFO and Now Solutions, CHC was
retained on a monthly basis to perform the monthly financial functions and
implement CHC's recommendations including the establishment of a standard chart
of accounts between Now Solutions and the Company until March 2004. The Company
retained independent consultants to prepare its financial statements.

         In March 2004, the Company retained Sheri Pantermuehl to serve as the
CFO of the Company and Now Solutions. Ms. Pantermuehl is now responsible for
preparing the financial statements of Now Solutions and the Company.

ITEM 8B. OTHER INFORMATION

         None.


                                       37
<PAGE>

                                    PART III

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

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

<TABLE>
<CAPTION>
            NAME                           AGE        POSITION
            ----                           ---        --------
<S>                                        <C>        <C>
            Richard S. Wade                61         President, Chief Executive Officer and Director
            William K. Mills               46         Secretary and Director
            Sheri Pantermuehl              48         Chief Financial Officer of the Company and Now Solutions, Inc.
</TABLE>

         RICHARD S. WADE, AGE 61, PRESIDENT, CHIEF EXECUTIVE OFFICER, DIRECTOR

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

         WILLIAM K. MILLS, AGE 46, SECRETARY, DIRECTOR

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

         SHERI PANTERMUEHL, AGE 48, CHIEF FINANCIAL OFFICER OF THE COMPANY AND
         ITS SUBSIDIARY NOW SOLUTIONS, INC.

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

         Directors are elected at the Annual Meeting of Shareholders and serve
until their successors have been elected and qualified. Officers are appointed
by and serve at the discretion of the Board of Directors. There are no family
relationships between any of the executive officers or directors.



                                       38
<PAGE>

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934

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

         To the best of the Company's knowledge, based solely on review of the
copies of such forms furnished to it, or written representations that no other
forms were required, the Company believes that all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
(10%) stockholders were complied with during 2002 and 2003 with the following
exception: Richard Wade did not timely file Changes in Beneficial Ownership on
Form 4 or his Form 5 for 2002 and Sheri Pantermuehl did not timely file Form 3
or Form 4. With respect to any former directors, officers, and ten percent (10%)
stockholders of the Company, the Company does not have any knowledge of any
known failures to comply with the filing requirements of Section 16(a).

CODE OF ETHICS

         We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer and other persons performing
similar functions, as well as all of our other employees and directors. This
code of ethics is filed as Exhibit 14.1 to this 10-KSB Report.

SIGNIFICANT EMPLOYEES

         LUIZ VALDETARO, AGE 46, CHIEF TECHNOLOGY OFFICER

         Mr. Valdetaro was previously a consultant (1993-1997) and Chief
Technology Officer (1997-1999) of Diversified Data Resources, a software
company. Mr. Valdetaro helped to implement the first PC to Mainframe in Latin
America in the late 1970s. Mr. Valdetaro also developed a product called ACE.
ACE, an expert based system written in C and assembler using HLLAPI to automate
the operations of IBM mainframes, was sold to Diversified Data Resources in
1991. Mr. Valdetaro, a member of Who's Who Executive Club prior to being Chief
Technology Officer of Diversified Data Resources, was a Senior Systems Engineer
for System/One and EDS, after System/One was acquired by EDS. Prior to that he
was a senior systems engineer for Bank of America. Mr. Valdetaro is a graduate
of Pontific Catholic University, Rio de Janeiro, Brazil with a B.S. in
Electronic Engineering and a M.S. in Systems Engineering.

         STEPHEN O. ROSSETTI, AGE 53, CHAIRMAN AND CEO, GOVERNMENT INTERNET
         SYSTEMS, INC.; DIRECTOR OF NOW SOLUTIONS, INC.

         As a former senior staff member of the House Armed Services Committee
and as director of the Readiness Subcommittee staff, Stephen Rossetti brings his
extensive government experience and crucial contacts to the Company. As director
of the Readiness Subcommittee staff, Mr. Rossetti helped to oversee nearly $90
billion in annual spending of the Department of Defense and management of the
$16 billion defense business and service structure. He also was responsible for
the oversight of the Department of Defense information technology program,
financial programs, infrastructure, military readiness, and counter-terrorism
including chemical and biological weapons preparedness and response. In 1998,
the White House appointed Mr. Rossetti to reform Pentagon business processes,
including service as Chairman of the Defense Travel Board to overhaul the
Department's travel and relocation services for its 4 million employees. During
his tenure with the U.S. Federal government, he worked with the Senate and House
Government Reform Committees, Budget Committees, Armed Services Committees,
Appropriations Committees, and Federal Agencies. In 1996, he was appointed
Executive Director for Morale, Welfare and Recreation and Resale Activities in
the Office of the Secretary of Defense where he oversaw on-base military
businesses with annual revenue of $16 billion. In 1999, he was appointed to
serve as the Director of the Department of Defense integrated travel and
relocation office. Mr. Rossetti has received several honors for his service from
the Congress, the President, and the Secretary of Defense. Since January 2001,
he served as President of Markquest, a lobbying and consulting practice in
Washington D.C. He now serves as our Executive Vice-President of Government
Affairs.



                                       39
<PAGE>

SIGNIFICANT EMPLOYEES OF NOW SOLUTIONS, INC.

         MARIANNE M. FRANKLIN, AGE 45, PRESIDENT AND CEO

         Marianne M. Franklin is President and Chief Executive Officer of Now
Solutions. Ms. Franklin brings extensive experience in the payroll and human
resources industry, which included over 8 years working with this product, under
Ross Systems, most recently as Vice-President of North American sales. As
Vice-President, he built a respected sales division for North America and
increased sales revenue by 200% over a three-year period. Prior to this
function, she was Director of Ross' Canadian Operations where she grew customer
base by 400% over a four-year period. Her background also includes 2 years with
ADP and 13 years in the banking industry, working with their payroll products.

         KENT ORGAIN, AGE 54, VICE-PRESIDENT, DEVELOPMENT

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

         DOROTHY SPOTTS, AGE 43, VICE-PRESIDENT, SERVICES AND SUPPORT

         Ms. Spotts' responsibilities include the overall management of
Application Consulting, Integration Services and Customer Support. She brings
with her a variety of practical and proven skills to promote customer
satisfaction. She has effectively transitioned Customer Support through three
technology generations. Ms. Spotts joined Ross Systems, Inc. in April 1991 as a
Support Analyst in the Customer Support department progressing to Operations
Manager. Subsequently, she attained the position of Manager of Integration
Services in September 1997. In March 1999, she was promoted to Director of
Integration Services and then became Director of Professional Services in July
2000. Ms. Spotts graduated with a BBA from the University of Texas at Austin.

         CARMELINA UGGENTI, AGE 46, VICE PRESIDENT, CUSTOMER DEVELOPMENT

         Ms. Uggenti has the overall responsibility for Now Solutions' global
sales, pre-sales, professional services pre-sales and marketing. Prior to this
position, Ms. Uggenti had joined Ross Systems, Inc. in January 1994 as a Senior
Consultant/Project Manager in the Human Resources/Payroll Professional Services
department. In 1998 she became responsible for the pre-sales organization.
During her tenure, she has assisted in expanding the client base in her
territory by 200%.

ITEM 10. EXECUTIVE COMPENSATION

         The following table shows all the cash compensation paid by the
Company, as well as certain other compensation paid or accrued, during the
fiscal years ended December 31, 2003, 2002 and 2001 to the Company's five
highest paid executive officers and employees, who were employed by the Company
during 2003. No restricted stock awards, long-term incentive plan payouts or
other types of compensation, other than the compensation identified in the chart
below, were paid to these executive officers during these fiscal years. Except
as set forth below, no other executive officer earned a total annual salary and
bonus for any of these years in excess of $100,000.



                                       40
<PAGE>

<TABLE>
<CAPTION>
                                      ANNUAL COMPENSATION                            LONG-TERM COMPENSATION
                          -------------------------------------------    --------------------------------------
                                                                                   AWARDS             PAYOUTS
                                                                        -------------------------     --------
                                                            OTHER       RESTRICTED
NAME AND                                                    ANNUAL        STOCK         OPTIONS/       LTIP       ALL OTHER
PRINCIPAL POSITION        YEAR      SALARY     BONUS     COMPENSATION    AWARD(S)         SARS        PAYOUTS   COMPENSATION
------------------        ----      ------     -----     ------------    --------         ----        -------   ------------
                                     ($)        ($)          ($)           ($)            (#)           ($)          ($)

<S>                       <C>    <C>            <C>          <C>          <C>          <C>             <C>         <C>
Richard Wade,(1)          2003   $  300,000(1)   --           --           --          20,600,000(1)      --          --
President and Chief       2002   $  300,000      --                        --                  --         --          --
Executive Officer         2001   $  162,500      --           --           --             250,000(1)      --          --

Luiz Valdetaro, (2)       2003   $  150,000      --                        --                  --         --          --
Chief Technology          2002   $  150,000                                             1,000,000
Officer                   2001   $  150,000      --           --           --                  --         --          --

Aubrey McAuley (3         2003   $  120,000      --           --           --                  --         --          --
Executive V.P., Product   2002      120,000      --           --           --                  --         --          --
Development & Sales       2001           --      --           --           --                  --         --          --
Support

Laurent Tetard (4)        2003   $  105,000      --           --           --           1,500,000         --          --
Director of Operations    2002   $  105,000      --           --           --             500,000         --          --
                          2001   $   85,000      --           --           --           1,000,000         --          --

James Salz (5)            2003   $  100,000      --                        --                  --         --          --
Corporate Counsel         2002   $  100,000      --           --           --           5,000,000         --          --
                          2001   $   17,500      --           --           --             200,000         --          --
</TABLE>

         No stock options were exercised by the named executive officers during
the fiscal year ended December 31, 2001, 2002 or 2003.


(1)   Mr. Wade deferred $300,000 and $300,000 of his salary in 2003 and 2002,
      respectively. Pursuant to his employment agreement, dated December 1,
      2001, Mr. Wade, as President and CEO, is entitled to purchase up to
      20,600,000 shares of common stock for 3 years at a strike price of $0.10,
      vesting in equal monthly amounts over a 36 month period. Mr. Wade also
      serves as a Director of the Company. As a Director, he was entitled to
      options to purchase up to 250,000 shares of Common Stock that expired on
      February 5, 2004.

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

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

(4)   Mr. Tetard is owed payment of $32,813 and $65,625 of his salary in 2003
      and 2002, respectively. Mr. Tetard's service as an employee of the Company
      terminated in September 2003. Mr. Tetard continues to provide services to
      the Company and Now Solutions, Inc. as a consultant. In January 2004, in
      exchange for services to the Company, Mr. Tetard was issued 1,000,000
      unregistered shares of common stock of the Company, subject to "piggy
      back" registration rights. In December 2003, options to purchase 1,000,000
      shares of common stock of the Company, which were issued in December 1999
      expired. As of January 7, 2005, options to purchase 500,000 shares of
      common stock of the Company, which were issued in 2001, expired.

(5)   Mr. Salz is owed payment of $55,000 and $58,333 of his salary in 2003 and
      2002, respectively. In January 2004, Mr. Salz received 1,000,000
      unregistered shares of common stock subject to "piggy-back" registration
      rights in connection for a $10,000 loan made to the Company in June 2003.
      As of January 7, 2005, options to purchase 200,000 shares of common stock
      of the Company, which were issued in 2001, expired.

No options were granted to the named officers or any employees in 2003.


                                       41
<PAGE>

The below table shows information aggregate options held by the named officers
at the end of 2003.

<TABLE>
<CAPTION>
                                YEAR-END OPTION VALUES (2002-2003)
----------------------------------------------------------------------------------------------
                           NO. OF SECURITIES UNDERLYING
                               OPTIONS/SARS GRANTED         VALUE OF UNEXERCISED IN-THE-MONEY
                            AS OF FISCAL YEAR END 2003     OPTIONS AT FISCAL YEAR END 2003 (1)
                            --------------------------     -----------------------------------
NAME                       EXERCISABLE    UNEXERCISABLE      EXERCISABLE        UNEXERCISABLE
----                       -----------    -------------      -----------        -------------
<S>                        <C>            <C>                <C>                <C>
Richard Wade(2)            13,983,333        6,866,667           --                   --

Luiz Valdetaro              1,000,000               --

Laurent Tetard(3)           2,000,000               --           --                   --

Jim Salz (4)                5,200,000               --           --                   --
</TABLE>


(1)      Based on Share Price of $0.0030 on December 31, 2003.


(2)      Pursuant to his employment agreement, dated December 1, 2001, Mr. Wade,
         as President and CEO, is entitled to purchase up to 20,600,000 shares
         of common stock for 3 years at a strike price of $0.10 vesting in equal
         amounts each over a 36 months period. Mr. Wade also serves as a
         Director of the Company. As a Director, he was entitled to options to
         purchase up to 250,000 shares of common stock of the Company at a
         strike price of $0.086 that expired on February 5, 2004.

(3)      In December 2003, options to purchase 1,000,000 shares of common stock
         of the Company, which were issued to Mr. Tetard in December 1999 and
         extended in December 2001, expired. In January 2004, Mr. Tetard was
         issued 1,000,000 unregistered shares of common stock of the Company
         subject to "piggy-back" registration rights in connection with
         consulting services. As of January 7, 2005, options to purchase 500,000
         shares of common stock of the Company, which were issued in 2001,
         expired.

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

STOCK OPTION PLAN.

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

STOCK OPTIONS AND WARRANTS

For summaries of stock option and warrant activity in 2002 and 2003, please see
Note 13 of Item 7.

For a table summarizing option and warrant activities in 2002 and 2003, please
see Note 13 of Item 7.

For a table providing information relating to stock options/warrants at December
31, 2003 summarized by exercise price, please see Note 13 of Item 7.

DIRECTOR COMPENSATION

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



                                       42
<PAGE>

LIMITATION OF LIABILITY: INDEMNIFICATION

         Our Bylaws include an indemnification provision under which we have
agreed to indemnify directors and officers of the Company to fullest extent
possible from and against any and all claims of any type arising from or related
to future acts or omissions as a director or officer of the Company.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing, or otherwise, the Company has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.

EMPLOYMENT AGREEMENTS

         In December 2001, the Company executed an employment agreement with
Richard Wade pursuant to which Mr. Wade serves as Chief Executive Officer and
President of the Company under which Mr. Wade will receive an annual base salary
of $300,000, and the issuance of 5-year warrants to purchase 20,000,000 shares
of common stock of the Company at a strike price of $0.10 per share and 5-year
warrants to purchase 600,000 shares of stock. Mr. Wade is also entitled to an
annual bonus from a bonus pool for executives equal to 5% of the Company's
taxable income (without deduction for depreciation). Mr. Wade's share of the
bonus pool is equal to the percentage of his annual base compensation to the
total of the combined annual base compensation of all executives in the pool. In
the event the agreement is terminated by Mr. Wade's death, his estate shall be
entitled to compensation accrued to the time of death plus the lesser of one
year's base compensation or the compensation due through the remainder of the
employment term. In the event of termination by the Company without cause, Mr.
Wade would receive base compensation for the remainder of the employment term
and his all of his warrants would automatically vest. Mr. Wade did not have a
written employment agreement with the Company during the years 1999 and 2000.
Mr. Wade has deferred his compensation (which was fully accrued) since January
1, 2002.

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

         In March 2004, the Company and Sheri Pantermuehl agreed to the terms of
a 2-year employment agreement, whereby Ms. Pantermuehl agreed to provide
services as the Chief Financial Officer for the Company and its subsidiary Now
Solutions, LLC. Pursuant to the employment agreement, the Company shall pay Ms.
Pantermuehl a base salary of $125,000 per annum. In connection with the
agreement, the Company agreed to grant 5-year incentive stock options to
purchase 2,500,000 shares of common stock of the Company within 45 business days
at an exercise price on the date of issuance. The stock options were issued in
April 2004 at a strike price of $0.014 per share. In addition, Now Solutions
issued 1.5% of so-called "phantom stock" of Now Solutions to Ms. Pantermuehl.



                                       43
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP BY NAMED EXECUTIVE OFFICERS, DIRECTORS AND BENEFICIAL OWNERS

         The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of January 7, 2005, by
each of our directors and executive officers and any person or entity, known by
us to be the beneficial owner of more than five percent of the outstanding
shares of common stock. The table also shows the beneficial ownership of our
stock by all directors and executive officers as a group. The table includes the
number of shares subject to outstanding options and warrants to purchase shares
of Common Stock. The percentages are based on 867,768,895 shares of common stock
outstanding as of January 7, 2005, together with options, warrants or other
securities convertible or exchangeable by the beneficial owner(s) into shares of
common stock within 60 days of December 31, 2003.

<TABLE>
<CAPTION>
                                                                          SHARES
                                                                     OF COMMON STOCK              PERCENT
 NAME AND ADDRESS OF BENEFICIAL OWNER(1)                             BENEFICIALLY OWNED          OF CLASS
 ---------------------------------------                             ------------------          --------
<S>                                                                      <C>                     <C>
 Sheri Pantermuehl                                                       2,500,000(2)                   *
 Richard Wade                                                          136,825,500(3)              15.77%
 William K. Mills                                                        4,033,000(4)                   *
 Total Directors and Officers (Three People)                           143,358,500                 16.52%
</TABLE>


*     Means less than 1%.


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

(2)   In connection with Ms. Pantermuehl's employment agreement, the Company
      granted 5-year incentive stock options to purchase 2,500,000 shares of
      common stock at a strike price of $0.014.

(3)   Includes options to purchase up to 20,600,000 shares of common stock of
      the Company for services as CEO and President. Also includes 101,370,050
      shares owned by Mountain Reservoir Corp. ("MRC"), a corporation controlled
      by the W5 Family Trust, of which Richard W. Wade is a trustee; and
      includes 1,000,000 shares owned by Jennifer Wade, a child of Mr. Wade. MRC
      pledged 10,450,000 common stock of the Company shares as collateral on a
      $181,000 note issued in October 2002. In December 2002, MRC pledged
      36,303,932 shares of common stock of the Company in connection with a
      $425,000 note as collateral on the note. This collateral was pledged in
      conjunction with 15,000,000 shares of the common stock of the Company
      pledged by Mr. Luiz Valdetaro, the Chief Technology Officer of the
      Company. In January 2002, the Company executed an indemnity and
      reimbursement agreements with Mountain Reservoir Corporation to cover both
      of the above pledges by MRC. . Pursuant to the pledges made by MRC, the
      Company agreed to reimburse MRC for any shares sold as collateral to cover
      the default of any loan. On January 31, 2002, the $425,000 note was in
      default and the 36,303,932 shares were transferred to the lender. In
      September 2002, the lender informed the Company that 19,751,000 shares of
      the collateral were sold for $254,382, the remaining 31,552,932 shares
      were transferred to two third parties, the debt was satisfied as of April
      1, 2002, and that the note had been cancelled. Accordingly, the Company
      reclassified the note payable to the third party including accrued
      interest to the note payable to related parties. In September and October
      2002, the Company issued 36,303,932 and 15,000,000 shares of its common
      stock to MRC and Mr. Luiz Valdetaro, respectively, in accordance with the
      executed indemnity and reimbursement agreements of January 2002. At the
      time of issuing common stock, the value of the note payable plus accrued
      interest was approximately $450,000. The Company reclassified from note
      payable to related parties to common stock and additional paid in capital.
      In November 2002, MRC and Mr. Valdetaro assigned any additional rights
      they had in the stock collateral to the Company. The Company is currently
      pursuing these rights with the lender to obtain a specific accounting and
      a refund of any monies that may be due to the Company. The differential
      between the value of the stock issued for reimbursement of shares to
      Mountain Reservoir Corporation and Mr. Valdetaro and the value of the
      note, plus accrued interest, was accounted for as forgiveness of debt.

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


                                       44
<PAGE>



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During the years ended December 31, 2002 and 2001, the Company paid
Parker, Mills & Patel LLP ("PMP"), its former general legal counsel,
approximately $4,000 and $133,371 in exchange for consideration for legal
services rendered. William Mills, a partner at PMP, is also a director of the
Company. The Company issued 2,621,622 shares of common stock in July 2001 and
1,560,000 shares of common stock in November 2001 with an aggregate value of
$121,000 to William Mills, a director of the Company, of Parker, Mills & Patel
LLP for partial payment of legal services. The 2,612,622 shares and 1,560,000
shares were pursuant to an S-8 registration statement filed on November 8, 2001.

         During 2001, PMP made advances of approximately $30,000 to third party
vendors on behalf of the Company. In exchange, PMP received a 6% promissory note
due January 2002 and three-year warrants to purchase 300,000 shares of common
stock at a purchase price of $0.014 per share. The warrants vested upon
issuance. At December 31, 2003, the outstanding balance under of $23,974 was in
default. These warrants expired in November 2004.

         In December 2001, the Company executed a $425,000 note payable to
Brighton Opportunity Fund, LP, a third party. The Company received proceeds of
$300,000 and paid a commitment fee of $125,000. The note accrues interest at 12%
per annum and was due January 31, 2002. The note was secured by 36,303,932
shares of the Company's common stock that were owned by Mountain Reservoir
Corporation, and 15,000,000 shares that are owned by Mr. Luiz Valdetaro, Chief
Technology Officer of the Company, to cover any shortfall in the event of
default. Mountain Reservoir Corp. is a corporation controlled by the W5 Family
Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5
Family Trust. In January 2001, the Company executed separate indemnity and
reimbursement agreements with Mountain Reservoir Corporation and Mr. Luiz
Valdetaro to cover their pledges of 36,303,932 and 15,000,000 shares of common
stock, respectively. Pursuant to these agreements, the Company agreed to
reimburse Mountain Reservoir and Mr. Luiz Valdetaro for any shares sold as
collateral to cover the default of any loan. On January 31, 2002, the note was
in default. The lender disposed of 19,751,000 shares of the above totaling
51,303,932 shares for $254,382. In September 2002, the lender informed the
Company that the remaining 31,552,932 shares were transferred to these two third
parties and that the debt was satisfied as of April 1, 2002. Consequently, the
note payable has been cancelled. Accordingly, the Company reclassified the note
payable to the third party including accrued interest to the note payable to
officers as these two officers loaned their shares of common stock to the
Company.

         In September and October 2002, the Company issued 36,303,932 and
15,000,000 shares of its common stock to Mountain Reservoir Corporation and Mr.
Luiz Valdetaro, respectively, in accordance with the executed indemnity and
reimbursement agreements concerning a $425,000 note payable issued by the
Company to Brighton Opportunity Fund, LP, a third party in December 2001. At the
time of issuing common stock, the value of the note payable plus accrued
interest was approximately $450,000. The Company reclassified from note payable
to officers to common stock and additional paid in capital. In November 2002,
Mountain Reservoir Corporation and Mr. Luiz Valdetaro assigned their rights to
obtain the necessary accounting information from these two third parties to the
Company.

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

         For the year ended 31, 2002, the Company had borrowed an aggregate of
$49,085 from Richard Wade, the Company's President and Chief Executive Officer
of the Company, of which none was still outstanding as of December 31, 2003. Mr.
Wade is also a director of the Company.



                                       45
<PAGE>

         In July 2001, the Company agreed to pay $4,500 per month to Stephen
Rossetti to provide government business consultation services on a
month-to-month basis. In addition, the consultant is entitled to receive 3-year
warrants to purchase common stock equal to $5,500 per month based on a strike
price of the previous average five day market price on the date of issuance. In
May 2003, the Company issued a $7,500 promissory note bearing interest at twelve
percent (12%), due in June 2003, to Stephen Rossetti in connection with a loan
in the same amount. Mr. Rossetti is the CEO and a Director of Government
Internet Systems, Inc., and a director of Now Solutions, Inc., which are both
subsidiaries of the Company. In September 2002, the Company amended the
consulting agreement of Stephen Rossetti to provide services in the capacity of
Executive V.P. Governmental Affairs, in consideration for 3 year warrants to
purchase 1,000,000 shares of its common stock at a share price of $0.012,
$30,000 for services rendered through August 31, 2002, and $5,000 per month for
a period of one year. The warrants were issued at a fair market value of $6,191
(valued using the Black-Scholes valuation model). In October 2004, the Company
and Stephen Rossetti agreed to amend the terms of the $7,500 note payable issued
in May 2003 and the agreement for consulting services. In consideration for
canceling outstanding debt under the note payable and the consulting agreement,
the Company issued 6,500,000 unregistered shares of the common stock of the
Company at a fair market value of $84,500. As of January 7, 2005, of the
4,150,145 warrants issued for consulting services for the Company and GIS,
2,232,288 warrants have expired.

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

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

         In February 2004, Robert Farias loaned $500,000 to Now Solutions, the
Company's wholly-owned subsidiary and received a $500,000 promissory note from
Now Solutions, secured by its assets and a 5% royalty on any sales by Now
Solutions of over $8,000,000 up to $500,000. The note bears interest at 10% per
annum and Now Solutions is required to make monthly interest payments for all
interest accrued in the previous month on the first day of each month beginning
April 1, 2004 and beginning on October 1, 2004 and continuing on the first day
of every month thereafter, monthly principal payments of $91,500 plus interest
until the note has been paid in full. In the event Now Solutions receives cash
proceeds due to a capital infusion or upfront licensing fees from a reseller
that is outside its normal scope of business (i.e., not part of software sales
in the regular course of business), Now Solutions is required to pay 50% of such
proceeds remaining toward payment of the $500,000 note. In connection with the
loan, the Company issued (i) 5 year warrants to purchase 5,000,000 shares of
common stock at a $0.01 per share; (ii) 5 year warrants to purchase 5,000,000
shares of common stock of the Company at a $0.02 per share; (iii) 5 year
warrants to purchase 5,000,000 shares of common stock of the Company at a $0.03
per share, (iv) 5,000,000 unregistered shares of common stock of the Company (at
a fair market value of $75,000), and (v) an additional 5,000,000 unregistered
shares of common stock of the Company in the event that $250,000 was not paid
toward the loan on or before March 15, 2004, which were issued (at a fair market
value of $120,000). All of the foregoing warrants and stock are subject to
"piggy-back" registration rights. In addition, the Company also pledged a 30%
ownership interest in Now Solutions to ensure the making of the $500,000 loan to
Now Solutions. In connection with the amendment, Now Solutions entered into a
security agreement with the lender to guarantee the note. The security interest
of Now Solutions' assets on the secured promissory note will be junior to Now
Solutions' present indebtedness to WAMCO 32, Ltd and Arglen. Robert Farias is a
director of Now Solutions, a 100% owned subsidiary of the Company. The note is
in default. As of January 17, 2005, Now Solutions had made principal payments
totaling $183,000 to Robert Farias. In January 2005, Now Solutions was informed
by WAMCO 32 that these payments were not in compliance with the loan agreement
with WAMCO 32 and WAMCO 32 would be issuing a demand letter to Farias for the
$183,000.


                                       46
<PAGE>

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

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

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

         In February 2004, the Company purchased a 21% ownership interest in
MedData Solutions, Inc. from Robert Farias. In exchange, the Company issued
9,000,000 unregistered shares of the common stock of the Company (at a fair
market value of $135,000), which have "piggy-back" registration rights. Robert
Farias is a director of Now Solutions, a 100% owned subsidiary of the Company.


                                       47
<PAGE>

ITEM 13.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

         AUDIT FEES. The aggregate fees billed for professional services
rendered by the Company's principal accounting firm, BDO Seidman, LLP, was
$152,740 and $116,310 for the audit of the Company's annual financial statements
for the fiscal years ended 2003 and 2002, respectively, and the reviews of the
financial statements included in the Company's Forms 10-QSB for those fiscal
years.

         TAX FEES. The aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal accountant for tax
advice, tax planning and tax return preparation were $29,198 and $37,820, for
the years ended 2003 and 2002, respectively. In addition, BDO Dunwoody LLP in
Toronto billed $34,740 and $0 for tax advice, tax planning and tax return
preparation for the years ended 2003 and 2002, respectively. Dickstein Shapiro
Moran & Oshinsky LLP billed $31,690 and $0 for tax advice and tax planning for
the years ended 2003 and 2002, respectively.

         ALL OTHER FEES. Other than the services described above, the aggregate
fees billed for services rendered by the principal accountant was $0 and $0,
respectively, for the fiscal years ended 2003 and 2002.

ITEM 14.  DEFAULTS UNDER SENIOR SECURITIES

         The $5.5 million secured promissory note, bearing interest at 9% per
annum, issued by Now Solutions to Coast and purchased by WAMCO 32, Ltd., as
amended in June 2004, is currently delinquent. The security interest of Now
Solutions' assets on the secured promissory note are senior to Now Solutions'
present indebtedness to Arglen and Robert Farias. Now Solutions has made all
interest payments as of December 31, 2004 but it is $267,501 delinquent in
principle payments. The Company has not received a notice of default from WAMCO
31, Ltd. The Company is in discussions with the holder of the note to resolve
the outstanding payments.

         The non-interest bearing secured promissory note providing for payments
of $200,000 in April 2004, $100,000 in June 2004, and $300,000 in September
2004, issued by the Company and Now Solutions to Arglen in connection with the
settlement of litigation and the purchase by the Company of Arglen's interest in
Now Solutions is currently in default. The security interest of Now Solutions'
assets on the secured promissory note are junior to Now Solutions' present
indebtedness to WAMCO 32, Ltd. The note is currently in default. In August 2004,
Arglen obtained a default judgment in Los Angeles court. The Company and Now
Solutions owe interest and legal fees in addition to the principal outstanding
on the note. The Company has filed a motion in the Delaware court to stay the
enforcement of the judgment pending resolution of the Delaware action. For more
details on the Delaware action, please see Item 3, Legal Proceedings.

         The interest bearing secured promissory note in the amount of $500,000
providing for payments of $91,500 beginning in October 2004, issued by Now
Solutions to Mr. Farias in connection with the loan to Now Solutions is
currently in default. The security interest of Now Solutions' assets on the
secured promissory note are junior to Now Solutions' present indebtedness to
WAMCO 32, Ltd and Arglen. As of January 17, 2005, Now Solutions had made
principal payments totaling $183,000 to Robert Farias. In January 2005, Now
Solutions was informed by WAMCO 32 that these payments were not in compliance
with the loan agreement with WAMCO 32 and WAMCO 32 would be issuing a demand
letter to Farias for the $183,000. The Company is in discussions with the holder
of the note to resolve the outstanding payments. Mr. Farias is a director of Now
Solutions, a 100% owned subsidiary of the Company.

         The $84,000 promissory note, bearing interest at 12% per annum, as
amended, issued by Enfacet, Inc. to Robert Farias in June 2001 is currently in
default. The security interest of Now Solutions' assets on the secured
promissory note is junior to Now Solutions' present indebtedness to WAMCO 32,
Ltd, and Arglen and the Farias $500,000 promissory note. Mr. Farias is a
director of Now Solutions, a 100% owned subsidiary of the Company.

         The $350,000 promissory note, bearing interest at 8% per annum, as
amended, issued by Enfacet, Inc. to a third party in August 2001 is currently in
default. The security interest of Now Solutions' assets on the secured
promissory note is junior to Now Solutions' present indebtedness to WAMCO 32,
Ltd, Arglen, and the Farias $500,000 promissory note.

         The $90,000 promissory note, bearing interest at 10% per annum, as
amended, issued by the Company to a third party in June 2003 is currently in
default. The security interest of Now Solutions' assets on the secured
promissory note is junior to Now Solutions' present indebtedness to WAMCO 32,
Ltd, Arglen, and the Farias $500,000 promissory note.

         The $280,000 promissory note, bearing interest at 12% per annum and
issued to Robert Farias on October 31, 2001, as amended by the parties, is
currently in default. The security interest of Now Solutions' assets on the
secured promissory note is junior to Now Solutions' present indebtedness to
WAMCO 32, Ltd, and Arglen, the Farias $500,000 promissory note, and the $84,000,
$350,000, and $90,000 promissory notes. The security interest of the Company's
SiteFlash technology assets owned by the Company is the only security interest
that has been granted by the Company. Mr. Farias is a director of Now Solutions,
a 100% owned subsidiary of the Company.


                                       48
<PAGE>

         The $181,584 promissory note, bearing interest at 12% per annum, as
amended, issued by the Company to Robert Farias in October 2003 is currently in
default. The security interest of Now Solutions' assets on the secured
promissory note is junior to Now Solutions' present indebtedness to WAMCO 32,
Ltd, Arglen, the Farias $500,000 promissory note, and the $84,000, $350,000, and
$90,000 promissory notes. Mr. Farias is a director of Now Solutions, a 100%
owned subsidiary of the Company. The note is also secured by 10,450,000 shares
of the Company's common stock that are owned by MRC to cover any shortfall. MRC
is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and
CEO of the Company, is the trustee of the W5 Family Trust.

ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K AND EVALUATION OF CONTROLS AND
PROCEDURES

         (a) The following exhibits are filed as part of this filing:

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

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

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

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

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

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

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

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

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


                                       49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
3.5                   Certificate of Amendment of Certificate of               Incorporated by reference to Exhibit 3.5 to
                      Incorporation (2000)                                     the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

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

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

3.8                   Certificate of Designation of 4% Cumulative Redeemable   Attached herewith
                      Series C Preferred Stock

4.2                   Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.2 to
                      and Ujjwal Bhowmik dated December 17, 1999               the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.3                   Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.3 to
                      and Juan Caballero dated December 17, 1999               the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.4                   Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.4 to
                      and Tawee Ekundomsin dated December 17, 1999             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.5                   Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.5 to
                      and John R. Feeney dated December 20, 1999               the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.6                   Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.6 to
                      Company and Julie M. Holmes Dated December 20, 1999      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.7                   Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.7 to
                      and Laurent H. Tetard dated December 18, 1999            the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.8                   Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.8 to
                      Company and Andre Bertrand dated December 16, 1999       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.9                   Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.9 to
                      Company and Jeff Davison dated December 16, 1999         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.10                  Non-Statutory Stock Option Agreement between the         Incorporated by referenced to Exhibit 4.10 to
                      Company and Bee C. Lavery dated December 16, 1999        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.11                  Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.11 to
                      Company and Donn F. Morey dated December 16, 1999        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001
</TABLE>


                                       50
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
4.12                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.12 to
                      an Steve Lu dated December 19, 2000                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.13                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.13 to
                      and Ujjwal Bhowmik dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.14                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.14 to
                      and Juan Caballero dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.15                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.15 to
                      and Tawee Ekundomsin dated February 5, 2001              the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.16                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.16 to
                      and John R. Feeney dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.17                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.17 to
                      and Laurent H. Tetard dated February 5, 2001             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.18                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.18 to
                      and Diane Castillo dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.19                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.19 to
                      and Carlos Lomheim dated February 5, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.20                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.20 to
                      and Alex Federico dated February 5, 2001                 the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.21                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.21 to
                      and Jeannifer Caldona dated February 5, 2001             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.22                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.22 to
                      and Geoffrey Golliher dated February 5, 2001             the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.23                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.23 to
                      and Feng Yu (Frank) Zhou dated February 5, 2001          the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.24                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.24 to
                      and Jennifer Kim dated February 5, 2001                  the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.25                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.25 to
                      and Daniela Moura dated February 5, 2001                 the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001
</TABLE>


                                       51
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
4.26                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.26 to
                      and James Kim dated February 5, 2001                     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.27                  Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.27 to
                      Company and Gary Freeman dated February 14, 2001         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

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

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

4.30                  Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.30 to
                      Company and Terry Washburn dated February 5, 2001        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.31                  Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.31 to
                      Company and Vijay Amritraj dated June 5, 2001            the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.32                  Non-Statutory Stock Option Agreement between the         Incorporated by reference to Exhibit 4.32 to
                      Company and Munish Gupta dated June 5, 2001              the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.33                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.33 to
                      and Tawee Ekundomsin dated June 15, 2001                 the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.34                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.34 to
                      and John R. Feeney dated June 15, 2001                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.35                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.35 to
                      and Laurent Tetard dated June 15, 2001                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.36                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.36 to
                      and Diane Castillo dated June 15, 2001                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.37                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.37 to
                      and Geoffrey Golliher dated June 15, 2001                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.38                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.38 to
                      and Frank Zhou dated June 15, 2001                       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.39                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.39 to
                      and Jennifer Kim dated June 15, 2001                     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001
</TABLE>


                                       52
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
4.40                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.40 to
                      and James Kim dated June 15, 2001                        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.41                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.40 to
                      and James Kim dated June 15, 2001                        the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.42                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.42 to
                      and Fabian Marta dated June 15, 2001                     the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.43                  Incentive Stock Option Agreement between the Company     Incorporated by reference to Exhibit 4.43 to
                      and Daniela Moura dated June 15, 2001                    the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

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

4.45                  Warrant Agreement between the Company and Phil           Incorporated by reference to Exhibit 4.45 to
                      Alexander dated October 23, 2000                         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

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

4.47                  Warrant Agreement between the Company and Michael Blum   Incorporated by reference to Exhibit 4.47 to
                      dated October 23, 2000                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.48                  Warrant Agreement between the Company and Gary Blum      Incorporated by reference to Exhibit 4.48 to
                      dated February 5, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

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

4.50                  Warrant Agreement between the Company and Robert         Incorporated by reference to Exhibit 4.50 to
                      Wagman dated May 1, 2001                                 the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.51                  Warrant Agreement between the Company and Robert         Incorporated by reference to Exhibit 4.51 to
                      Wagman dated June 1, 2001                                the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.52                  Warrant Agreement between the Company and Mark Kellner   Incorporated by reference to Exhibit 4.52 to
                      dated January 18, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

4.53                  Warrant Agreement between the Company and Stephen Gunn   Incorporated by reference to Exhibit 4.53 to
                      dated April 9, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001
</TABLE>


                                       53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
4.54                  Warrant Agreement between the Company and Gary L. Blum   Incorporated by reference to Exhibit 4.54 to
                      dated June 15, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001
                      Form of Cashless Exercise Warrant

4.55                                                                           Attached herewith

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

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

10.3                  Marketing Agreement between the Company and              Incorporated by reference to Exhibit 10.3 to
                      Entertainment Marketing Group                            the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

10.4                  Employment Agreement between the Company and Richard     Incorporated by reference to Exhibit 10.4 to
                      Wade                                                     the Company's Form 10-KSB/A filed on May 17,
                                                                               2001

10.5                  Agreement between the Company and Xatnu, Inc. dated      Incorporated by reference to Exhibit 10.1 to
                      October 16, 2000                                         the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.6                  Agreement between the Company and Xatnu, Inc. dated      Incorporated by reference to Exhibit 10.2 to
                      June 29, 2001                                            the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.7                  Agreement between the Company and Parker Mills Patel     Incorporated by reference to Exhibit 10.3 to
                      dated June 29, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.8                  Agreement between the Company and Franklin Financial     Incorporated by reference to Exhibit 10.4 to
                      dated July 9, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.9                  Agreement between the Company and Gary L. Blum, Esq.     Incorporated by reference to Exhibit 10.5 to
                      dated July 10, 2001                                      the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.10                 Agreement between the Company and Taurus Global, LLC     Incorporated by reference to Exhibit 10.6 to
                      dated July 9, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

10.11                 Agreement between the Company and M.S. Farrell & Co.,    Incorporated by reference to Exhibit 10.7 to
                      Inc. dated July 9, 2001                                  the Company's Registration Statement on Form
                                                                               S-8 filed on July 13, 2001

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

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


                                       54
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.14                 Certificate of Designation of Vertical Computer, Inc.    Incorporated by reference to Exhibit 3.1 to
                      Series "C" 4% Cumulative Convertible Preferred Stock     Company's Form 10-QSB/A filed on December 19,
                                                                               2001

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

10.16                 Equity Line of Credit Agreement between the Company      Incorporated by reference to Exhibit 10.2 to
                      and Cornell Capital Partners, L.P. dated August 16,      the Company's Form 10-QSB/A filed on December
                      2001                                                     19, 2001

10.17                 Securities Purchase Agreement between the Company and    Incorporated by reference to Exhibit 10.3 to
                      third party buyers for $250,000 of Convertible           the Company's Form 10-QSB/A filed on December
                      Debentures                                               19, 2001

10.18                 Enfacet, Inc. Stock Purchase Agreement dated             Incorporated by reference to Exhibit 10.4 to
                      August 21, 2001                                          the Company's Form 10-QSB/A filed on December
                                                                               19, 2001

10.19                 Agreement between Enfacet and the Company dated August   Incorporated by reference to Exhibit 10.5 to
                      24, 2001                                                 the Company's Form 10-QSB/A filed on December
                                                                               19, 2001

10.20                 Agreement between the Company and Chuck Ashman dated     Incorporated by reference to Exhibit 10.1 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.21                 Agreement between the Company and Michael Blum dated     Incorporated by reference to Exhibit 10.2 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.22                 Agreement between the Company and Gary Blum dated        Incorporated by reference to Exhibit 10.3 to
                      November 2, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.23                 Agreement between the Company and Justin Davis dated     Incorporated by reference to Exhibit 10.4 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.24                 Agreement between the Company and Allison Enderle        Incorporated by reference to Exhibit 10.5 to
                      dated October 29, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.25                 Agreement between the Company and Robert Farias dated    Incorporated by reference to Exhibit 10.6 to
                      October 30, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.26                 Agreement between the Company and Donald P. Hateley      Incorporated by reference to Exhibit 10.7 to
                      dated October 29, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.27                 Agreement between the Company and Annette Keith dated    Incorporated by reference to Exhibit 10.8 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001
</TABLE>


                                       55
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.28                 Agreement between the Company and Aubrey McAuley dated   Incorporated by reference to Exhibit 10.9 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.29                 Agreement between the Company and Tom McCloskey dated    Incorporated by reference to Exhibit 10.10 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.30                 Agreement between the Company and William Mills dated    Incorporated by reference to Exhibit 10.11 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.31                 Agreement between the Company and Leroy Molock dated     Incorporated by reference to Exhibit 10.12 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.32                 Agreement between the Company and David Rezeieh dated    Incorporated by reference to Exhibit 10.13 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.33                 Agreement between the Company and Steve Rosetti dated    Incorporated by reference to Exhibit 10.14 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.34                 Agreement between the Company and Priyam Sharma dated    Incorporated by reference to Exhibit 10.15 to
                      November 2, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.35                 Agreement between the Company and Jacob Stearns dated    Incorporated by reference to Exhibit 10.16 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.36                 Agreement between the Company and Marilyn Stewart        Incorporated by reference to Exhibit 10.17 to
                      dated November 1, 2001                                   the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.37                 Agreement between the Company and Vasu Vijay dated       Incorporated by reference to Exhibit 10.18 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.38                 Agreement between the Company and Vijay Armitraj dated   Incorporated by reference to Exhibit 10.19 to
                      October 29, 2001                                         the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.39                 Agreement between the Company and Taurus Global, LLC     Incorporated by reference to Exhibit 10.20 to
                      dated July 9, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.40                 Agreement between Company and M.S. Farrell & Co., Inc.   Incorporated by reference to Exhibit 10.21 to
                      dated July 9, 2001                                       the Company's Registration Statement on Form
                                                                               S-8 filed on November 8, 2001

10.41                 Equity Line of Credit Agreement dated as of August       Incorporated by reference to Exhibit 10.40 to
                      2001, between the Company and Cornell Capital            the Company's Form 10-KSB A filed on May 20,
                      Partners, L.P.                                           2002
</TABLE>


                                       56
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.42                 Registration Rights Agreement dated as of August 2001    Incorporated by reference to Exhibit 10.42 to
                      between the Company and the buyers identified therein.   the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.43                 Escrow Agreement dated as of August 2001 among the       Incorporated by reference to Exhibit 10.43 to
                      Company, Yorkville Advisors Management, LLC and First    the Company's Form 10-KSB A filed on May 20,
                      Union National Bank.                                     2002

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

10.45                 Securities Purchase Agreement dated as of August 2001    Incorporated by reference to Exhibit 10.45 to
                      among between the Company and the buyers identified      the Company's Form 10-KSB A filed on May 20,
                      therein                                                  2002

10.46                 Consulting Agreement dated as of August 2001 between     Incorporated by reference to Exhibit 10.46 to
                      the Company and Yorkville Advisors Management, LLC       the Company's Form 10-KSB A filed on May 20, 2002

10.47                 Placement Agent Agreement dated as of August 2001        Incorporated by reference to Exhibit 10.47 to
                      among the Company, Westrock Advisors, Inc. and Cornell   the Company's Form 10-KSB A filed on May 20,
                      Capital Partners, L.P.                                   2002

10.48                 Registration Rights Agreement dated as of August 2001    Incorporated by reference to Exhibit 10.48 to
                      between the Company and Cornell Capital Partners, L.P.   the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.49                 Escrow Agreement dated as of August 2001 among the       Incorporated by reference to Exhibit 10.49 to
                      Company, Cornell Capital Partners, L.P., Butler          the Company's Form 10-KSB A filed on May 20,
                      Gonzalez LLP and First Union National Bank.              2002

10.50                 Warrant dated as of November 2001 given by the Company   Incorporated by reference to Exhibit 10.50 to
                      to Parker, Mills & Patel, LLP                            the Company's Form 10-KSB A filed on May 20,
                                                                               2002

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

10.52                 Promissory Note dated as of December 2001 given by the   Incorporated by reference to Exhibit 10.52 to
                      Company to Brighton Opportunity Fund, LP                 the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.53                 Bridge loan dated as of December 2001 given by the       Incorporated by reference to Exhibit 10.53 to
                      Company to Brighton Opportunity Fund, LP                 the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.54                 Option Agreement dated as of December 2001 given by      Incorporated by reference to Exhibit 10.54 to
                      the Company to iNetPurchasing, Inc.                      the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.55                 Stock Pledge Agreement dated as of December 2001 given   Incorporated by reference to Exhibit 10.55 to
                      by Mountain Reservoir Corp. to Brighton Opportunity      the Company's Form 10-KSB A filed on May 20,
                      Fund, LP                                                 2002
</TABLE>


                                       57
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.56                 Option Agreement dated as of December 2001 given by      Incorporated by reference to Exhibit 10.56 to
                      the Company to Basil Nikas                               the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.57                 Option Agreement dated as of December 2001 given by      Incorporated by reference to Exhibit 10.57 to
                      the Company to Robin Mattern                             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.58                 Option Agreement dated as of December 2001 given by      Incorporated by reference to Exhibit 10.58 to
                      the Company to Wayne Savage                              the Company's Form 10-KSB A filed on May 20,
                                                                               2002

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

10.60                 Reimbursement and Indemnity Agreement dated as of        Incorporated by reference to Exhibit 10.60 to
                      January 2002 between the Company and Luiz Claudio        the Company's Form 10-KSB A filed on May 20,
                      Valdetaro Galvao e Mello                                 2002

10.61                 Stock Pledge Agreement dated as of December 2001 given   Incorporated by reference to Exhibit 10.61 to
                      by Luiz Claudio Valdetaro Galvao e Mello to Brighton     the Company's Form 10-KSB A filed on May 20,
                      Opportunity Fund, LP                                     2002

10.62                 Amendment Agreement dated as of January 2002 between     Incorporated by reference to Exhibit 10.62 to
                      the Company and Strategic Media Alliance                 the Company's Form 10-KSB A filed on May 20,
                                                                               2002

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

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

10.65                 Promissory Note Agreement as of October 31, 2001         Incorporated by reference to Exhibit 10.65 to
                      between the Company and Paradigm Sales, Inc.             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

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

10.67                 Letter Agreement as of October 31, 2001 between the      Incorporated by reference to Exhibit 10.67 to
                      Company and a third party                                the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.68                 Promissory Note Agreement as of October 31, 2001         Incorporated by reference to Exhibit 10.68 to
                      between the Company and a third party lender             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.69                 Stock Pledge Agreement as of October 31, 2001 between    Incorporated by reference to Exhibit 10.69 to
                      the Company and a third party lender                     the Company's Form 10-KSB A filed on May 20,
                                                                               2002
</TABLE>


                                       58
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.70                 Stock Pledge Letter Agreement as of October 31, 2001     Incorporated by reference to Exhibit 10.70 to
                      between the Company and a third party lender             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

10.71                 Promissory Note Agreement as of November 7, 2001         Incorporated by reference to Exhibit 10.71 to
                      between the Company and a third party lender             the Company's Form 10-KSB A filed on May 20,
                                                                               2002

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

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

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

10.75                 Reimbursement and Indemnity Agreement as of January      Incorporated by reference to Exhibit 10.75 to
                      15, 2002 between the Company and Luiz Claudio            the Company's Form 10-KSB A filed on May 20,
                      Valdetaro Galvao e Mello                                 2002

10.76                 Reimbursement and Indemnity Agreement as of January      Incorporated by reference to Exhibit 10.76 to
                      15, 2002 between the Company and Mountain Reservoir      the Company's Form 10-KSB A filed on May 20,
                      Corporation                                              2002

10.77                 Reimbursement and Indemnity Agreement as of January      Incorporated by reference to Exhibit 10.77 to
                      15, 2002 between the Company and Mountain Reservoir      the Company's Form 10-KSB A filed on May 20,
                      Corporation                                              2002

10.78                 Reimbursement and Indemnity Agreement as of January      Incorporated by reference to Exhibit 10.78 to
                      15, 2002 between the Company and Mountain Reservoir      the Company's Form 10-KSB A filed on May 20,
                      Corporation                                              2002

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

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

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

10.82                 (a) Promissory Note, dated June 3, 2002, between the     Incorporated by reference to Exhibit 10.82 to
                      Company and a third party lender                         the Company's Form 10-QSB filed on June 24,
                                                                               2002
                      (b) Pledge Agreement, dated June 3, 2002, between the
                      Company and a third party lender

                      (c) Warrants, dated June 3, 2002, between the Company and
                      a third party lender (a) Promissory Note, dated June 24,
                      2002, between the
</TABLE>


                                       59
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.83                 Company and a third party lender                         Incorporated by reference to Exhibit 10.83 to
                      (b) Pledge Agreement, dated June 24, 2002, between the   the Company's Form 10-QSB filed on September
                      Company and a third party lender                         25, 2002
                      (c) Warrants dated June 24, 2002, between the Company
                      and a third party lender

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

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

10.86                 Equitilink Services Agreement, dated July 10, 2002,      Incorporated by reference to Exhibit 10.86 to
                      between the Company and Equitilink                       the Company's Form 10-QSB filed on September
                                                                               25, 2002

                      (a) Promissory Note, dated August 7, 2002, between the

10.87                 Company and a third party lender                         Incorporated by reference to Exhibit 10.87 to
                      (b) Pledge Agreement, dated August 7, 2002, between      the Company's Form 10-QSB filed on September
                      the Company and a third party lender                     25, 2002

10.88                 Agency Services Agreement dated, August 9, 2002,         Incorporated by reference to Exhibit 10.88 to
                      between the Company and a third party                    the Company's Form 10-QSB filed on September
                                                                               25, 2002

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

10.90                 Amendment to Consulting Agreement, dated                 Incorporated by reference to Exhibit 10.90 to
                      July 13, 2001, by and between the Company and Rossetti   the Company's Form 10-QSB filed on September
                                                                               25, 2002

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

10.92                 Stock Purchase Agreement, dated September 24, 2002,      Incorporated by reference to Exhibit 10.92 to
                      between the Company and Equitilink, LLC                  the Company's Form 10-QSB filed on December
                                                                               11, 2002
</TABLE>


                                       60
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.93                 (a) Term Sheet, dated October 17, 2002, between the      Incorporated by reference to Exhibit 10.93 to
                      Company and a third party lender                         the Company's Form 10-QSB filed on December
                      (b) Promissory Note, dated October 17, 2002, between     11, 2002
                      the Company and a third party lender
                      (c) Stock Pledge Agreement, dated October 17, 2002,
                      between the Company and a third party lender
                      (d) Put and Call Agreement, dated October 17, 2002,
                      between the Company and a third party lender

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

10.95                 Weber Promissory Note, dated December 5, 2002, between   Incorporated by reference to Exhibit 10.95 to
                      the Company and Victor Weber                             the Company's Form 10-QSB filed on December
                                                                               11, 2002

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

                      (a) Weber Promissory Note, dated December 20, 2002,
10.97                 between the Company and Victor Weber                     Incorporated by reference to Exhibit 10.97 to
                      (b)  Service and loan Agreement, dated  December 20,     the Company's Form 10-KSB filed on August 7,
                      2002, between the Company and Victor Weber               2003
                      (a) Form of Director Agreement of Company's
10.98                 subsidiary, Government Internet Systems, Inc. (GIS)      Incorporated by reference to Exhibit 10.98 to
                      Director Agreement, between GIS and director             the Company's Form 10-KSB filed on August 7,
                      (b) Form of Warrants in connection with GIS Director     2003
                      Agreement between the Company's Subsidiary, GIS, and
                      GIS director

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

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

                                                                               2003

                      (a) Executive Agreement, dated January 8, 2003,

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


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



                                       61
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.103                April 14, between the Company and third party buyers.    Incorporated by reference to Exhibit 10.103 to
                      (a) Securities Purchase Agreement (for $200,000 of       the Company's Form 10-KSB filed on August 7,
                      Convertible Debentures)                                  2003
                      (b) Form of Debenture
                      (c) Registration Rights Agreement

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

                      (a) Equity Line of Credit Agreement, (b) Registration
                      Rights Agreement (c) Compensation Debenture (a) Services
                      agreement, dated April 10, 2003, between

10.105                the Company and Vasu Vijay                               Incorporated by reference to Exhibit 10.105 to
                      (b) Promissory note, dated April 10, 2003, issued by     the Company's Form 10-KSB filed on August 7,
                      the Company to Vasu Vijay                                2003
                      (c) Consulting Agreement, dated April 14 2003, between
                      the Company and Vasu Vijay.

10.106                Stock Sale Agreement, dated April 11, 2003, between      Incorporated by reference to Exhibit 10.106 to
                      the Company and Mike Radlovic                            the Company's Form 10-KSB filed on August 7,
                                                                               2003

                      (a) Stock Sale Agreement,
                      (b) Stock Pledge Agreement
                      (c) Promissory Note

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

10.108                Loan Agreement, between the Company and a third party
                      lender, dated May 9, 2002 Incorporated by reference to
                      Exhibit 10.108 to (a) Term Sheet the Company's Form 10-KSB
                      filed on August 7, (b) Promissory Note 2003 (c) Warrants
                      Loan Agreement, between the Company and a third party

10.109                lender, dated May 9, 2002                                Incorporated by reference to Exhibit 10.109 to
                      (a) Term Sheet                                           the Company's Form 10-KSB filed on August 7,
                      (b) Promissory Note                                      2003

</TABLE>


                                       62
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.110                Equitilink Services Agreement, dated June 10, 2002,      Incorporated by reference to Exhibit 10.110 to
                      between the Company and Equitilink                       the Company's Form 10-QSB for the quarter
                                                                               ended March 31, 2003 filed on June 22, 2004
                      Loan, agreement, between the Company and a third party
10.111                lender                                                   Incorporated by reference to Exhibit 10.111 to
                      (a) Term Sheet, dated June 25, 2003                      the Company's Form 10-QSB  for the quarter
                      (b)  $90,000 note, dated June 26, 2003                   ended March 31, 2003, filed on June 22, 2004
                      (c) Pledge Agreement, dated June 26, 2003
                      Loan and Cancellation Agreement, dated July 1, 2003,
10.112                between the Company and Victor Weber                     Incorporated by reference to Exhibit 10.112 to
                      (a) Term Sheet                                           the Company's Form 10-QSB for the quarter
                      (b) $100,000 Promissory Note                             ended March 31, 2003 filed on June 22, 2004
                      (c) $40,000 Promissory Note
                      Loan Agreement, dated September 4, 2003, between the
10.113                Company and Victor Weber                                 Incorporated by reference to Exhibit 10.113 to
                      (a) Term Sheet                                           the Company's Form 10-QSB for the quarter
                      (b) $50,000 Promissory Note                              ended March 31, 2003 filed on June 22, 2004
                      $500,000 Farias Loan Agreement between Now Solutions
10.114                and the Company and Robert Farias, dated February 13,    Incorporated by reference to Exhibit 10.114 to
                      2004                                                     the Company's Form 10-QSB for the quarter
                      (a) Loan Agreement                                       ended March 31, 2003 filed on June 22, 2004
                      (b) Promissory Note, issued by Now Solutions
                      (c) Security Agreement between Robert Farias and Now
                      Solutions
                      (d) Ownership Pledge Agreement between Robert Farias
                      and the Company
                      Arglen Settlement between Arglen Acquisitions, LLC and
10.115                the Company                                              Incorporated by reference to Exhibit 10.115 to
                      (a) Arglen Settlement Agreement, dated December 4,       the Company's Form 10-QSB for the quarter
                      2004                                                     ended March 31, 2003 filed on June 22, 2004
                      (b) Promissory Note, dated February 13, 2004, issued
                      by Now Solutions to the Arglen Acquisitions, LLC
                      (c) Security Agreement, dated February 13, 2004
                      Employment Agreement between Now Solutions, Inc. and
10.116                Vertical Computer Systems, Inc. and Sheri Pantermuehl,   Incorporated by reference to Exhibit 10.115 to
                      dated March 1, 2004                                      the Company's Form 10-QSB for the quarter
                                                                               ended March 31, 2003 filed on June 22, 2004
                      Loan Amendment, dated June 15, 2004 between WAMCO 32

10.117                Ltd. and the Company and Now Solutions                   Attached herewith
                      (a) Amendment Number Five to Loan and Security
                      Agreement
                      (b) Amended and Restated Secured Term Promissory Note

</TABLE>


                                       63
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION                                              LOCATION
-------------         ------------------------------------------------------   ---------------------------------------------
<S>                   <C>                                                      <C>
10.118                Weber Loans Amendment, between the Company and Victor    Attached herewith
                      Weber, dated September 28, 2004
                      Amendment to Consulting Agreement and $7,500
10.119                Promissory Note, between the Company and Stephen         Attached herewith
                      Rossetti, dated October 12, 2004

                      Code of Ethics

14.1                                                                           Attached herewith



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

31.4                  (a) Certification of Chief Executive Officer Pursuant    Attached herewith
                      to Section 302 of the Sarbanes-Oxley Act of 2002,
                      dated January 10, 2005


                      (b) Certification of Chief Financial Officer Pursuant to
                      Section 302 of the Sarbanes-Oxley Act of 2002, dated
                      January 10, 2005

32.4                  (a) Certification of Chief Executive Officer Pursuant    Attached herewith
                      to Section 906 of the Sarbanes-Oxley Act of 2002,
                      dated January 10, 2005

                      (b) Certification of Chief Financial Officer Pursuant to
                      Section 906 of the Sarbanes-Oxley Act of 2002, dated
                      January 10, 2005
</TABLE>

         (B) REPORTS ON FORM 8-K:

            On October 23, 2002, the Company filed a report on Form 8-K for an
            amendment to Loan and Security Agreement between the Company's
            subsidiary, Now Solutions, Inc., and Coast Business Credit and
            amendment to deposit account pledge agreement between the Company
            and Coast Business Credit.

            On December 3, 2002, the Company filed a report on Form 8-K for an
            amendment to the articles of incorporation to change name of the
            Company's subsidiary, Emily Solutions, Inc. to Government Internet
            Solutions and the appointment of new directors and officers with
            respect to this entity.

            On September 8, 2003, the Company filed a report on Form 8-K for a
            change of address for its principal executive offices to Austin,
            Texas.

            On September 10, 2003, the Company filed a report on Form 8-K/A
            amending the prior 8-K for a change of address for its principal
            executive offices to Austin, Texas.



                                       64
<PAGE>

            On January 28, 2004, the Company filed a report on Form 8K
            concerning its settlement of legal proceedings with Arglen and the
            buyout of Arglen's minority interest in the Company's subsidiary,
            Now Solutions.

            On April 28, 2004, the Company filed a report on Form 8-K for the
            grant of a patent by the United States Patent and Trademark Office
            (No. 6,718,103) for an invention for "Transmission of Images over a
            Single Filament Fiber Optic Cable" on April 6, 2004.

            On September 8, 2003, the Company filed a report on Form 8-K for a
            change of address for its principal executive offices to Austin,
            Texas.

            On September 10, 2003, the Company filed a report on Form 8-K/A
            amending the prior 8-K for a change of address for its principal
            executive offices to Austin, Texas.

            On January 28, 2004, the Company filed a report on Form 8K
            concerning its settlement of legal proceedings with Arglen and the
            buyout of Arglen's minority interest in the Company's subsidiary,
            Now Solutions.

            On April 21, 2004, the Company filed a report on Form 8-K for a
            change of address for its principal executive offices to Fort Worth,
            Texas.

            On April 28, 2004, the Company filed a report on Form 8-K for the
            grant of a patent by the United States Patent and Trademark Office
            (No. 6,718,103) for an invention for "Transmission of Images over a
            Single Filament Fiber Optic Cable" on April 6, 2004.

            On August 2, 2004, the Company filed a report on Form 8-K for an
            amendment of the note payable issued by Now Solutions, Inc., to
            Coast Business Credit and purchased by WAMCO 32, Ltd., in the
            principal amount of $5,500,000.

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

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

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


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


                                       65
<PAGE>




                                   SIGNATURES

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated as of January 14, 2005.

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

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

                                           DIRECTORS:

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

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


                                       66