**UNITED**  **STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**________________________**





**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**




x
            Annual
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934: for the fiscal year ended December 31,
                2005




o
            Transition
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the transition period from _______________ to
                ____________




Commission
      File Number 0-28287


**_________________**




**BSI2000,
      INC.**


(Exact
      Name of Small Business Issuer in its charter)





**Delaware**
            **88-0418749**(State
                of Incorporation)
            (I.R.S.
                Employer Identification No.)**12600
                West Colfax Ave. Suite B410****Lakewood,
                Colorado**
            **80215**(Address
                of Principal Executive Offices)
            (Zip
                Code)


**(303)
      231-9095**


(Issuer’s
      Telephone Number)




Securities
      Registered Under Section 12(b) of the Exchange Act: **Common
      Stock, $0.001 par value**




Securities
      Registered Under Section 12(g) of the Exchange Act: **None**




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or 15(d) of the Securities Exchange Act during the past 12 months (or for
      such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days. **Yes
      x
      No o**




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. **x**




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




Issuer’s
      revenues for the fiscal year ended December 31, 2005 were: **$226,887**




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, was:
**$5,151,187 on****April 24 , 2006.**




There
      were **128,779,677** shares
      of
      the Issuer’s common stock outstanding on **April
      24, 2006** .




Transitional
      Small Business Disclosure Format (Check one): **No**




Documents
      incorporated by reference: **None**





**BSI2000,
      INC.**


**FISCAL
      YEAR 2005 FORM 10-KSB ANNUAL REPORT**


**INDEX**





PART
                I
            1ITEM
                1. DESCRIPTION OF BUSINESS
            1ITEM
                2. DESCRIPTION OF PROPERTY
            6ITEM
                3. LEGAL PROCEEDINGS
            6ITEM
                4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
            7PART
                II
            8ITEM
                5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
                BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
            8ITEM
                6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            12ITEM
                7. FINANCIAL STATEMENTS
            19ITEM
                8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            19ITEM
                8A. CONTROLS AND PROCEDURES
            19ITEM
                8B. OTHER INFORMATION
            20PART
                III
            21ITEM
                9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
            21ITEM
                10. EXECUTIVE COMPENSATION
            22ITEM
                11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT
            24ITEM
                12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
            24ITEM
                13. EXHIBITS AND REPORTS ON FORM 8-K
            25ITEM
                14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            26SIGNATURES
            27FINANCIAL
                STATEMENTS
            F-1





Exhibit
      31.1  Section
      302 Certification by Principal Executive Officer


Exhibit
      31.2  Section
      302 Certification by Principal Accounting Officer


Exhibit
      32.1  Section
      906 Certification by Principal Executive Officer


Exhibit
      32.2  Section
      906 Certification by Chief Accounting Officer










**PART
      I**




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




**ITEM
      1. DESCRIPTION OF BUSINESS**




**Formation**




On
      March
      31, 2003, Knowledge Foundations, Inc. (“ KFI ”),
      now
      known as BSI2000, Inc., closed its reverse triangular merger with BSI2000,
      Inc.,
      a privately held Colorado corporation. Immediately prior to the closing, KFI
      spun-off all of its assets and liabilities (except for a $50,000 note payable
      and related accrued interest of $6,825) to Dr. Richard Ballard, Jan Pettitt,
      Michael Dochterman, Robert A. Dietrich, Joel Vest, all of whom are directors,
      officers, and/or principal shareholders of KFI, and certain other KFI
      shareholders. In connection with this spin-off, 34,105,900 shares of the common
      stock of KFI surrendered by the foregoing parties were cancelled. After this
      spin-off, 5,027,818 shares of KFI remained outstanding.




In
      closing the reverse merger transaction, KFI issued 45,122,570 shares of its
      common stock for all of the outstanding shares of common stock of BSI2000.
      Immediately following the closing, KFI changed its name to BSI2000, Inc. and
      BSI2000., a wholly-owned subsidiary of KFI as a result of the merger, changed
      its name to BSI Operating, Inc.




As
      a
      result of the foregoing transactions, KFI divested itself of its business and
      acquired the business of BSI2000 For financial reporting purposes, the foregoing
      transactions have been accounted for as a recapitalization of BSI2000.
      Accordingly the net increase in the BSI2000 outstanding shares of 41,363,488
      shares (from 8,786,900 to 50,150,388 shares of common stock) has been reflected
      in the financial statements as shares issued in the recapitalization of BSI2000,
      Inc.




As
      a
      result of the accounting method adopted to record the merger, the historical
      financial statements of BSI2000, Inc. have become the historical financial
      statements of the continuing entity for financial reporting purposes. The
      historical financial statements of KFI are not presented herein.




**Business**




BSI2000,
      Inc. was incorporated under the name “Unified Data Link, Incorporated” in
      July 1993, and changed its name to “Bank Systems 2000, Inc.” in
      April 1995. The Company changed its name to “BSI2000, Inc.” on May 19,
      1995.




BSI2000,
      Inc. (“ BSI ”
or
      the
“ Company ”)
      designs, builds, and sells high-end security related products for the homeland
      defense, entry/exit access control, and identification markets. The Company
      has
      developed and is beginning to sell patented and patent-pending systems for
      identifying, authenticating, and tracking people and their activities by
      combining biometrics, electronic identification (“ ID ”)
      cards
      of various types, sensors, extensive embedded software, and advanced
      cryptography.




The
      Company believes that since the terror attacks on the United States in
      September 2001, that a global push toward secure identification and
      tracking with new advanced technologies is underway and accelerating. BSI has
      developed over the past several years a spectrum of security related products
      that integrate special hardware and proprietary software to provide turnkey
      systems to try to meet this new need.




1


The
      Company identified three specific target submarkets within the overall security
      market and then built proprietary products that it believes are specific to
      those vertical markets. The first market is advanced entry/exit access control
      to protect valuable physical infrastructure such as corporate headquarters
      buildings, financial and information technology (“ IT ”)
      facilities, government sites such as nuclear and hydroelectric plants, water
      treatment works, petrochemical and chemical plants, national laboratories,
      and
      the like. The second target market is highly secure identification cards for
      national IDs and other purposes and the third target market is advanced but
      inexpensive portable fingerprint scanning systems and devices for use by police,
      sheriffs, first responders, and coroners.




The
      products that the Company has developed all depend on a central technology
      core
      of electronic identification cards, biometrics, and advanced cryptography and,
      thus, are all related. For example, the fingerprint scanning systems developed
      by BSI are direct results of the research and development completed by the
      Company over a period of several years to integrate biometrics into its other
      products.




In
      2003,
      the U.S. Immigration and Naturalization Service (“ INS ”),
      now
      part of the United States Department of Homeland Security (“ DHS ”),
      awarded a small development contract to BSI to build a pilot test Green Card
      authentication and verification system. Six of the resulting BSI SIGABA2000TM
units were delivered to INS for approximately $25,000. As part of that contract,
      the Company and its senior management and technical staff were granted certain
      security clearances that enabled BSI to complete classified work for the U.S.
      Federal Government. In addition, as part of that project, the Company designed
      and built the Crypto2000TMTM encryption, key management, and hardware random
      number generator hardware/software module which enables cryptographically secure
      transactions with optical cards that BSI believes is a capability unique to
      the
      Company. Key components of the Crypto2000TM unit have been certified under
      certain conditions by the National Institute of Standards and Technology
      (“ NIST ”)
      to the
      FIPS 140-1 (1, 2, 3) level which is a recognized advanced standard of encryption
      and, especially, hacker resistance. The Company has a project underway to gain
      the even stronger FIPS 140-2 (1, 2, 3, (physical) 4) certification from NIST
      for
      the entire Crypto2000TM system. The independent laboratory work for that effort
      is being completed by IBM/Canada (Domus) for submission to NIST. In addition,
      BSI is in the process of enhancing the Crypto2000TM module to provide similar
      protection for magnetic stripe, radio frequency identification (“ RFID ”),
      and
      contact/contactless smart cards based systems. The Company believes that
      Crypto2000TM with its associated patent applications provide a competitive
      advantage for BSI over other companies in the target markets.




**Current
      Products.** BSI has
      developed a number of closely related products that are designed specifically
      for the above described target markets:




**MAXXNET2000TM
      Entry/Exit Access Control System.** This
      product is designed to provide site protection for high-value buildings,
      installations, and facilities. MAXXNET2000TM combines electronic identification
      cards with biometrics, sensors, database systems, extensive embedded software,
      and integrated devices to protect commercial, government, and military
      installations. It is an access control suite of products that incorporate all
      of
      the security command and control functions that the Company believes are
      necessary in today's high-risk environment. With a 50,000 card reader capacity
      and a guaranteed transaction time of under one second, it is, BSI believes,
      one
      of the most powerful access control systems employed anywhere. MAXXNET2000TM
features include video badging, graphic alarm monitoring and control through
      an
      extensive graphical user interface (“ GUI ”)
      command and control interface, panel-based biometric template storage, closed
      circuit television (“ CCTV ”)
      and
      digital video recording (“ DVR ”)
      and
      audio integration. It also hosts other advanced and unique functions needed,
      the
      Company believes, to meet the security requirements of today's increasingly
      hostile threat environment. Up to 96 workstations can simultaneously monitor
      alarms and manage reactions within a complete worksite, which, if needed, can
      be
      distributed geographically across the globe. The functions of each workstation
      can be easily tailored to the specific needs of each facility. SECURUS2000TM is
      scalable from a single personal computer (“ PC ”)
      to
      interconnected networks that span the world. Further security is provided by
      the
      option of biometric workstation logon. By using its PLC RLLP programming,
      SECURUS2000TM provides, BSI believes, the operational flexibility to handle the
      most complex security command and control tasks. A core component of the system
      is the MAXX-NETTM base entry/exit access control system recently purchased, in
      its entirety, by the Company from New Sytron, Inc. and CyberCountry Systems,
      LLC
      which was then enhanced by BSI to include biometrics, advanced cryptography,
      and
      other items. MAXX-NETTM has been sold by New Sytron/CyberCountry and their
      predecessors to a number of airports, prisons and detention centers, corporate
      facilities and others. For example, MAXX-NETTM has provided entry/exit access
      control protection, and continues today, at the Denver International Airport
      (“ DIA ”),
      which
      has the most secure “Category X” rating by the Federal Aviation Administration
      (“ FAA ”),
      where
      it provides distributed and centrally controlled and monitored security for
      more
      than 50 individual buildings over 53 square miles with approximately 2,000
      controlled and monitored doors and access points. Some 45,000 ID/access
      electronic cards have been issued to flight crews, airline ground personnel,
      maintenance workers, vendors, and security personnel. Denver International
      Airport is the fifth busiest airport in the United States and the 10th busiest
      in the world. Other installations include Anchorage International Airport,
      the
      U.S. Air force Academy, Sterling Correctional Facility in Colorado, San
      Francisco Water Management, Riverside Justice Center, Rocky Mountain National
      Park, Missoula Detention Center in Montana, and others. BSI believes that the
      current installed base of MAXX-NETTM combined with the security enhancements made
      and underway by BSI including biometrics and advanced cryptography provides
      a
      competitive advantage for the Company for its “MAXXNET2000TM product. A patent
      has been awarded to BSI that the Company believes will help protect certain
      aspects of MAXXNET2000TM in the marketplace.




2


**AQUA2000TM
      Water Treatment Facility Monitoring, Intrusion Detection, and Access Control
      System.** Since
      the
      terror attacks of September 2001, DHS and other national agencies have
      issued guidance and directives that advise water treatment delivery systems
      to
      increase their vigilance to protect their infrastructure from physical attack
      or
      sabotage and, especially, to protect against possible chemical, biological,
      and
      radiological contamination. BSI developed the AQUA2000TM integrated system to
      enable treatment and delivery plants to counter such threats. The system
      combines the MAXXNET2000TM entry/exit access control system with additional
      capabilities and technologies that are specific to water treatment and was
      designed and developed in conjunction with leading water treatment engineers
      and
      specialists to provide a turnkey package able to monitor, identify, and assess
      potential and actual threats to the nation's water supply and delivery
      infrastructure. In April 2005, the Company sold its first AQUA2000TM system
      to the J. G. Beacham Water Treatment Plant in Athens, Georgia for approximately
      $250,000. In August 2005, BSI received a follow on order from the J. G.
      Beacham Plant for certain advanced real-time video monitoring capabilities.
      The
      Company has applied for several patents that, if awarded, BSI believes will
      help
      protect the product in the marketplace.




**CLEARID2000TMTM
      Electronic Fingerprint Scanning System.** The
      Company built the CLEARID2000TM specifically as a relatively inexpensive and
      portable, though advanced, electronic fingerprint scanning machine. It
      eliminates the manual inking procedures now commonly used and, BSI believes,
      dramatically increases the accuracy and reliability of print collection by
      providing immediate scan quality feedback to the operator. The system
      automatically electronically prints the standard Federal Bureau of
      Investigations (“ FBI ”)
      fingerprint FD258 “Blue” and FD249 “Red” hardcopy cards that are used across the
      country for background checks and scans by law enforcement agencies, school
      districts, numerous government agencies, contractors, and many others. The
      product was a direct fallout of the extensive research and development conducted
      in biometrics and other areas for advanced card entry/exit access control
      systems. In July 2005, BSI was notified that the FBI had tested the
      CLEARID2000TM-T configuration of the product and had certified it to be in
      compliance with the FBI's Integrated Automated Fingerprint Identification System
      (“ IAFIS ”)
      Image
      Quality Specifications (“ IQS ”).
      The
      Company began to ship CLEARID2000TM units in late June 2005 and current
      customers include several police and sheriff's departments as well as a
      coroner's office.




**VERUS2000TM
      Green Card Authentication Device.** BSI
      developed the VERUS2000TM system as a result of work performed for the INS, now
      DHS, under contract, in 2003. The system is designed, the Company believes,
      to
      inexpensively and reliably solve the problem of fake and counterfeit Green
      Cards
      carried by resident aliens that are used as primary identification by employees.
      BSI believes that such fraudulent Green Cards are in use across the country
      in
      high volume and represent a significant security hole for the defense of this
      country. VERUS2000TM has been tested by a major airport in the United States; by
      a state driver's license issuance bureau; and by a major European airline in
      a
      large European airport. BSI believes that passage of the REALID Act of 2005
      by
      Congress that was signed by President Bush may open a market for the product
      as
      states begin to comply with the Act's requirements to authenticate Green Cards
      before issuing state driver's licenses where a Green Card is presented as
      primary photo ID by license applicants. The Company has applied for a patent
      that, if awarded, BSI believes will help protect the product in the marketplace.
      However, there can be no assurance that such a market will exist.




**CIVILITAS2000TM
      Government Identification System.** The
      Civilitas (the Latin word for “citizen”) optical card is for government issue to
      record identification data and allows up to 16 separate government programs
      to
      be tracked and monitored on a single card, including border crossings, medical
      records, social pension eligibility and cash transfers, medical records, police
      records, etc. Each partition can have its own encryption key. Border crossings
      also may be monitored and flagged, as an option, by advanced heuristic software
      techniques to automatically notice suspicious events for closer inspection
      by
      security personnel. The system was designed and built by BSI to meet the
      expected requirements of the Italian National ID card project. In addition,
      the
      Company has proposed, and plans to continue to propose, the system to other
      countries. However, there can be no assurance that a market will exist for
      the
      product.




3


**MICROBANKER2000TM
      Optical Bank Card.** The
      Company has developed the MICROBANKER2000TM system to enable modern banking
      services to be easily implemented and deployed anywhere in the world. The system
      has no requirements for online telecommunications and is designed to operate
      in
      those parts of the world where it is difficult or impossible to authenticate
      and
      verify standard VISATM-style bankcards because telephone systems are expensive or
      nonexistent. Information that is written (and read) to (and from) the optical
      bank cards by the MICROBANKER2000TM terminals include a digital cardholder
      photograph, scanned fingerprints for biometric identification, name and address
      information, etc., current bank account balance, and a log/audit trail of all
      transactions generated and recorded on the card. In short, the MICROBANKER2000TM
system provides, BSI believes, everything needed to conduct secure day-by-day
      financial transactions in those parts of the world where such capabilities
      do
      not exist but are needed. The first target market for MICROBANKER2000TM is in
      South Africa. The Company completed a technology demonstration for a very large
      social organization with several million members in the remote far north of
      the
      country. The original intent of BSI was to create an entity under the so-called
      “village bank” concept to enable the entity to issue and operate bankcards.
      However, the South African laws changed which requires the Company to form
      a
      partnership with an established bank in South Africa which is the approach
      that
      BSI is currently and actively taking. The Company filed a patent in South Africa
      to, it believes, help protect the MICROBANKER2000TM system and the related
      concepts in that country. There can be no assurance that a market exists for
      the
      product.




***Technical
      Information*** .
      Most of
      the systems and products built and marketed by BSI include electronic
      identification cards. The Company supports all of the major card families such
      as magnetic stripe, RFID, contact/contactless smart cards, and the very secure
      optical cards in an effort to provide a spectrum of security levels - from
      the
      very low (e.g., magnetic stripe) to the midrange (e.g., smart cards) to the
      very
      high (e.g., optical cards).




BSI
      believes that optical cards are the most secure cards in the world because
      they
      have on the order of 100x - 1000x the amount of memory of other cards which
      enables digital cardholder photographs, multiple random biometrics, extensive
      access rights, and audit trails to be recorded on the card; because the written
      memory is permanent without the data fallout caused by static electricity and
      cosmic and natural radiation that is encountered with smart cards; and because
      optical cards meet certain international travel document and other
      standards.




BSI
      continues to develop (and apply for patent protection covering) software in
      the area of strong encryption techniques and high-performance data management
      methods for card systems. BSI has 19 patent applications pending and has been
      awarded one patent. These methods are required for secure and efficient card
      systems to be safely used in the field. Other patent applications cover the
      use
      of the technology.




The
      hardware for most applications is fairly straightforward and consists of a
      metal
      or plastic shell, internal bracketry, power supply and switching, control button
      and status light emitting diodes ( LEDs ”),
      color
      liquid crystal display (“ LCD )
      screen,
      single board process control computer, integrated optical card device, sound
      transducer, thermal printer, and others. However, hardware for the MAXXNET2000
      entry exit access control system includes a number of custom hardware PC
      boards.




Devices
      integrated into BSI systems include fingerprint scanners, signature verification
      pads, and external door lock controls.




***Patents*** .
      BSI has
      applied to the United States Patent & Trademark Office (the “ USPTO ”)
      for
      the following patents among others: (1) medical record maintenance and analysis
      system, (2) optical card security system, (3) optical prescription card, (4)
      cryptographic key management device, (5) cryptographically secure transactions
      with optical cards, (6) hardware random number generator, (7) optical card
      fitness system, (8) optical banking card, (8) traveler screening system, (9)
      authenticating optical card reader, (10) cryptographically secure transactions
      with optical cards - international application, (11) optical motor vehicle
      card,
      (12) optical military card, (13) optical card for updating software, (14)
      systems and methods for reading optical card data, (15) optical immunization
      card, (16) embedded holograms on optical cards, (17) facility security with
      optical cards, (18) optical drive, and (19) authentication of optical cards,
      and
      others. To date, BSI has filed 19 patent applications in the U.S. and one in
      South Africa (Optical banking card). One patent has been awarded to the Company
      - “Optical Card Based System for Individualized Tracking and Record Keeping”
(USPTO #6,775,774) which was issued in August 2004.




***Sales
      and Marketing, and Sources of Revenue*** .
      BSI’s
      sales and marketing strategy and our plan to create sources of revenue has
      three
      primary components:




1.  Identify
      target markets that have, the Company believes, a real need. Design and build
      products that meet that need. File patents to cover as much of the newly
      developed technology or new uses for existing technology as practical and as
      affordable by BSI.




4


2.  Setup
      sales channels on an individual basis for each product. For example, with
      AQUA2000TM , build relationships with the consulting engineering companies that
      work with water treatment plants to design their security upgrades. For
      CIVILITAS2000TM, create teaming agreements with larger companies that have, or
      are expected to have, contracts in place for national ID card systems for
      national governments. For CLEARID2000TM, put into place agreements with regional
      and national distributors of security equipment and strive to have the equipment
      listed in the standard Department of Homeland Security (“ DHS ”)
      approved equipment lists. For SECURUS2000TM, create relationships with regional
      and national security systems distributors but also work with qualified
      engineering consulting firms that have contracts or are expected to have
      contracts to design security systems and upgrades for airports. For VERUS2000TM,
      approach the DHS directly.




3.  Market
      the products of the Company as aggressively as practical and affordable by
      the
      methods above and by targeted direct mailings of short marketing video digital
      video disk (“ DVDs ”)
      and
      other material. In addition, work with media outlets to bring BSI and its
      products to the attention of the customer and potential customer
      base.




***Current
      Contracts*** . **** It
      is
      important to note that BSI has not yet delivered product in any significant
      quantity; however, BSI has put into place various strategic teaming and alliance
      agreements with substantial external partner companies as follows:




***L.C.
      Sistemia*** .
      On
      May 7, 2001, BSI signed a strategic alliance agreement with L.C. Sistemia,
      an Italian systems engineering and project management company with offices
      in
      Rome (“ LCS ”).
      Pursuant to legislation enacted in 2000 to implement a secure national
      identification card system, the Italian government awarded two contracts. One
      contract is held by Siemens A.G. to install and operate card initialization
      systems (i.e., issuance of secure optical cards) for ultimately up to
      58,000,000 people. The second contract is held by LCS to supply the optical
      cards and card transaction units for use in passport offices, medical clinics,
      police stations, post offices, and other government offices.




Until
      May 7, 2011, BSI has the exclusive right to develop and market the
      transaction units into Italy through LCS, as required to satisfy LCS’ contract
      with the Italian government. LCS has agreed not to design, market or sell any
      other company’s optical card transaction units to the Italian government. The
      price for the units will be BSI’s actual direct cost plus 25%. Development costs
      and changes in products will be borne by BSI. BSI will be paid an additional
      amount equal to a 1% royalty on all amounts paid for optical cards sold into
      Italy by LaserCard Systems Corporation, and this royalty will be paid to BSI
      by
      LaserCard Systems Corporation. As of the date hereof, BSI has not received
      an
      initial order for transaction processing units or an estimate of the amount
      of
      the initial order or the timing thereof.




BSI
      has
      the right to terminate the agreement with LCS if sales into Italy are less
      than
      target levels. BSI has developed the Civilitas 2000 national identification
      card
      system, which is expected to be used in the LCS portion of the encryption and
      data programming of cards for the Italian government system. BSI retains all
      rights to this technology, and intends to market similar systems to other
      governments.




***LaserCard
      Systems*** .
      On
      April 28, 2000, BSI signed a one year agreement with LaserCard Systems,
      which was renewed on June 3, 2004 for a one-year term. Pursuant to the
      agreement, LaserCard Systems Corporation had the right to sell its products
      to
      other resellers and end-users. During the term of the contract, BSI bought
      a
      limited amount of products from LaserCard Systems Corporation. The agreement
      has
      been renewed and remains valid until September 5, 2006.




**Other
      Agreements.** BSI
      also
      has in place a number of teaming, distribution, and other agreements, most
      of
      which have been recently formed.




**MAXX-NETTM** ***.*** On
      August 25, 2005, BSI2000, Inc. entered into an Assignment of Intellectual
      Property Rights and related Security Agreement with The New Sytron, Inc., a
      Colorado corporation (“ NSI ”),
      pursuant to which BSI purchased all right, title and interest in and to the
      access control system commonly known as “MAXX-NETTM ” (the “ MAXX-NETTM
      System ”).
      As
      consideration for the purchase, BSI (a) paid $150,000 to NSI, (b) issued NSI
      a
      6%, 48-month secured promissory note in the principal amount of $500,000, and
      (c) issued NSI a warrant to purchase 1,000,000 shares of the Company’s common
      stock, par value $0.001 per share, at an exercise price of $0.05 per share.
      BSI
      markets, sells and supports the MAXXNET system under the name
      MAXXNET2000.




***Competition*** *.* The
      Company believes that its primary competition comes from vendors with similar
      products but that have significantly less security. For example, there are
      numerous entry/exit access control systems on the market, but BSI knows of
      no
      other system similar to MAXXNET2000TM available that incorporates highly secure
      cards, effective and certified encryption, and with the large installed base,
      and credibility, of MAXXNET2000TM . For the fingerprinting market, while there
      are numerous competitors to the products available from the Company, BSI is
      not
      aware of any competing system with the portability and relative low cost of
      the
      CLEARID2000TM machine. In addition, the Company believes that the CRYPTO2000TM
encryption module is unique and that no competing system exists anywhere for
      optical cards. However, it should be noted that many of the competitors of
      BSI
      are significantly larger with far more resources than the Company. There can
      be
      no assurance that BSI will be able to compete in the marketplace.




5


BSI
      is
      aware of only one other competitor, Zerco Systems, Inc., a small company, that
      markets embedded optical card systems of any form. BSI believes it can compete
      effectively against Zerco as Zerco appears to have only one embedded product
      and
      has, the Company believes, very limited sales to date.




***Manufacturing,
      Support and Facilities*** .
      BSI out
      sources hardware manufacturing to one or more contract assembly houses on a
      turnkey basis. The manufacturer will manage all parts purchasing, inventory
      control, quality control, fabrication and assembly, testing, as well as burn-in
      operations as volumes of shipped equipment and systems increase.




Fully
      tested and finished hardware products will be shipped to the Company's office
      in
      Lakewood, Colorado where the proprietary control and security software will
      be
      loaded and encryption keys installed. After complete checkout, the finished
      software and hardware units will be packaged, inventoried, and shipped to the
      end-user.




The
      Company believes that the primary advantages to this approach include the
      ability to control inventory on an agile 30-day (or less) schedule, the
      ability to benefit from the parts purchasing power of a large assembler, and
      the
      elimination of direct purchasing and components overhead.




Except
      for the optical card reader drives and heads that BSI buys from LSI, all
      purchased electronic components for the products are standard and commercially
      available from multiple sources. A typical BSI machine has several hundred
      inventoried components and subassemblies including a number of custom machined
      pieces.




With
      the
      present lower volumes, all systems, other than MAXXNET electronic PC boards
      are
      assembled and tested in-house and then shipped to the customer.




***Employees*** .
      As of
      December 31, 2005, BSI had 10 full-time **** and
      no
      part-time employees, of which three are involved in software programming and
      support, five are involved in the marketing and deployment of product, and
      two
      are involved in BSI’s administrative and financial operations. None of BSI’s
      employees are represented by a labor union, and BSI has never experienced a
      work
      stoppage. BSI believes that its relationship with its employees are good. BSI’s
      ability to achieve its financial and operational objectives depends in large
      part upon BSI’s continuing ability to attract, integrate, retain and motivate
      highly qualified sales, technical and managerial personnel, and upon the
      continued service of BSI’s senior management and key sales and technical
      personnel. See the section of this Report entitled “Executive Compensation.”
Competition for such qualified personnel in BSI’s industry and the geographical
      locations of BSI’s offices is intense, particularly in software development and
      technical personnel.




***Research
      & Development*** .
      BSI
      expended $462,304 in 2005 for research and development (“ R&D ”)
      purposes as compared to $542,635 in 2004. This decrease is attributable to
      consulting fees of $50,145 and salaries of $23,018. These costs were expensed
      as
      incurred and decreased as a result of the needs identified relating to potential
      markets for BSI’s products in various parts of the world.




**ITEM
      2. DESCRIPTION OF PROPERTY**




BSI
      leases 2,800 square feet of space at 12600 West Colfax Avenue, B410, Lakewood,
      Colorado. The lease, which expires on February 1, 2007, provides for rental
      payments of $4,349.04 per month plus payment of BSI’s share of building
      operating expenses, such as real estate taxes, insurance and utilities. BSI
      also
      leases an additional 2,367 square feet of space at 12600 West Colfax Avenue,
      A-260, Lakewood, Colorado. The lease, which expires on September 1, 2009,
      provides for rental payments of $3,156 per month plus payment of BSI’s share of
      building operating expenses, such as real estate taxes, insurance and utilities.
      The offices house sales and marketing, software and hardware research and
      development as well as manufacturing control, limited inventory and other
      administrative tasks.




**ITEM
      3. LEGAL PROCEEDINGS**




BSI
      is
      not a party to any pending legal proceedings outside the ordinary course of
      its
      business other than as set forth below.




6


On
      November 19, 2004, **** Excell
      HDI (“ Excell ”)
      brought a lawsuit against BSI in the District Court of Jefferson County,
      Colorado, alleging breach of contract and fraudulent inducement of contract
      in
      connection with a Marketing Services Agreement (the “ MSA ”)
      between the parties where Excell acted as a consultant to BSI. The suit sought
      damages of $78,750 and exemplary damages of another $78,750. After being advised
      by counsel of the expected cost to defend against the suit, BSI settled the
      lawsuit during June 2005 by agreeing to pay to Excell $28,000 over a three
      month period. Included in the settlement are mutual releases from both parties.
      As of September 30, 2005, the settlement amount was paid in full.





During
      October 2005, the Company was notified of a potential claim that relates to
      its
      purchase of the MAXX-NETTM assets from NSI. The claim involves copyright issues
      that relate to third party software that is used in certain MAXX-NETTM
installations. The Company believes that this claim does not have merit, and
      will defend its position in this matter vigorously. The Company believes that
      this claim will not have a significant financial impact and therefore has made
      no allowance nor established any reserve for this claim in the financial
      statements appearing elsewhere in this Report.




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




On
      July
      20, 2005, BSI held a special meeting of its stockholders to present an Amendment
      to its Certificate of Incorporation to increase the authorized shares of BSI’s
      common stock, par value $0.001 per share, from 200,000,000 shares to 400,000,000
      shares. A quorum was present at the special meeting and the Amendment to the
      Certificate of Incorporation was adopted having received 84,171,993 votes in
      favor, 6,628,149 against and 1,209,072 abstentions.




7


**PART
      II**




**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES**




BSI’s
      common stock currently trades on the Over-the-Counter Bulletin Board (the
“ OTCBB ”)
      under
      the trading symbol “BSIO”.




The
      following table sets forth the average high and low bid information for the
      common stock for each quarter within the last two fiscal years as reported
      by
      the National Quotation Bureau, and represent interdealer quotations, without
      retail markup, markdown or commission, and may not be reflective of actual
      transactions.




**Bid
                Prices****High**
            
            **Low****2004**First
                Quarter
            
            
            0.1700
            
            
            0.0830Second
                Quarter
            
            
            0.134
            
            
            0.036Third
                Quarter
            
            
            0.105
            
            
            0.051Fourth
                Quarter
            
            
            0.068
            
            
            0.0515**2005**First
                Quarter
            
            
            0.058
            
            
            0.028Second
                Quarter
            
            
            0.049
            
            
            0.020Third
                Quarter
            
            
            0.077
            
            
            0.033Fourth
                Quarter
            
            
            0.053
            
            
            0.026**2006**January
                2 through March 17
            
            
            0.037
            
            
            0.025





BSI
      is
      authorized to issue 400,000,000 shares of common stock, $ 0.001 par value per
      share. As of March 11, 2006, there were 126,629,677 shares of common stock
      issued and outstanding. As of March 11, 2006, BSI had approximately 350
      shareholders of record for its common stock.




BSI
      is
      authorized to issue 20,000,000 shares of preferred stock, $0.001 par value
      per
      share, none of which is outstanding. The preferred stock is undesignated and
      may
      not be designated or issued by the Company’s Board of Directors (the
“ Board ”)
      absent
      prior stockholder approval.




**Dividends**




BSI
      has
      not declared or paid cash dividends on its common stock since its inception
      and
      does not anticipate paying such dividends in the foreseeable future. The payment
      of dividends may be made at the discretion of the Board and will depend upon,
      among other factors, on BSI’s operations, its capital requirements, and its
      overall financial condition.




**Recent
      Sales of Unregistered Securities**




During
      the last three years, BSI sold the following unregistered
      securities:




On
      February 10, 2006, BSI issued a 12% secured convertible debenture to Cornell
      Capital Partners, LP (“ Cornell ”)
      in the
      principal amount of $1,000,000 . This debenture superseded the debenture that
      was issued on November 2, 2005 as described in the next paragraph. Of this
      principal amount, $350,000 was funded on November 4, 2005, $300,000 was funded
      on February 10, 2006, $100,000 will be funded on the fifth business day
      following an increase in the Company’s common stock, par value $0.001 per share,
      and $250,000 was to be funded two business days prior to the date a registration
      statement was to be filed with the United States Securities and Exchange
      Commission (the “ SEC ”
or
      the
“ Commission ”)
      to
      register the shares underlying the debenture. The debentures were secured by
      substantially all of BSI’s assets, had a three-year term and accrued interest at
      12% per annum. **** Cornell
      was entitled, at its option, to convert, and sell all or any part of the
      principal amount of the debentures, plus accrued interest, into shares of BSI’s
      common stock at the price per share equal to the lesser of (a) an amount
      equal to an amount equal to 120% of the closing bid price of the common stock
      as
      listed on a principal market as quoted by Bloomberg LP, on November 3, 2005
      or
      (b) an amount equal to 80% of the lowest closing bid price of the common
      stock for the five trading days immediately preceding the conversion date which
      may be adjusted pursuant to the other terms of the debentures. BSI could redeem,
      with three business days advance written notice to Cornell, a portion or all
      amounts outstanding under the debentures prior to the maturity date as follows:
      (i) if the closing bid price of the of BSI’s common stock, as reported by
      Bloomberg, LP, was less than the fixed price, as defined below, at the time
      of
      the redemption notice, BSI was to pay an amount equal to the principal amount
      outstanding and accrued interest being redeemed, plus a redemption premium
      of
      20% of the amount redeemed. The “Fixed Price” was an amount equal to 120% of the
      closing bid price of the BSI’s common stock as listed on a principal market as
      quoted by Bloomberg LP on November 3, 2005. BSI also issued to Cornell five
      year
      warrants for 1,250,000 shares at $0.04 per share, 5,000,000 shares at $0.02
      per
      share 15,000,000 shares at an exercise price of $0.01 or as subsequently
      adjusted under the terms of the warrant.




8


On
      November 2, 2005, BSI issued a 12% secured convertible debenture to Cornell
      in
      the principal amount of $1,000,000. Of this principal amount, $350,000 was
      funded on November 4, 2005, $400,000 was to be funded on the fifth business
      day
      following an increase in the Company’s common stock, par value $0.001 per share,
      and $250,000 was to be funded two business days prior to the date a registration
      statement was to be filed with the Commission to register the shares underlying
      the debenture. The debentures were secured by substantially all of BSI’s assets,
      had a three-year term and accrued interest at 12% per annum. **** Cornell
      was entitled, at its option, to convert, and sell all or any part of the
      principal amount of the debentures, plus accrued interest, into shares of BSI’s
      common stock at the price per share equal to the lesser of (a) an amount
      equal to an amount equal to 120% of the closing bid price of the common stock
      as
      listed on a principal market as quoted by Bloomberg LP, on November 3, 2005
      or
      (b) an amount equal to 80% of the lowest closing bid price of the common
      stock for the five trading days immediately preceding the conversion date which
      may be adjusted pursuant to the other terms of the debentures. BSI could redeem,
      with three business days advance written notice to Cornell, a portion or all
      amounts outstanding under the debentures prior to the maturity date as follows:
      (i) if the closing bid price of the of BSI’s common stock, as reported by
      Bloomberg, LP, was less than the fixed price, as defined below, at the time
      of
      the redemption notice, BSI was to pay an amount equal to the principal amount
      outstanding and accrued interest being redeemed, plus a redemption premium
      of
      20% of the amount redeemed. The “Fixed Price” was an amount equal to 120% of the
      closing bid price of the BSI’s common stock as listed on a principal market as
      quoted by Bloomberg LP on November 3, 2005. In the event the debentures were
      redeemed, then BSI was to issue to Cornell a warrant to purchase 20,000,000
      shares at an exercise price of $0.05 or as subsequently adjusted under the
      terms
      of the warrant.




On
      August 5, 2005, BSI issued a 5% secured convertible debenture in the amount
      of $1,000,000 to Cornell that is due August 2, 2007. The debenture is
      convertible into BSI’s common stock at a price per share equal to the lesser of
      (a) 120% of the closing bid price of the common stock as listed on a principal
      market, as quoted by Bloomberg LP as of August 2, 2005, or (b) 80% of the lowest
      closing bid price of BSI’s common stock, as quoted by Bloomberg, LP, for the
      five trading days immediately preceding the conversion date. The debenture
      will
      automatically convert into BSI’s common stock on the second anniversary of
      issuance. BSI has the right to redeem the debenture with three days advance
      notice any or all of the outstanding debenture amount at its sole discretion.
      The redemption price will be 120% of the face amount redeemed plus accrued
      interest. Once the redemption notice has been given, Cornell may continue to
      convert the remaining outstanding debenture. In the event that BSI exercises
      it
      right of redemption as described above for either all or a portion of the
      outstanding debenture, Cornell will receive for every $100,000 invested a
      warrant to purchase 50,000 shares of BSI’s common stock. The warrant will have
“piggy-back” registration rights and will survive for two years from closing.
      The exercise price of the warrant will be 120% of the volume weighted average
      price on the closing date.




On
      July 15, 2005, BSI issued a 5% secured convertible debenture in the amount
      of $125,000 to Cornell that is due July 15, 2007. The debenture is
      convertible into BSI’s common stock at a price per share equal to the lesser of
      (a) 120% of the closing bid price of the common stock as listed on a principal
      market, as quoted by Bloomberg LP, on July 15, 2005, or (b) 80% of the lowest
      closing bid price of BSI’s common stock, as quoted by Bloomberg, LP, for the
      five trading days immediately preceding the conversion date. The debenture
      will
      automatically convert into BSI’s common stock on the second anniversary of
      issuance. BSI has the right to redeem the debenture with three days advance
      notice any or all of the outstanding debenture amount at its sole discretion.
      The redemption price will be 120% of the face amount redeemed plus accrued
      interest. Once the redemption notice has been given, Cornell may continue to
      convert the remaining outstanding debenture. In the event that BSI exercises
      it
      right of redemption as described above for either all or a portion of the
      outstanding debenture, Cornell will receive for every $100,000 invested a
      warrant to purchase 50,000 shares of BSI’s common stock. The warrant will have
“piggy-back” registration rights and will survive for two years from closing.
      The exercise price of the warrant shall be 120% of the volume weighted average
      price on the closing date




On
      June 17, 2005, BSI issued a 5% secured convertible debenture in the amount
      of $125,000 to Cornell that is due June 17, 2008. The debenture is
      convertible into BSI’s common stock at a price per share equal to the lesser of
      (a) 120% of the closing bid price of the common stock as listed on a principal
      market, as quoted by Bloomberg LP, as of June 17, 2005, or (b) 80% of the lowest
      closing bid price of BSI’s common stock, as quoted by Bloomberg, LP, for the
      five trading days immediately preceding the conversion date. The debenture
      will
      automatically convert into BSI’s common stock on the second anniversary of
      issuance. BSI has the right to redeem the debenture with three days’ advance
      notice any or all of the outstanding debenture amount at its sole discretion.
      The redemption price will be 120% of the face amount redeemed plus accrued
      interest. Once the redemption notice has been given, Cornell may continue to
      convert the remaining outstanding debenture. In the event that BSI exercises
      it
      right of redemption as described above for either all or a portion of the
      outstanding debenture, Cornell will receive for every $100,000 invested a
      warrant to purchase 50,000 shares of BSI’s common stock. The warrant will have
“piggy-back” registration rights and will survive for two years from closing.
      The exercise price of the warrant shall be 120% of the volume weighted average
      price on the closing date.




9


On
      January 19, 2005, BSI issued a 5% convertible debenture in the amount of
      $250,000 to Cornell that is due January 20, 2008. The debenture is
      convertible into BSI’s common stock at either the fixed price of 120% of the
      Volume Weighted Average Price on January 19, 2005, or 80% of the average of
      the three lowest daily Volume Weighted Average Price, as reported by Bloomberg,
      LP, of BSI’s common stock for the five trading days immediately preceding the
      conversion date. The debenture will automatically convert into BSI’s common
      stock on the third anniversary of issuance. BSI has the right to redeem the
      debenture with three days’ advance notice any or all of the outstanding
      debenture amount at its sole discretion. The redemption price will be 120%
      of
      the face amount redeemed plus accrued interest. Once the redemption notice
      has
      been given, Cornell may continue to convert the remaining outstanding debenture.
      In the event that BSI exercises it right of redemption as described above for
      either all or a portion of the outstanding debenture, Cornell will receive
      for
      every $100,000 invested a warrant to purchase 50,000 shares of BSI’s common
      stock. The warrant will have “piggy-back” registration rights and will survive
      for two years from closing. The exercise price of the warrant shall be 120%
      of
      the volume weighted average price on the closing date.




On
      December 10, 2004, BSI received net proceeds of $435,723 from a $500,000
      secured promissory note issued to Cornell. The note was repaid August 10, 2005.
      The note is secured by substantially all of BSI’s non-cash assets. The note
      bears interest at 12% per annum during its term, and bears a default rate of
      interest of 24% if the note is not paid when due. BSI paid cash fees of $64,277
      in connection with the issuance of the note. As of March 10, 2005 BSI
      effectively repaid $325,000 of the note and accrued interest pursuant to
      draw-downs under the Equity Line (described below).




On
      November 4, 2004, BSI received net proceeds of $178,051 from a $200,000 secured
      promissory note issued to Cornell. The note was due on December 4, 2004.
      The note was secured by substantially all of BSI’s non-cash assets. The note
      carried interest at 12% per annum during its term, and carried a default rate
      of
      interest of 24% if the note was not paid when due. BSI paid cash fees of $21,949
      in connection with the issuance of the note. As of December 31, 2004, BSI
      effectively repaid this note and accrued interest thereon pursuant to draw-downs
      under the Equity Line.




On
      October 7, 2004, BSI issued a 5% convertible debenture in the amount of $500,000
      to Cornell that is due October 7, 2007, on December 10, 2004, BSI issued a
      5% convertible debenture in the amount of $500,000 to Cornell that is due
      December 10, 2007, and on January 20, 2005, BSI issued a 5% convertible
      debenture in the amount of $250,000 to Cornell that is due January 20, 2008.
      These three debentures are convertible into BSI’s common stock at either the
      fixed price of 120% of the Volume Weighted Average price on the closing date
      (October 7, 2007, December 10, 2007 and January 20, 2008, respectively) or
      80% of the average of the three lowest daily Volume Weighted Average Price,
      as
      reported by Bloomberg, L.P., of BSI’s common stock for the five trading days
      immediately preceding the conversion date. These debentures will automatically
      convert into BSI’s common stock on the third anniversary of issuance. BSI has
      the right to redeem the debentures with three days advance notice any or all
      of
      the outstanding debenture amount at its sole discretion. The redemption price
      will be 120% of the face amount redeem plus accrued interest. Once the
      redemption notice has been given, Cornell may continue to convert the remaining
      outstanding debenture. On October 7, 2004, BSI received $500,000 less a 10%
      fee
      of $50,000 and $10,000 for legal costs. BSI received $500,000 (net of 10% fee)
      on December 10, 2004 and $250,000 (net of 10% fee) on January 20, 2005.
      Cornell has the option to convert these debentures on the same day as issuance.
      As a result of this conversion feature, Cornell has been provided intrinsic
      value that has been calculated as the difference between the price of the
      Company’s common stock on the date of issuance, as compared to the discounted
      conversion price (or 80% of the stock price on the date of issuance). This
      intrinsic value has been multiplied by the number of shares that would be issued
      to Cornell upon conversion, which has resulted in $125,000 of intrinsic value
      for each of the convertible debentures issued during 2004. Accretion of this
      intrinsic value will be incurred over the term of the convertible debenture
      as a
      charge to interest expense. In accordance with EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and potentially Settled in, a
      Company’s Own Stock”, the conversion feature of each convertible debenture has
      been included as a short-term liability and were originally valued at fair
      value
      at the date of issuance. As a liability, the convertible features are revalued
      each period until and unless the debt is converted. During the year ended
      December 31, 2004, the Company recorded other income of $29,954 related to
      the
      change in fair value from the date of issuance of the debt to December 31,
      2004.
      This amount is included as a component of other income in the accompanying
      consolidated statement of operations. If the debt is converted prior to
      maturity, the carrying value will be transferred to equity.




10


On
      September 13, 2004, BSI issued 990,099 shares of common stock to Cornell for
      $50,000 cash. Costs associated with this transaction were $2,500.




On
      July
      15, 2004, BSI issued Bernard Nann 250,000 options at a strike price of $0.089
      per share, 50,000 of which vested on the date of the grant, and the remaining
      200,000 vests 50,000 per year for so long as Mr. Nann remains a director of
      BSI.
      These options were issued as compensation to Mr. Nann for his present and future
      services as a director of BSI. All of these options have a 5-year term.




On
      June
      18, 2004, BSI received net proceeds of $231,935 from a $250,000 secured
      promissory note issued to Cornell. The note was due on October 18, 2004. The
      note was secured by substantially all of BSI’s non-cash assets. The note carried
      interest at 12% per annum during its term, and carried a default rate of
      interest of 24% if the note was not paid when due. BSI paid cash fees of $18,065
      in connection with the issuance of the note. During 2004, BSI effectively repaid
      this note and accrued interest thereon pursuant to draw-downs under the Equity
      Line.




On
      June
      8, 2004, BSI received net proceeds of $320,208 from a $350,000 secured
      promissory note issued to Cornell. The note was due on September 20, 2004.
      The
      note was secured by substantially all of BSI’s non-cash assets. The note carried
      interest at 12% per annum during its term, and carried a default rate of
      interest of 24% if the note was not paid when due. BSI paid cash fees of $29,792
      in connection with the issuance of the note. During 2004, BSI effectively repaid
      this note and accrued interest thereon pursuant to draw-downs under the Equity
      Line.




On
      April
      14, 2004, BSI received net proceeds of $229,679 from a $250,000 secured
      promissory note issued to Cornell. The note was due on June 21, 2004. The note
      was secured by substantially all of BSI’s non-cash assets. The note carried no
      interest during its term, but carried a default rate of interest of 24% if
      the
      note is not paid when due. BSI paid cash fees of $20,321 in connection with
      the
      issuance of the note. During 2004, BSI effectively repaid this note and accrued
      interest thereon pursuant to draw-downs under the Equity Line.




On
      March
      12, 2004, BSI issued Richard Kirk 250,000 options at a strike price of $0.11
      per
      share, all of which vested on the date of the grant. These options were issued
      as compensation to Mr. Kirk for his services as a director of BSI. All of these
      options have a 5-year term.




On
      March
      3, 2004, BSI received net proceeds of $229,524 from a $250,000 secured
      promissory note issued to Cornell. The note was due on June 23, 2004. The note
      was secured by substantially all of BSI’s non-cash assets. The note carried
      interest of 12% during its term, and carried a default rate of interest of
      24%
      if the note is not paid when due. BSI paid cash fees of $20,476 in connection
      with the issuance of the note. During 2004, BSI effectively repaid this note
      and
      accrued interest thereon pursuant to draw-downs under the Equity
      Line.




On
      February 4, 2004, BSI received net proceeds of $223,559 from a $250,000 secured
      promissory note issued to Cornell. The note was due on May 12, 2004. The note
      was secured by substantially all of BSI’s non-cash assets. The note carried no
      interest during its term, but carried a default rate of interest of 24% if
      the
      note is not paid when due. BSI paid cash fees of $26,441 in connection with
      the
      issuance of the note. During 2004, BSI effectively repaid this note and accrued
      interest thereon pursuant to draw-downs under the Equity Line.




On
      December 19, 2003, BSI received net proceeds of $170,917 from a $200,000
      secured promissory note issued to Cornell Capital Partners. The note is due
      on
      April 26, 2004. The note is secured by substantially all of BSI’s non-cash
      assets. The note bears no interest during its term, but bears a default rate
      of
      interest of 24% if the note is not paid when due. Discounts and fees paid to
      obtain the loan were $29,083. During 2004, BSI effectively repaid this note
      and
      accrued interest thereon pursuant to draw-downs under the Equity
      Line.




On
      October 31, 2003, BSI entered into an Equity Line of Credit Agreement (the
      “ Equity
      Line ”)
      with
      Cornell. Under the Equity Line, BSI may issue and sell to Cornell common stock
      for a total purchase price of up to $15 million. Subject to certain conditions,
      BSI is entitled to commence drawing down on the Equity Line when the common
      stock to be issued under the Equity Line is registered with the Commission
      and
      the registration statement is declared effective and will continue for two
      years
      thereafter. The purchase price for the shares will be equal to 99% of the market
      price, which is defined as the lowest closing bid price of the common stock
      during the five trading days following the notice date. The amount of each
      advance is subject to an aggregate maximum advance amount of $210,000, with
      no
      advance occurring within seven trading days of a prior advance. Cornell received
      1,875,000 shares of common stock as a one-time commitment fee. Cornell is
      entitled to retain a fee of 4% of each advance. In addition, BSI entered into
      a
      related placement agent agreement with Newbridge Securities Corporation
      (“ Newbridge ”),
      a
      registered broker-dealer. Pursuant to the placement agent agreement, BSI paid
      Newbridge a one-time placement agent fee of 35,714 shares of common stock.
      The
      Equity Line was terminated on October 30, 2005.




11


Except
      as
      otherwise indicated above, BSI believes that all of the above transactions
      were
      transactions not involving any public offering within the meaning of Section
      4(2) of the Securities Act of 1933, as amended (the “ 1933
      Act ”),
      since
      (a) each of the transactions involved the offering of such securities to a
      substantially limited number of persons; (b) each person took the securities
      as
      an investment for his/her/its own account and not with a view to distribution;
      (c) each person had access to information equivalent to that which would be
      included in a registration statement on the applicable form under the 1933
      Act;
      (d) each person had knowledge and experience in business and financial matters
      to understand the merits and risk of the investment; therefore no registration
      statement needed to be in effect prior to such issuances.




**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




**General**




The
      following discussion and analysis should be read in conjunction with the
      Consolidated Financial Statements and the Notes thereto appearing elsewhere
      in
      this Report.




**Going
      Concern**




The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the ordinary course of business.




Our
      independent auditors have added an explanatory paragraph to their audit opinions
      issued in connection with the years 2005 and 2004 financial statements, which
      states that the financial statements raise substantial doubt as to BSI’s ability
      to continue as a going concern. Our ability to make operations profitable or
      obtain additional funding will determine our ability to continue as a going
      concern. Our financial statements do not include any adjustments that might
      result from the outcome of this uncertainty. Based on our current budget
      assessment, we believe that we will need to obtain approximately $1,875,000
      in
      additional debt or equity capital from one or more sources to fund operations
      for the next 12 months. These funds are expected to be obtained from the sale
      of
      securities. However, no assurances can be given that BSI will be successful
      in
      such activities. Should it not be, the accompanying financial statements will
      be
      materially affected and our ability to continue as a going concern could be
      severely hampered. BSI does not have cash reserves on hand that will sustain
      operations beyond March 31, 2006.




**Critical
      Accounting Policies And Estimates**




Management’s
      discussion and analysis of BSI’s financial condition and results of operations
      are based upon BSI’s consolidated financial statements, which have been prepared
      in accordance with accounting principles generally accepted in the United States
      of America. The preparation of these financial statements requires that BSI
      make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and related disclosure of contingent assets and
      liabilities. At each balance sheet date, management evaluates its estimates,
      including but not limited to, those related to inventories, accrued liabilities,
      and the valuation allowance offsetting deferred income taxes. BSI bases its
      estimates on historical experience and on various other assumptions that are
      believed to be reasonable under the circumstances. Actual results may differ
      from these estimates under different assumptions or conditions. The estimates
      and critical accounting policies that are most important in fully understanding
      and evaluating BSI’s financial condition and results of operations include those
      listed below, as well as its valuation of equity securities used in transactions
      and for compensation, and its revenue recognition methods.




12




**Revenue
      Recognition**




BSI
      recognizes revenue in compliance with the SEC Staff Accounting Bulletin
      (“ SAB ”)
      No.
      101, “Revenue Recognition in Financial Statements”. Revenue is recognized when
      an order has been placed by the customer, the product has been shipped and
      collectibility is reasonably assured. Prices of the products are determined
      prior to entering into a purchase agreement. From inception through
      December 31, 2005, revenues earned represented sales to distributors of
      demonstrations units of BSI’s products. Transaction-based revenue is recognized
      as transactions are completed and are billed monthly based on service agreement
      rates in effect. Distribution rights revenue is recognized ratable over the
      life
      of each underlying distribution agreement.




**Intangible
      Assets**




Intangibles
      include trademarks and patents, which are recorded at cost. To date, BSI has
      been awarded one patent by the USPTO, and has 19 additional provisional and
      non-provisional applications for patents pending with the USPTO. Once accepted,
      BSI will begin amortization over the life of each patent.




**Income
      Taxes**




BSI
      recognizes deferred tax liabilities and assets based on the differences between
      the tax basis of assets and liabilities and their reported amounts in the
      financial statements that will result in taxable or deductible amounts in future
      years.




**Software
      And Research And Development Costs**




Expenditures
      made for research and development are charged to expense as incurred. Costs
      incurred to date for the development of BSI’s products have been charged to
      expense as incurred. Future costs may be capitalized to the extent they meet
      the
      requirements of the Financial Accounting Standards Board’s (the “ FASB’s ”)
      Statement of Financial Account Standards (“ SFAS ”)
      No. 86
“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
      Marketed.”




13




Accounting
      for Complex Accounting
      Transaction




The
      Company accounting for complex financing
      transactions revolving around the issuance of convertible debentures as follows.
      Cash fees paid on convertible debentures are amortized over the life of the
      convertible debenture. Derivative liabilities for the conversion feature within
      each convertible note are created at the time of issuance of convertible debt
      at
      their respective fair values, with authorization over the life of each debenture
      charged to interest expense using the effective interest method. If the
      debentures are converted prior to maturity, the pro rata portion of the fair
      value of the derivative liability at the time of conversion is recorded as
      an
      increase in equity. Each period the derivative is revalued, with the resulting
      increase or decrease in fair value recorded as other income or
      expense.




Due
      to the lack of a cap on the number of shares that
      can be issued in connection with the convertible debentures issued by the
      Company, warrents issued by the Company must also be recorded at their
      respective fair values at issuance with subsequent adjustments period by period
      to reflect the change in fair value of each warrent liability. These adjustments
      are also recorded as other income or expense.




**Basic
      And Diluted Earnings Per Common Share**




Basic
      earnings per share are computed by dividing net income by the number of weighted
      average common shares outstanding during the year. Diluted earnings per share
      is
      computed by dividing net income by the number of weighted average common shares
      outstanding during the year, including potential common shares, which consisted
      of warrants, options and convertible debt.




**SEC
      Inquiry**




In
      2003,
      BSI received requests from the Commission’ s
      Central
      Regional Office for certain documents, including those concerning arrangements
      with certain strategic partners, relationships with the TSA and INS, recent
      issuances of securities, investor relations, and information relating to
      investment opinions distributed by third parties. The SEC’s letter states that
      the staff’s inquiry should not be construed as an indication that any violations
      of securities laws have occurred or as an adverse reflection on any individuals,
      entities, or investments. BSI responded promptly and fully to the request and
      will cooperate with any further requests. BSI did not receive any additional
      requests in 2004 or 2005.





On
      June
      27, 2005, BSI was contacted by the Staff of the Commission during the course
      of
      a routine review of its periodic filings and made inquiries regarding certain
      of
      BSI’s accounting policies. As a result of this inquiry, management re-evaluated
      BSI’s accounting for certain items on the consolidated balance sheet,
      consolidated statements of operations, consolidated statement of changes in
      stockholders' equity(deficit) and consolidated statements of cash flows.
      Following the evaluation, BSI determined that the consolidated balance sheet,
      consolidated statements of operations, consolidated statement of changes in
      stockholders' equity(deficit) and consolidated statements of cash flows 
for the fiscal year ended December 31, 2004 should be restated in the Form
      10-KSB for the fiscal year ended December 31, 2004. The effect of these errors
      on the consolidated balance sheet, consolidated statements of operations,
      consolidated statement of changes in stockholders' equity(deficit) and
      consolidated statements of cash flows was considered material. Accordingly,
      BSI
      is required to restate its financials for the fiscal year ended December 31,
      2004 and the fiscal quarters ended March 31, 2005, June 30, 2005 and September
      30, 2005. Please refer to **Note
      12 - Restatement Associated with Accounting for Derivative Instruments in
      Connection with Issuance of Debentures.**




**Financial
      Condition**





BSI
      had
      net losses of $2,143,917 and $1,568,978 for the years ended December 31,
      2004 and December 31, 2003, respectively. For the year ended
      December 31, 2005, BSI had a net loss of $3,798,795, an increase of
      $1,654,878 or 77% from 2004. As of December 31, 2005, BSI had cash and cash
      equivalents of $4,423 as compared to $893,387 at December 31, 2004, or an
      decrease of $888,964 or 99%; and current liabilities of $777,393 as compared
      to
      $688,808 at December 31, 2004, an increase of $88,585 or 13%. BSI does not
      have sufficient cash or other current assets to meet BSI’s current liabilities.
      In order to meet those obligations, BSI will need to raise cash from the sale
      of
      securities or from borrowings. BSI estimates that its cash reserves on December
      31, 2005 will not sustain BSI beyond March 31, 2006. Our independent auditors
      have added an explanatory paragraph to their audit opinions issued in connection
      with the years 2005, 2004, 2003, 2002 and 2001 financial statements, which
      states that BSI’s ability to continue as a going concern depends upon its
      ability to resolve liquidity problems, principally by obtaining capital,
      commencing sales and generating sufficient revenues to become profitable. BSI’s
      ability to obtain additional funding will determine BSI’s ability to continue as
      a going concern.




**Results
      Of Operations**




The
      following discussion should be read in conjunction with financial statements
      and
      the related notes and the other financial information appearing elsewhere in
      this report.




**Comparison
      Of The Year Ended December 31, 2005 To The Year Ended December 31,
      2004**




***Overall
      Results Of Operations***




For
      the
      year ended December 31, 2005, BSI incurred an overall loss of $3,798,795 or
      $0.034 per share, which was a material increase from the loss of $2,143,917or
      $0.035 per share for the comparable period in the prior year.




14


***Revenue***




BSI
      had
      revenues of $226,887 and $5,918 during the one-year periods ended
      December 31, 2005 and 2004, respectively, or an increase of $220,969 or
      3734%. Such revenues were from the sale of products as well as contracts
      performed by the Company, and distributions fees.




***Operating
      Expenses***




Operating
      expenses for the year ended December 31, 2005, were $2,451,801 and
      represent an increase of $493,286 or nearly 25% in operating expenses of
      $1,958,515 for the comparative period ended December 31, 2004.




The
      largest component of operating expenses for the periods ended December 31,
      2005 and 2004 related to general and administrative expenses. For the period
      ended December 31, 2005, general and administrative expense were $1,629,525
      an increase of $505,452 or nearly 55% in general and administrative expenses
      of
      $1,048,073 for the comparative period ended December 31, 2004. This
      increase is attributable to a decrease in consulting fees of $130,633, salaries,
      payroll taxes and related benefits of $174,306, temporary labor of $25,629,
      shareholder relations expense of $18,212, legal fees of $150,444, increase
      in
      accounting and auditing fees of $63,217, insurance expense of $56,206, and
      expenses related to the issuance of options and warrants of $109,259. The
      increase in legal and accounting fees are attributable to the complexity of
      the
      MAXXNET purchase as well as the SEC comment letters dealing with the complex
      accounting issues surrounding the Company’s convertible debt.




BSI
      had
      selling expenses for the year ended December 31, 2005 of $435,252, as
      compared to $367,807 for the comparative period ended December 31, 2004, an
      increase of $67,445 or 18%. The increases in selling expenses are primarily
      attributable to salary expense of $99,683, a decrease in demonstration units
      0f
      $30,565, a decrease in travel and entertainment expenses of $38,391, and an
      increase in material development and trade show costs of $29,977. BSI had
      research and development expenses of $462,304 for the year ended
      December 31, 2005, as compared to $542,635 for the period ended
      December 31, 2004, a decrease of $80,331 or 15%. This increase is
      attributable to a decrease in consulting fees of $50,145 and a salaries and
      wages totaling $23,018.




***Other
      Expenses***




As
      to the
      other expenses, BSI had other expense of $1,449,252 for the year ended
      December 31, 2005, as compared to other expense of $191,320 for the year
      ended December 31, 2004, which represents an increase of $1,257,932 or
      658%. BSI had interest expense of $924,894 and $51,572 for the years ended
      December 31, 2005 and 2004, respectively, which represents a $873,322 or
      1693% increase. BSI had interest income of $4,416 and $2 for the years ended
      December 31, 2005 and 2004, respectively, or a decrease of $4,414 or 2207%.
      BSI incurred financing costs of $934,727 and $185,755 during 2005 and 2004,
      respectively, or an increase of $748,972 or 403%., BSI had other income of
      $415,953 in 2005 and $45,755 in 2004, or an increase of $370,198 or 809%. All
      of
      these other income and expense items, other than interest income relate to
      the
      Equity Line of Credit with Cornell, and convertible debentures issued to
      Cornell.




**Liquidity
      And Capital Resources**




As
      of
      December 31, 2005, BSI had cash of $4,423 as compared to $893,387 at
      December 31, 2004, a decrease of $888,964 or 99%, current liabilities of
      $773,393, as compared to $688,808, or an increase of $84,585 or 12%, and cash
      used by operations was $2,051,606 in 2005 as compared to $2,139,381 at
      December 31, 2004, or a decrease of $87,775 or 4%. BSI does not have
      sufficient cash and cash equivalents or other current assets to meet BSI’s
      current liabilities. In order to meet those obligations, BSI will need to raise
      cash from the sale of securities or from borrowings. Our independent auditors
      have added an explanatory paragraph to their audit opinions issued in connection
      with the years 2005, 2004, 2003, 2002 and 2001 financial statements, which
      states that BSI’s ability to continue as a going concern depends upon BSI’s
      ability to resolve liquidity problems, principally by obtaining capital,
      commencing sales and generating sufficient revenues to become profitable. Our
      ability to obtain additional funding will determine BSI’s ability to continue as
      a going concern. BSI estimates that is cash reserves as of December 31,
      2005 will not sustain BSI beyond March 31, 2006.




15


On
      February 10, 2006, BSI issued a 12% secured convertible debenture to Cornell
      in
      the principal amount of $1,000,000 . This debenture superseded the debenture
      that was issued on November 5, 2005 as described in the next paragraph. Of
      this
      principal amount, $350,000 was funded on November 4, 2005, $300,000 was funded
      on February 10, 2006, $100,000 will be funded on the fifth business day
      following an increase in the Company’s common stock, par value $0.001 per share,
      and $250,000 was to be funded two business days prior to the date a registration
      statement was to be filed with the Commission to register the shares underlying
      the debenture. The debentures were secured by substantially all of BSI’s assets,
      had a three-year term and accrued interest at 12% per annum. **** Cornell
      was entitled, at its option, to convert, and sell all or any part of the
      principal amount of the debentures, plus accrued interest, into shares of BSI’s
      common stock at the price per share equal to the lesser of (a) an amount
      equal to an amount equal to 120% of the closing bid price of the common stock
      as
      listed on a principal market as quoted by Bloomberg LP, on November 3, 2005
      or
      (b) an amount equal to 80% of the lowest closing bid price of the common
      stock for the five trading days immediately preceding the conversion date which
      may be adjusted pursuant to the other terms of the debentures. BSI could redeem,
      with three business days advance written notice to Cornell, a portion or all
      amounts outstanding under the debentures prior to the maturity date as follows:
      (i) if the closing bid price of the of BSI’s common stock, as reported by
      Bloomberg, LP, was less than the fixed price, as defined below, at the time
      of
      the redemption notice, BSI was to pay an amount equal to the principal amount
      outstanding and accrued interest being redeemed, plus a redemption premium
      of
      20% of the amount redeemed. The “Fixed Price” was an amount equal to 120% of the
      closing bid price of the BSI’s common stock as listed on a principal market as
      quoted by Bloomberg LP on November 3, 2005. BSI also issued to Cornell five
      year
      warrants for 1,250,000 shares at $.04 per share, 5,000,000 shares at $0.02
      per
      share 15,000,000 shares at an exercise price of $0.01 or as subsequently
      adjusted under the terms of the warrant.




On
      July 5, 2005 BSI entered into a Securities Purchase Agreement with Cornell,
      dated as of June 17, 2005, pursuant to which BSI may sell to Cornell up to
      $1,250,000 of secured convertible debentures pursuant to the terms contained
      in
      the secured convertible debenture. Pursuant to the terms of the Securities
      Purchase Agreement, on June 17, 2005, BSI issued a 5% secured convertible
      debenture in the amount of $125,000 to Cornell that is due June 17, 2007.
      The debenture is convertible into BSI’s common stock at a price per share equal
      to the lesser of (a) 120% of the closing bid price of the common stock as listed
      on a principal market, as quoted by Bloomberg LP as of the effective date of
      the
      secured convertible debenture, or (b) 80% of the lowest closing bid price of
      BSI’s common stock, as quoted by Bloomberg, LP, for the five trading days
      immediately preceding the conversion date. The debenture will automatically
      convert into BSI’s common stock on the second anniversary of issuance. BSI has
      the right to redeem the debenture with three days advance notice any or all
      of
      the outstanding debenture amount at its sole discretion.




On
      July 15, 2005, BSI issued a 5% secured convertible debenture in the
      principal amount of $125,000 to Cornell that is due July 15, 2007. The
      debenture is convertible into BSI’s common stock at a price per share equal to
      the lesser of (a) 120% of the closing bid price of the common stock as listed
      on
      a principal market, as quoted by Bloomberg LP, as of the effective date of
      the
      secured convertible debenture, or (b) 80% of the lowest closing bid price of
      BSI’s common stock, as quoted by Bloomberg, LP, for the five trading days
      immediately preceding the conversion date. The debenture will automatically
      convert into BSI’s common stock on the second anniversary of issuance. BSI has
      the right to redeem the debenture with three days advance notice any or all
      of
      the outstanding debenture amount at its sole discretion.




On
      August 2, 2005, BSI issued a 5% secured convertible debenture in the
      principal amount of $1,000,000 to Cornell that is due August 2, 2007. The
      debenture is convertible into BSI’s common stock at a price per share equal to
      the lesser of (a) 120% of the closing bid price of the common stock as listed
      on
      a principal market, as quoted by Bloomberg LP, as of the effective date of
      the
      secured convertible debenture, or (b) 80% of the lowest closing bid price of
      BSI’s common stock, as quoted by Bloomberg, LP, for the five trading days
      immediately preceding the conversion date. The debenture will automatically
      convert into BSI’s common stock on the second anniversary of issuance. BSI has
      the right to redeem the debenture with three days advance notice any or all
      of
      the outstanding debenture amount at its sole discretion.




On
      November 3, 2005, BSI entered into a Securities Purchase Agreement with Cornell
      pursuant to which BSI issued a 12% secured convertible debenture to Cornell
      in
      the principal amount of $1,000,000. Of this principal amount, $350,000 was
      funded on November 4, 2005, $400,000 will be funded on the fifth business day
      following an increase in the Company’s common stock, par value $0.001 per share,
      and $250,000 will be funded two business days prior to the date a registration
      statement is filed with the Commission to register the shares underlying these
      debentures. The debentures are secured by substantially all of the Company’s
      assets, have a three-year term and accrue interest at 12% per annum. **** Cornell
      is entitled, at its option, to convert, and sell all or any part of the
      principal amount of the debentures, plus accrued interest, into shares of the
      Company’s common stock at the price per share equal to the lesser of (a) an
      amount equal to an amount equal to 120% of the closing bid price of the common
      stock as listed on a principal market as quoted by Bloomberg LP, on the date
      hereof or (b) an amount equal to 80% of the lowest closing bid price
      of the common stock for the five trading days immediately preceding the
      conversion date which may be adjusted pursuant to the other terms of the
      debentures. BSI may redeem, with three business days’ advance written notice to
      Cornell, a portion or all amounts outstanding under the secured convertible
      debentures prior to the maturity date as follows: (i) if the closing bid price
      of the of BSI’s common stock, as reported by Bloomberg, LP, is less than the
      Fixed Price, as defined below, at the time of the redemption notice, BSI will
      pay an amount equal to the principal amount outstanding and accrued interest
      being redeemed, plus a redemption premium of 20% of the amount redeemed. The
      “Fixed Price” is an amount equal to 120% of the closing bid price of the BSI’s
      common stock as listed on a principal market, as quoted by Bloomberg LP, on
      November 3, 2005. In the event the debentures are redeemed, then BSI will issue
      to Cornell a warrant to purchase 20,000,000 shares at an exercise price of
      $0.05
      or as subsequently adjusted under the terms of the warrant.




16


On
      February 4, 2004, BSI received net proceeds of $223,559 from a $250,000 secured
      promissory note issued to Cornell. The note is due on May 12, 2004. The note
      is
      secured by substantially all of BSI’s non-cash assets. The note bears no
      interest during its term, but bears a default rate of interest of 24% if the
      note is not paid when due. BSI paid cash fees of $26,441 in connection with
      the
      issuance of the note. During 2004, BSI effectively repaid this note and accrued
      interest thereon pursuant to draw-downs under the Equity Line.




On
      March
      3, 2004, BSI received net proceeds of $229,524 from a $250,000 secured
      promissory note issued to Cornell. The note is due on June 23, 2004. The note
      is
      secured by substantially all of BSI’s non-cash assets. The note bears interest
      of 12% during its term, and bears a default rate of interest of 24% if the
      note
      is not paid when due. BSI paid cash fees of $20,476 in connection with the
      issuance of the note. During 2004, BSI effectively repaid this note and accrued
      interest thereon pursuant to draw-downs under the Equity Line.




On
      March
      12, 2004, BSI issued Richard Kirk 250,000 options at a strike price of $0.11
      per
      share, all of which vested on the date of the grant. These options were issued
      as compensation to Mr. Kirk for his services as a director of BSI. All of these
      options have a 5-year term. In engaging in the foregoing transaction involving
      unregistered securities of BSI, BSI relied upon the private offering exemption
      provided under Section 4(2) of the 1933 Act, in that the transaction involved
      a
      private offering of BSI’s unregistered securities, BSI did not make a public
      offering or sale of its securities, the investor was accredited, and the
      investor represented to BSI that it was acquiring the securities for investment
      purposes and for its own account, and not with an eye toward further
      distribution.




On
      April
      14, 2004, BSI received net proceeds of $229,679 from a $250,000 secured
      promissory note issued to Cornell. The note is due on June 21, 2004. The note
      is
      secured by substantially all of BSI’s non-cash assets. The note bears no
      interest during its term, but bears a default rate of interest of 24% if the
      note is not paid when due. BSI paid cash fees of $20,321 in connection with
      the
      issuance of the note. During 2004, BSI effectively repaid this note and accrued
      interest thereon pursuant to draw-downs under the Equity Line.




On
      June
      8, 2004, BSI received net proceeds of $320,208 from a $350,000 secured
      promissory note issued to Cornell. The note is due on September 20, 2004. The
      note is secured by substantially all of BSI’s non-cash assets. The note bears
      interest at 12% per annum during its term, and bears a default rate of interest
      of 24% if the note is not paid when due. BSI paid cash fees of $29,792 in
      connection with the issuance of the note. During 2004, BSI effectively repaid
      this note and accrued interest thereon pursuant to draw-downs under the Equity
      Line.




On
      June
      18, 2004, BSI received net proceeds of $231,935 from a $250,000 secured
      promissory note issued to Cornell. The note is due on October 18, 2004. The
      note
      is secured by substantially all of BSI’s non-cash assets. The note bears
      interest at 12% per annum during its term, and bears a default rate of interest
      of 24% if the note is not paid when due. BSI paid cash fees of $18,065 in
      connection with the issuance of the note. During 2004, BSI effectively repaid
      this note and accrued interest thereon pursuant to draw-downs under the Equity
      Line.




On
      July
      15, 2004, BSI issued Bernard Nann 250,000 options at a strike price of $0.089
      per share, 50,000 of which vested on the date of the grant, and the remaining
      200,000 vests 50,000 per year for so long as Mr. Nann remains a director of
      BSI.
      These options were issued as compensation to Mr. Nann for his present and future
      services as a director of BSI. All of these options have a 5-year term. In
      engaging in the foregoing transaction involving unregistered securities of
      BSI,
      BSI relied upon the private offering exemption provided under Section 4(2)
      of
      the 1933 Act in that the transaction involved a private offering of BSI’s
      unregistered securities, BSI did not make a public offering or sale of its
      securities, the investor was accredited, and the investor represented to BSI
      that it was acquiring the securities for investment purposes and for its own
      account, and not with an eye toward further distribution.




On
      September 13, 2004, BSI issued 990,099 shares of common stock to Cornell for
      $50,000 cash. Costs associated with this transaction were $2,500. In engaging
      in
      the foregoing transaction involving unregistered securities of BSI, BSI relied
      upon the private offering exemption provided under Section 4(2) of the 1933
      Act
      in that the transaction involved a private offering of BSI’s unregistered
      securities, BSI did not make a public offering or sale of its securities, the
      investor was accredited, and the investor represented to BSI that it was
      acquiring the securities for investment purposes and for its own account, and
      not with an eye toward further distribution.




17


On
      October 7, 2004, BSI issued a 5% convertible debenture in the amount of $500,000
      to Cornell that is due October 7, 2007, on December 10, 2004, BSI issued a
      5% convertible debenture in the amount of $500,000 to Cornell that is due
      December 10, 2007, and on January 20, 2005, BSI issued a 5% convertible
      debenture in the amount of $250,000 to Cornell that is due January 20, 2008.
      These debentures are convertible into BSI’s common stock at either the fixed
      price of 120% of the Volume Weighted Average price on the closing date (October
      7, 2007, December 10, 2007 and January 20, 2008, respectively) or 80% of
      the average of the three lowest daily Volume Weighted Average Price, as reported
      by Bloomberg, L.P., of BSI’s common stock for the five trading days immediately
      preceding the conversion date. These debentures will automatically convert
      into
      BSI’s common stock on the third anniversary of issuance. BSI has the right to
      redeem the debentures with three days advance notice any or all of the
      outstanding debenture amount at its sole discretion. The redemption price shall
      be 120% of the face amount redeem plus accrued interest. Once the redemption
      notice has been given, Cornell may continue to convert the remaining outstanding
      debenture. Cornell has the option to convert the debenture on the same day as
      issuance. As a result of this conversion feature, Cornell has been provided
      intrinsic value that has been calculated as the difference between the price
      of
      the Company’s common stock on the date of issuance, as compared to the
      discounted conversion price (or 80% of the stock price on the date of issuance).
      This intrinsic value has been multiplied by the number of shares that would
      be
      issued to Cornell Capital Partners upon conversion, which has resulted in a
      $125,000 intrinsic value for each of the convertible debentures issued during
      2004. Accretion of this intrinsic value will be incurred over the term of the
      convertible debenture as a charge to interest expense. In accordance with EITF
      00-19, “Accounting for Derivative Financial Instruments Indexed to, and
      potentially Settled in, a Company’s Own Stock”, the conversion feature of each
      convertible debenture has been included as a short-term liability and were
      originally valued at fair value at the date of issuance. As a liability, the
      convertible features are revalued each period until and unless the debt is
      converted. During the year ended December 31, 2004, we recorded other income
      of
      $29,954 related to the change in fair value from the date of issuance of the
      debt to December 31, 2004. This amount is included as a component of other
      income in the accompanying consolidated statement of operations. If the debt
      is
      converted prior to maturity, the carrying value will be transferred to
      equity.




In
      engaging in the foregoing transactions involving unregistered securities of
      BSI,
      BSI relied upon the private offering exemption provided under Section 4(2)
      of
      the 1933 Act in that the transactions involved the private offering of BSI’s
      unregistered securities, BSI did not make a public offering or sale of its
      securities, the investor was accredited, and the investor represented to BSI
      that it was acquiring the securities for investment purposes and for its own
      account, and not with an eye toward further distribution.




On
      November 4, 2004, BSI received net proceeds of $178,051 from a $200,000 secured
      promissory note issued to Cornell. The note is due on December 4, 2004. The
      note is secured by substantially all of BSI’s non-cash assets. The note bears
      interest at 12% per annum during its term, and bears a default rate of interest
      of 24% if the note is not paid when due. BSI paid cash fees of $21,949 in
      connection with the issuance of the note. BSI effectively repaid this note
      and
      accrued interest thereon pursuant to draw-downs under the Equity
      Line.




On
      December 10, 2004, BSI received net proceeds of $435,723 from a $500,000
      secured promissory note issued to Cornell Capital Partners, LP. The note is
      due
      on March 11, 2005. The note is secured by substantially all of BSI’s non-cash
      assets. The note bears interest at 12% per annum during its term, and bears
      a
      default rate of interest of 24% if the note is not paid when due. BSI paid
      cash
      fees of $64,277 in connection with the issuance of the note. As of March 11,
      2005, BSI effectively repaid $300,000 of the note and accrued interest thereon
      pursuant to draw-downs under the Equity Line.




On
      October 31, 2003, BSI entered into the Equity Line with Cornell as described
      above. Under the Equity Line, BSI may issue and sell to Cornell common stock
      for
      a total purchase price of up to $15 million. Subject to certain conditions,
      BSI
      is entitled to commence drawing down on the Equity Line when the common stock
      to
      be issued under the Equity Line is registered with the Commission and the
      registration statement is declared effective and will continue for two years
      thereafter. The purchase price for the shares will be equal to 99% of the market
      price, which is defined as the lowest closing bid price of the common stock
      during the five trading days following the notice date. The amount of each
      advance is subject to an aggregate maximum advance amount of $210,000, with
      no
      advance occurring within seven trading days of a prior advance. Cornell received
      1,875,000 shares of common stock as a one-time commitment fee. Cornell is
      entitled to retain a fee of 4% of each advance. In addition, BSI entered into
      a
      related placement agent agreement with Newbridge, a registered broker-dealer.
      Pursuant to the placement agent agreement, BSI paid Newbridge a one-time
      placement agent fee of 35,714 shares of common stock. The Equity Line was
      terminated on October 30, 2005.




**Plan
      Of Operations**




BSI
      continues to rely on funding by Cornell while it pursues potential sales of
      the
      Access Control and Site Security and other products to commercial customers
      located in the United States, Middle East, South Africa, and
      elsewhere.




18


If
      a
      substantial contract is awarded, BSI anticipates that it will need to increase
      the size of its staff to approximately 15-to-25 employees and consultants (BSI
      currently has 10 full-time employees and three consultants) and will need to
      establish and enhance its production capabilities. The Company expects that
      these activities will require additional financing.




If
      a
      contract is not awarded, BSI may be required to significantly reduce its
      administrative costs, salaries and research and development activities until
      such time as a new plan of action can be developed. The new plan, if required,
      may include locating additional sources of funding or merger and acquisition
      activities.




**Off-Balance
      Sheet Arrangements**




None.




**Recent
      Accounting Pronouncements Affecting the Company**




The
      Company has adopted the disclosure-only provisions of Statement of Financial
      Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (as
      amended by SFAS No. 148 “Accounting for Stock Based Compensation - Transition
      and Disclosure”). Accordingly, no compensation cost has been recognized for the
      stock option plans. Had compensation cost for the Company’s option plan been
      determined based on the fair value at the grant date for awards consistent
      with
      the provisions of SFAS No. 123, the Corporation’s net loss and basic loss per
      common share would have been changed to the pro forma amounts indicated
      below:




For
                the Years Ended
            
            Inception
              (July
                30, 1993)
              throughDecember 31,
            
            December 31,2005
            
            2004
            
            2005Net
                loss - as reported
            
            $
            (3,798,795
            )
            $
            (2,143,917
            )
            $
            (11,223,001
            )Net
                loss - pro forma
            
            $
            (4,106,365
            )
            $
            (2,230,816
            )
            $
            (11,617,470
            )Basic
                loss per common share - as reported
            
            $
            (0.034
            )
            $
            (0.03
            )
            $
            (0.411
            )Basic
                loss per common share - pro forma
            
            $
            (0.037
            )
            $
            (0.031
            )
            $
            (0.43
            )





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions used: expected life of 5 years, 85.28% weighted average volatility,
      risk free rate interest rate of 4.25% and a 0% dividend yield.




In
      April
      2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement No. 4, 44 and
      64, Amendment of FASB Statement No. 13, and Technical Corrections.” This
      statement provides guidance on the classification of gains and losses from
      the
      extinguishment of debt and on the accounting for certain specified lease
      transactions. The Company adopted SFAS No. 145 January 1, 2003. Adoption of
      SFAS
      No. 145 did not have a material impact on the Company.




In
      June
      2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit
      or Disposal Activities,” (effective January 1, 2003) which replaces Emerging
      Issues Task Force (“ EITF ”)
      Issue
      No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and
      Other Costs to Exit an Activity (including Certain Costs Incurred in a
      Restructuring).” SFAS No. 146 requires that a liability for a cost associated
      with an exit or disposal activity be recognized when the liability is incurred
      and states that an entity’s commitment to an exit plan, by itself, does not
      create a present obligation that meets the definition of a liability. SFAS
      No.
      146 also establishes that fair value is the objective for initial measurement
      of
      the liability. The Company adopted this statement on January 1, 2003; adoption
      did not have an effect on results of operations and financial
      position.




In
      October 2002, the FASB issued SFAS No. 147 “Acquisitions of Certain Financial
      Institutions.” SFAS No. 147 amends FASB Statements No. 72 and 144 and FASB
      Interpretations No. 9. Adoption of SFAS No. 147 did not have a material impact
      on the Company.




In
      November 2002, the Financial Accounting Standards Board issued Interpretation
      No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,
      Including Indirect Guarantees of Indebtedness of Others (the Interpretation),
      which addresses the disclosure to be made by a guarantor in its interim and
      annual financial statements about its obligations under guarantees. The
      Interpretation also requires the recognition of a liability by a guarantor
      at
      the inception of certain guarantees. The Interpretation requires the guarantor
      to recognize a liability for the non-contingent component of the guarantee,
      this
      is the obligation to stand ready to perform in the event that specified
      triggering events or conditions occur. The initial measurement of this liability
      is the fair value of the guarantee at inception. The recognition of the
      liability is required even if it is not probable that payments will be required
      under the guarantee or if the guarantee was issued with a premium payment or
      as
      part of a transaction with multiple elements. The Company adopted the disclosure
      provisions of the Interpretation beginning with its fiscal 2003 consolidated
      financial statements, and will apply the recognition and measurement provisions
      for all guarantees entered into or modified after December 31, 2002.
      However, the Company is not a guarantor of indebtedness of others.




19


**ITEM
      7. FINANCIAL STATEMENTS**




Attached
      hereto and filed as a part of this Report are BSI’s Consolidated Financial
      Statements.






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




None.




**ITEM
      8A. CONTROLS AND PROCEDURES**




***a.***  ***Evaluation
      Of Disclosure Controls And Procedures***




BSI’s
      Principal Executive Officer and Principal Accounting Officer (one person),
      after
      evaluating the effectiveness of BSI’s disclosure controls and procedures (as
      defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended (the “ 1934
      Act ”))
      as of
      the end of the period covered by this Report, have concluded that as of such
      date, BSI’s disclosure controls and procedures were not adequate and effective
      to ensure that material information relating to BSI that is required to be
      disclosed by BSI in reports that it files or submits under the 1934 Act, is
      recorded, processed, summarized and reported within the time periods specified
      in SEC rules and accumulated and communicated to BSI’s management, including its
      Principal Executive Officer and Principal Accounting Officer (one person),
      to
      allow timely decisions regarding required disclosure.




Notwithstanding
      the immediately preceding paragraph, in the second fiscal quarter of 2005,
      the
      Company’s independent registered public accounting firm, Ehrhardt Keefe Steiner
& Hottman PC, advised the Company’s management and Board of Directors (the
“ Board ”)
      that
      there were material weaknesses in our internal controls and procedures during
      fiscal years 2004 and 2005. Management believes that until these material
      weaknesses are corrected, a potential misapplication of generally accepted
      accounting principles or potential accounting error in the Company’s financial
      statements could occur. Enhancing the Company’s internal controls to correct the
      material weaknesses has and will result in increased costs to BSI. While the
      Company has taken several steps to improve internal controls in 2005, Ehrhardt
      Keefe Steiner & Hottman PC has advised our management and our Board of
      Directors that, in Ehrhardt Keefe Steiner & Hottman PC’s opinion, and BSI
      concurs, there were weaknesses reportable conditions during 2004 and 2005
      which constituted material weaknesses in the Company’s internal controls. The
      identified material weaknesses stem in part from BSI's numerous equity
      transactions involving very complex and judgmental accounting issues. While
      all
      of these transactions were recorded, Ehrhardt Keefe Steiner & Hottman PC in
      their audit work noted instances where generally accepted accounting principles
      were not correctly applied and adjustments to and restatement of BSI's
      consolidated financial statements were required. The Company also has material
      weaknesses, in general, over its ability to produce accurate and timely
      financial statements in accordance with generally accepted accounting principles
      and SEC rules and regulations. These material weaknesses primarily relate to
      a
      lack of sufficient and qualified personnel assigned to the accounting and
      reporting function.




The
      Company has reviewed FAS 133 and EITF 00-19 (regarding the Derivative Liability
      Issue), and has applied applicable guidance in each pronouncement that
      applies to the convertible debentures issued to Cornell during 2004 and 2005.
      This process has resulted in the Company determining that it must amend its
      December 31, 2004 Form 10-KSB, March 31, 2005 Form 10-QSB, June 30, 2005 Form
      10-QSB and September 30, 2005 Form 10-QSB. As of the date hereof the Company
      either has filed all such amended Reports or will file all such Reports within
      30 days.




The
      Company estimates that it has expended approximately $20,000.




20


***b.***  ***Changes
      In Internal Controls Over Financial Reporting***




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




The
      Company did not implement any remedial measures until after the Company received
      the June 27, 2005 comment letter from the SEC because prior to such date the
      Company’s internal controls and procedures failed to identify any material
      weaknesses or deficiencies.




**ITEM
      8B. OTHER INFORMATION**




None.




21




**PART
      III**




**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**




As
      of
      December 31, 2005, the directors and executive officers of BSI, their age,
      positions in BSI, the dates of their initial election or appointment as
      directors or executive officers, and the expiration of the terms are as
      follows:




**Name
                of Director/**
              **Executive
                Officer**
            
            **Age**
            
            **Position**
            
            **Period
                Served (1)**Jack
                Harper
            
            53
            
            Chairman
                and President
            
            1995
                to presentRichard
                A. Kirk
            
            75
            
            Director
                and Secretary
            
            1995
                to presentJohn
                D. Woods
            
            65
            
            Director
            
            2005
                to present




____________________




(1)
            Period
                served includes the period served in same capacity with BSI, Inc.,
                a
                private Colorado corporation.




There
      is
      no arrangement or understanding between the directors and officers of BSI and
      any other person pursuant to which any director or officer was or is to be
      selected as a director or officer.





The
      directors of BSI devote such time to the Company’s affairs on an as needed
      basis.





None
      of
      BSI’s directors or executive officers is a director of any company that files
      reports with the SEC.




**Family
      Relationships**




To
      our
      knowledge, there are no family relationships between or among the directors,
      executive officers or any other person.




**Legal
      Proceedings**




None
      of
      BSI’s directors have been involved in legal proceedings relevant to the
      Company.




**Audit
      Committee and Audit Committee Financial Expert**




BSI
      does
      not have an audit committee, nor an audit committee financial
      expert.




**Committees
      of the Board of Directors**




Currently,
      BSI does not have an executive or any standing committees of the
      Board.




**Election
      Of Directors**




BSI’s
      directors are elected at the annual meeting of stockholders and hold office
      until their successors are elected. BSI’s officers are appointed by the Board
      and serve at the pleasure of the Board and are subject to employment agreements,
      if any, approved and ratified by the Board.




**Background
      of Directors**




***Jack
      Harper, President, Chief Executive Officer, And Chairman of the
      Board***




Mr.
      Harper has been President and Chairman of the Board of BSI since late 1995.
      Previously, from 1989 until 1994, Mr. Harper was President of Technology Fusion,
      Inc., a company that specialized in low-cost add-in video hardware products
      for
      the Apple Macintosh. Mr. Harper received an MBA from the University of Denver
      in
      2000, having completed all studies in 1992; in 1975, Mr. Harper received a
      B.S.
      in Electrical Engineering and a B.A. in Mathematics with a Minor in Russian
      Language from the University of Houston.




22




***Richard
      A. Kirk, Secretary And Director***




Mr.
      Kirk
      has been a Director of BSI since August of 1995 and acting Secretary since
      July
      of 1999. He was Chairman of the Board of Access Long Distance, a long distance
      provider that was sold in 2001. Mr. Kirk worked for United Bank of
      Denver/Norwest Bank/Wells Fargo from 1958 through 1990, ultimately serving
      as
      Chairman, President and Chief Executive Officer. In 1986, Mr. Kirk was elected
      Vice Chairman of the United Banks of Colorado, Inc. (now Wells Fargo). In 1992,
      he retired from the Norwest Bank Denver but continued as Chairman Emeritus
      and
      served on its Advisory Board. He is a graduate of the Haverford College; the
      Advanced Management Program of the Harvard Business School; and the Stonier
      Graduate School of Banking at Rutgers University. Mr. Kirk serves on boards
      of
      several nonprofit institutions and is an appointed Commissioner of the Denver
      Water Board.




***John
      D. Woods, Director***




John
      D.
      Woods is a founding shareholder of Community Bankshares Inc. and has served
      as
      Chairman of the Board since its incorporation in February 1989. He divides
      his
      business time on affairs of the holding company and also as Chairman and part
      owner of Market Reach, Ltd., London, England.




He
      has
      spent 40 years in the banking industry, starting at the Northern Trust Company,
      Chicago, Illinois in 1956. During the course of his career, he has served as
      President and COO of Winters National Bank, Dayton, Ohio (a 42.5 billion bank
      now part of Bank One), and Chairman and CEO of Omaha National Bank and its
      successor, FirstTier Financial, Inc (a $4.7 billion banking organization now
      part of US Bank, Minneapolis, Minnesota). Mr. Woods received his B.A. degree
      from the University of Colorado in Boulder, Colorado.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the 1934 Act and the rules promulgated thereunder require BSI’s
      officers and directors, and persons who beneficially own more than 10% of a
      registered class of BSI equity securities, to file reports of ownership and
      changes in ownership with the SEC and to furnish BSI with copies
      thereof.




Based
      on
      its reviews of the copies of the Section 16(a) forms received by it, or written
      representations from certain reporting persons, BSI believes that, during the
      last fiscal year, all Section 16(a) filing requirements applicable to its
      officers, directors and greater than 10% beneficial owners were complied with
      and filed timely.




**Code
      of Ethics**




On
      April
      12, 2004, the Board adopted a written Code of Ethics designed to deter
      wrongdoing and promote honest and ethical conduct, full, fair and accurate
      disclosure, compliance with laws, prompt internal reporting and accountability
      to adherence to the Code of Ethics. The Code of Ethics was filed as an exhibit
      to the Company’s Form 10-KSB for the period ending December 31,
      2004.




**ITEM
      10. EXECUTIVE COMPENSATION**




The
      following table sets forth, for the fiscal year ended December 31, 2005,
      2004, and 2003 certain information regarding the compensation earned by BSI’s
      President (the “ Named
      Executive Officer ”),
      with
      respect to services rendered by him to BSI. No other officer of BSI has been
      paid or earned compensation in excess of $100,000 in any such fiscal
      year.




**Summary
      Compensation Table**





**Annual
                Compensation**
            
            **Long-Term
                Compensation****Name
                and principal Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Other
                Annual Compensation**
            
            **Restricted
                Stock Awards**
            
            **Securities
                Underlying Options/SARs**
            
            **All
                Other Compensation**Jack
                Harper,
            
            
            2005
            
            $
            125,000
            
            
            
            
            
            --
            
            
            --
            
            
            8,000,000
            
            
            --Chairman
                and
            
            
            2004
            
            $
            125,000
            
            
            35,000
            
            
            --
            
            
            --
            
            
            
            
            
            --President
            
            
            2003
            
            $
            90,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --


___________________




(1)
            Mr.
                Harper was issued 2,500,000 shares in consideration for $2,500 and
                the
                forgiveness of accrued wages.




(2)
            The
                2004 bonus to Mr. Harper was in recognition of his financial support
                during the early days of BSI that resulted in personal
                debt.




23




The
      following table sets forth, for the fiscal year ended December 31, 2005 certain
      information regarding the options/SARs granted to BSI’s Named Executive
      Officer.




**OPTION/SAR
      GRANTS TABLE**





**Name**
            
            **No.
                of Securities Underlying Options/SARs Granted**
              **(#)**
            
            **%
                Total Options/SARs Granted to Employees in year
                ended**
              **December
                31, 2005**
              **(%)**
            
            **Exercise
                or Base Price**
              **($
                per Share)**
            
            **Expiration
                Date**Jack
                Harper
            
            
            8,000,000
            
            
            37
            %
            $
            0.03
            
            
            5-19-2010




The
      following table sets forth certain information regarding options exercised
      in
      the fiscal year ended December 31, 2005 by BSI’s Named Executive
      Officer.




**Aggregated
      Options/SAR Exercises**


**In
      Last Fiscal Year And**


**Fiscal
      Year End Options/SAR Values**





**Name**
            
            **Shares**
              **Acquired
                on**
              **Exercise
                (#)**
            
            **Value**
              **Realized
                ($)**
            
            **Number
                of Securities Underlying Unexercised**
              **Options/SARs
                at**
              **Fiscal
                Year End (#) Exercisable/ Unexercisable**
            
            **Value
                of Unexercised**
              **In-the-Money**
              **Options/SARs
                at**
              **Fiscal
                Year End ® Exercisable/Unexercisable**Jack
                Harper
            
            
            0
            
            
            0
            
            
            8,000,000
            
            
            0





The
      following table sets forth certain information regarding long-term incentive
      plan awards in the fiscal year ended December 31, 2005 by BSI’s Named Executive
      Officer.





**Long-Term
      Incentive Plans - Awards in Last Fiscal Year**




**Estimated
                future payouts under**
              **non-stock
                price-based plans****Name**
            
            **No.
                of Shares, units**
              **or
                other rights (#)**
            
            **Performance
                or**
              **other
                period until**
              **maturation
                or payout**
            
            **Threshold**
              **($
                or #)**
            
            **Target**
              **($
                or #)**
            
            **Maximum**
              **($
                or #)**Jack
                Harper
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0





On
      October 24, 1996, BSI adopted a Stock Option Plan whereby the Board can issue
      both incentive and nonqualified options to directors, employees and consultants.
      Currently, there are no outstanding stock options issued under the
      plan.




**Compensation
      Of Directors**




BSI
      periodically reimburses its directors for out-of-pocket expenses they incur
      in
      fulfillment of their duties as directors of BSI. In 2005, BSI paid the following
      remuneration to its directors: (i) on February 24, 2005, BSI issued Mr. Woods
      250,000 options at a strike price of $0.042 per share, 50,000 of which vested
      on
      the date of the grant, and the remaining 200,000 vests 50,000 per year for
      so
      long as he remains a member of the Board of Directors; and (ii) on May 19,
      2005,
      BSI issued Mr. Harper 8,000,000 options, Mr. Kirk 3,000,000 options and Mr.
      Woods 3,000,000 options, all at a strike price of $0.03 per share, all of which
      vested on the date of the grant. All of the options issued to Messrs. Harper,
      Kirk and Woods have a five year term.




24




**Employment
      Contracts, Termination of Employment, and Change-in-Control
      Arrangements**




BSI
      presently has an oral employment contract with Jack Harper. The employment
      agreement provides for an annual salary of $125,000 per year, as well as group
      life, health, dental and disability insurance. The employment agreement is
      for
      an indefinite period, but is terminable at will.






**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**




The
      Company has 126,629,677  shares
      of
      common stock issued and outstanding as of December 31, 2005. There are no shares
      of preferred stock issued and outstanding as of December 31, 2005. The table
      below sets forth certain information with respect to the common stock
      beneficially owned by (i) each director, nominee and executive officer of the
      Company; (i) each person who owns beneficially more than 5% of the common stock;
      and (iii) all directors, nominees and executive officers as a
      group.




**Security
      Ownership of Certain Beneficial Owners and Management**





**Title
                of Class**
            
            **Name
                and Address of Beneficial Owner**
            
            **Amount
                and nature**
              **of
                Beneficial Ownership**
            
            **Percentage
                of Class****(1)**Common
            
            Jack
                Harper
            
            18,403,102
            
            14.53%12600
                West Colfax Ave. Suite B410Lakewood,
                Colorado 80215Common
            
            Richard
                Kirk
            
            7,601,340
            
            6.00%12600
                West Colfax Ave. Suite B410Lakewood,
                Colorado 80215Common
            
            John
                Woods
            
            3,050,000
            
            2.4%12600
                West Colfax Ave. Suite B410Lakewood,
                CO 80215All
                Officers And Directors As A Group (3) Persons
            
            15,054,442
            
            22.93
                %Common
            
            Cornell
                Capital Partners, LP
            
            5,355,479
            
            4.2%101
                Hudson Street, Suite 3606Jersey
                City, NJ 07302


______________________________




*
            Less
                than 1%.




(1)
            Applicable
                percentage of ownership is based on 126,629,677 shares of common
                stock
                outstanding as of December 31, 2005 together with securities exercisable
                or convertible into shares of common stock within 60 days of December
                31,
                2005 for each stockholder. Beneficial ownership is determined in
                accordance with the rules of the Commission and generally includes
                voting
                or investment power with respect to securities. Shares of common
                stock
                subject to securities exercisable or convertible into shares of common
                stock that are currently exercisable or exercisable within 60 days of
                December 31, 2005 are deemed to be beneficially owned by the person
                holding such options for the purpose of computing the percentage
                of
                ownership of such person, but are not treated as outstanding for
                the
                purpose of computing the percentage ownership of any other
                person.




(2)
            Unless
                otherwise indicated, the persons named in the table have sole voting
                and
                investment power with respect to all shares of common stock shown
                as
                beneficially owned by them. Cornell is a Delaware limited partnership
                whose General Partner is Yorkville Advisers, LLC (‘Yorkville”).
                The managing member of Yorkville is Mark Angelo, who makes all investment
                decisions on behalf of Yorkville.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




During
      the last two years, BSI has not entered into a transaction with a value in
      excess of $60,000 with a director, officer or beneficial owner of 5% or more
      of
      the Company’s common stock.




No
      officer, director, or affiliate of BSI has or proposes to have any direct or
      indirect material interest in any asset proposed to be acquired through security
      holdings, contracts, options, or otherwise.




25




**ITEM
      13. EXHIBITS AND REPORTS ON FORM 8-K**




The
      following documents are filed as part of this report:




***(a)***  ***Exhibits.***




**Exhibit
                No.**
            
            **Description**
            
            **Location**2.1
            
            Agreement
                and Plan of Merger, dated August 7, 2000, between Calipso and Knowledge
                Foundations, Inc.
            
            Incorporated
                by reference to Exhibit 2(1) to the Current Report on Form 8-K filed
                on
                September 27, 2000.2.2
            
            Merger
                Agreement, dated April 23, 2002, between BSI, Inc., Knowledge Foundations,
                Inc. and KFI, Inc.
            
            Incorporated
                by reference to Exhibit 99.2 to the Current Report on Form 8-K filed
                on
                May 9, 20022.3
            
            First
                Amendment to Merger Agreement dated August 8, 2002, between BSI,
                Inc.,
                KFI, Inc. and Knowledge Foundations, Inc.
            
            Incorporated
                by reference to Form S-4 filed on August 13, 20022.4
            
            Separation
                and Distribution Agreement by and among Knowledge Foundations, Inc.,
                Cyber
                Knowledge, Inc. and CKI Group
            
            Incorporated
                by reference to Form S-4 filed on August 13, 20022.5
            
            Second
                Amendment to Merger Agreement dated November 20, 2002 between BSI,
                Inc.,
                KFI, Inc. and Knowledge Foundations, Inc.
            
            Incorporated
                by reference to Form S-4/A1 filed on November 27, 20023.1
            
            Certificate
                of Incorporation of Knowledge Foundations, Inc. filed on May 31,
                1994
            
            Incorporated
                by reference to Form 10-SB filed on November 24, 19993.2
            
            Certificate
                of Amendment of Certificate of Incorporation re: 36:1 forward
                split
            
            Incorporated
                by reference to Exhibit 3(i)(a) to the Current Report on Form 8-K
                filed on
                September 27, 20003.3
            
            Certificate
                of Amendment of Certificate of Incorporation re: 35:1 forward
                split
            
            Incorporated
                by reference to Exhibit 3(i)(b) to the Current Report on Form 8-K
                filed on
                September 27, 20003.4
            
            Certificate
                of Amendment of Certificate of Incorporation re: increase in authorized
                shares
            
            Incorporated
                by reference to Exhibit 3(i)(c) to the Current Report on Form 8-K
                filed on
                September 27, 20003.5
            
            Certificate
                of Amendment of Certificate of incorporation re: name
                change
            
            Incorporated
                by reference to Exhibit 3.3 to the Current Report on Form 8-K filed
                on
                April 8, 20033.6
            
            Bylaws
                of Knowledge Foundations, Inc.
            
            Incorporated
                by reference to Form 10-SB filed on November 24, 19993.7
            
            Certificate
                of Merger, dated August 17, 2000, filed with the Secretary of State
                of
                Delaware
            
            Incorporated
                by reference to Exhibit 3(i) to the Current Report on Form 8-K filed
                on
                September 27, 200014.1
            
            Code
                of Ethics
            
            Incorporated
                by reference to Exhibit 14.1 to Form 10-KSB filed on April 15,
                200531.1
            
            Section
                302 Certification of Principal Executive Officer
            
            Provided
                Herewith31.2
            
            Section
                302 Certification of Principal Accounting Officer
            
            Provided
                Herewith32.1
            
            Section
                906 Certification of Principal Executive Officer
            
            Provided
                Herewith32.2
            
            Section
                906 Certification of Principal Accounting Officer
            
            Provided
                Herewith




26


**(b)**  **Reports
      on Form 8-K:**




The
      Registrant filed no reports on Form 8-K during the fourth quarter of fiscal
      year
      2005.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




For
      the
      period covered by this Report, Ehrhardt Keefe Steiner & Hottman PC, an
      independent registered public accounting firm, billed BSI fees for various
      reviews and audits of the Companys financial statements included in filings
      on
      form 10QSB abd 10KSB of $93,177 and fees of $24,388 for services related to
      the
      Registration Statement on Form SB-2 and review of various other SEC filings,
      and
      quarterly reviews on SEC Forms 10-QSB, as well as $3,500 for income tax
      preparation services. Ehrhardt Keefe Steiner & Hottman PC has provided no
      other services to BSI other than the foregoing.




27




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the 1934 Act, the Registrant caused
      this
      Report to be signed on behalf by the undersigned, thereunto duly
      authorized.




Date:April
              20, 2006
            **BSI2000,
                INC.**By:
            */s/* *Jack
              Harper*Jack
              Harper,President,
                Chief Executive Officer, Chief Financial
              Officer,
                Principal Executive Officer, Principal
              Accounting
                Officer, and Director






In
      accordance with the 1934 Act, this Report has been signed below by the following
      persons on behalf of the Registrant and in the capacities and on the dates
      indicated.




Date:April
                20, 2006
            */s/
                Jack Harper*Jack
                Harper, DirectorDate:April
                20, 2006
            */s/
                Richard Kirk*Richard
                Kirk, DirectorDate:April
                20, 2006
            */s/
                John D. Woods*John
                D. Woods, Director








28





**BSI2000**


**(A
      Development Stage Company)**





**Consolidated
      Financial Statements**


**and**


**Report
      of Independent Resistered Public Accounting Firm**





**Table
      of Contents**





PageReport
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Financial StatementsConsolidated
                Balance Sheet
            F-2Consolidated
                Statements of Operations
            F-3Consolidated
                Statement of Changes in Stockholders’ Equity (Deficit)
            F-4Consolidated
                Statements of Cash Flows
            F-5Notes
                to Consolidated Financial Statements
            F-6














**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders


BSI
      2000,
      Inc.


Denver,
      Colorado








We
      have
      audited the accompanying consolidated balance sheet of BSI 2000, Inc. and
      subsidiary (A Development Stage Company) (the Company) as of December 31, 2005,
      and the related consolidated statements of operations, changes in stockholders’
equity (deficit) and cash flows for the years ended December 31, 2005 and 2004
      and for the cumulative period from Inception (July 30, 1993) through December
      31, 2005. These consolidated financial statements are the responsibility of
      the
      Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





We
      conducted our audits in accordance with auditing standards of The Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances but not for the purposes
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of BSI 2000, Inc. and
      subsidiary as of December 31, 2005, and the results of their operations and
      their cash flows for the years ended December 31, 2005 and 2004 and for the
      cumulative period from Inception (July 30, 1993) through December 31, 2005
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.





As
      discussed in Note 12, the accompanying 2004 consolidated financial statements
      have been restated.





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, the Company has experienced circumstances,
      which raise substantial doubt about its ability to continue as a going concern.
      Management’s plans regarding those matters also are described in Note 2. The
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.








Ehrhardt
      Keefe Steiner & Hottman PC


April
      24,
      2006


Denver,
      Colorado





F-1




**BSI
      2000, INC.**


**(A
      Development Stage Company)**


**Consolidated
      Balance Sheet**


**December
      31, 2005**





AssetsCurrent
                assetsCash
                and cash equivalents
            
            $
            4,423Accounts
                receivable, trade
            
            
            64,216Inventories
            
            
            85,868Other
            
            
            31,873Total
                current assets
            
            
            186,380Property
                and equipment, net
            
            
            40,169Intangible
                assets, net
            
            
            1,074,861Other
                long-term assets
            
            
            4,232Total
                assets
            
            $
            1,305,642Liabilities
                and Stockholders’ DeficitCurrent
                liabilitiesAccounts
                payable
            
            $
            344,215Accrued
                liabilities
            
            
            214,756Deferred
                revenue, current portion
            
            
            6,375Note
                payable, related party
            
            
            28,700Notes
                payable, current portion
            
            
            183,347Total
                current liabilities
            
            
            777,393Deferred
                revenue, long-term portion
            
            
            6,833Notes
                payable, less current portion
            
            
            477,431Convertible
                notes payable
            
            
            647,852Liability
                for derivative instruments
            
            
            2,038,686Total
                liabilities
            
            
            3,948,195Commitments
                and contingenciesStockholders’
                deficitPreferred
                stock, $.001 par value, 20,000,000 shares authorized, no shares issued
                and
                outstanding
            
            
            --Common
                stock, $.001 par value, 400,000,000 shares authorized, 124,479,677
                shares
                issued and outstanding
            
            
            124,480Additional
                paid-in capital
            
            
            8,455,968Accumulated
                deficit
            
            
            (11,223,001
            )Total
                stockholders’ deficit
            
            
            (2,642,553
            )Total
                liabilities and stockholders’ deficit
            
            $
            1,305,642





See
      notes
      to consolidated financial statements.








F-2


**BSI
      2000, INC.**


**(A
      Development Stage Company)**


**Consolidated
      Statements of Operations**





For
                the Years Ended
            
            Inception
              (July
                30, 1993) throughDecember
                31,
            
            December
                31,2005
            
            2004
            
            2005(Restated)
            
            (Restated)Revenues
            
            $
            226,887
            
            $
            5,918
            
            $
            328,535Cost
                of goods sold
            
            
            125,349
            
            
            --
            
            
            193,335Gross
                profit
            
            
            101,538
            
            
            5,918
            
            
            135,200Operating
                expensesSelling
                expenses
            
            
            435,252
            
            
            367,807
            
            
            1,842,032General
                and administrative
            
            
            1,447,571
            
            
            1,027,925
            
            
            5,186,040Stock
                based compensation expense
            
            
            105,954
            
            
            20,148
            
            
            253,741Research
                and development
            
            
            462,304
            
            
            542,635
            
            
            2,365,828Total
                operating expenses
            
            
            2,451,081
            
            
            1,958,515
            
            
            9,647,641Other
                (expense) incomeInterest
                expense
            
            
            (924,894
            )
            
            (51,572
            )
            
            (1,105,831
            )Interest
                income
            
            
            4,416
            
            
            2
            
            
            27,462Financing
                costs
            
            
            (934,727
            )
            
            (185,755
            )
            
            (1,167,425
            )Other
            
            
            (10,000
            )
            
            250
            
            
            73,526Changes
                in derivative liabilities
            
            
            415,953
            
            
            45,755
            
            
            461,708Total
                other (expense) income
            
            
            (1,449,252
            )
            
            (191,320
            )
            
            (1,710,560
            )Net
                loss
            
            $
            (3,798,795
            )
            $
            (2,143,917
            )
            $
            (11,223,001
            )Basic
                and diluted weighted average common shares outstanding
            
            
            110,853,987
            
            
            72,506,696
            
            
            27,303,207Basic
                and diluted loss per common share
            
            $
            (0.034
            )
            $
            (0.030
            )
            $
            (0.411
            )





See
      notes
      to consolidated financial statements.





F-3





**BSI
      2000, INC.**


**(A
      Development Stage Company)**


**Consolidated
      Statement of Changes in Stockholders’ Equity (Deficit)**


**For
      the Years Ended December 31, 2005 and 2004 and**


**For
      the Period from Inception (July 30, 1993) to December 31,
      2005**


Common
                  Stock
              
              Additional
                Paid-in
              
              Accumulated
                Deficit
                  During the Development
              
              Total
                Stockholders’
                EquityShares
              
              Amount
              
              Capital
              
              Stage
              
              (Deficit)Balance
                  at Inception - July 30, 1993
              
              
              --
              
              $
              -
              
              $
              --
              
              $
              --
              
              $
              --Stock
                  issued to founders for cash during the period ended December 31,
                  1993
              
              
              19,580
              
              
              85,000
              
              
              --
              
              
              --
              
              
              85,000Stock
                  issued for cash during the year ended December 31, 1993
              
              
              2,701
              
              
              57,500
              
              
              --
              
              
              --
              
              
              57,500Stock
                  issued to founders for services during the period ended December
                  31,
                  1993
              
              
              33,812
              
              
              146,793
              
              
              --
              
              
              --
              
              
              146,793Stock
                  issued for cash during the year ended December 31, 1994
              
              
              12,904
              
              
              65,000
              
              
              --
              
              
              --
              
              
              65,000Stock
                  issued for cash during the year ended December 31, 1995
              
              
              224,672
              
              
              118,763
              
              
              --
              
              
              --
              
              
              118,763Stock
                  issued for cash during the year ended December 31, 1996
              
              
              616,989
              
              
              227,872
              
              
              --
              
              
              --
              
              
              227,872Stock
                  issued for cash during the year ended December 31, 1997
              
              
              225,766
              
              
              144,612
              
              
              --
              
              
              --
              
              
              144,612Stock
                  issued for cash during the year ended December 31, 1998
              
              
              831,118
              
              
              788,309
              
              
              --
              
              
              --
              
              
              788,309Stock
                  issued for cash during the year ended December 31, 1999
              
              
              583,767
              
              
              364,854
              
              
              --
              
              
              --
              
              
              364,854Stock
                  issued for cash during the year ended December 31, 2000
              
              
              195,369
              
              
              122,106
              
              
              --
              
              
              --
              
              
              122,106Net
                  loss from Inception
              
              
              --
              
              
              --
              
              
              --
              
              
              (2,398,997
              )
              
              (2,398,997
              )Balance
                  - December 31, 2000
              
              
              2,746,678
              
              
              2,120,809
              
              
              --
              
              
              (2,398,997
              )
              
              (278,188
              )Stock
                  issued for cash
              
              
              46,600
              
              
              29,125
              
              
              --
              
              
              --
              
              
              29,125Stock
                  issued to officer for services
              
              
              2,500,000
              
              
              56,736
              
              
              --
              
              
              --
              
              
              56,736Stock
                  issued for services to an employee
              
              
              212,045
              
              
              212
              
              
              --
              
              
              --
              
              
              212Net
                  income
              
              
              --
              
              
              --
              
              
              --
              
              
              (338,679
              )
              
              (338,679
              )Balance
                  - December 31, 2001
              
              
              5,505,323
              
              
              2,206,882
              
              
              --
              
              
              (2,737,676
              )
              
              (530,794
              )Stock
                  issued for debt conversion
              
              
              1,159,426
              
              
              865,375
              
              
              --
              
              
              --
              
              
              865,375Stock
                  issued for cash @ $1.00 per share
              
              
              566,782
              
              
              566,782
              
              
              --
              
              
              --
              
              
              566,782Stock
                  issued for cash @ $.625 per share
              
              
              515,869
              
              
              322,418
              
              
              
              
              
              
              
              
              322,418Stock
                  issued for services to finders of private placement offering in
                  June 2002
                  at $.01 per share, net of expense
              
              
              300,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --Stock
                  issued for services
              
              
              25,000
              
              
              25,500
              
              
              --
              
              
              --
              
              
              25,500Stock
                  based compensation expense
              
              
              580,000
              
              
              50,000
              
              
              --
              
              
              --
              
              
              50,000Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              (973,635
              )
              
              (973,635
              )Balance
                  - December 31, 2002
              
              
              8,652,400
              
              
              4,036,957
              
              
              --
              
              
              (3,711,311
              )
              
              325,646Stock
                  issued for cash @ $1.00 per share
              
              
              134,500
              
              
              134,500
              
              
              
              
              
              --
              
              
              134,500Stock
                  issued for cash @ $.25 per share
              
              
              1,000,000
              
              
              1,000
              
              
              249,000
              
              
              
              
              
              250,000Stock
                  issued for equity line of credit commitment and placement
                  fees
              
              
              1,910,714
              
              
              1,911
              
              
              (1,911
              )
              
              --
              
              
              --Stock
                  issued for convertible note payable fees
              
              
              500,000
              
              
              500
              
              
              (500
              )
              
              --
              
              
              --Issuance
                  of stock in connection with reverse acquisition
              
              
              41,363,488
              
              
              (4,121,307
              )
              
              4,121,307
              
              
              --
              
              
              --Stock
                  issued for debt conversion
              
              
              390,625
              
              
              391
              
              
              49,609
              
              
              --
              
              
              50,000Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              (1,568,978
              )
              
              (1,568,978
              )Balance
                  December 31, 2003
              
              
              53,951,727
              
              
              53,952
              
              
              4,417,505
              
              
              (5,280,289
              )
              
              (808,832
              )Stock
                  issued for debt conversion
              
              
              35,949,972
              
              
              35,950
              
              
              2,454,579
              
              
              --
              
              
              2,490,529Stock
                  issued for cash, net of offering costs of $2,500
              
              
              990,099
              
              
              990
              
              
              46,510
              
              
              --
              
              
              47,500Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              (2,143,917
              )
              
              (2,143,917
              )Balance
                  December 31, 2004
              
              
              90,891,798
              
              $
              90,892
              
              $
              6,918,594
              
              $
              (7,424,206
              )
              $
              (414,720
              )Stock
                  Issued for Debt Conversion
              
              
              32,508,017
              
              
              32,508
              
              
              942,492
              
              
              
              
              
              975,000Stock
                  issued for services
              
              
              79,862
              
              
              80
              
              
              7,107
              
              
              
              
              
              7,187Stock
                  issued in connection with convertible debenture
              
              
              1,000,000
              
              
              1,000
              
              
              46,000
              
              
              
              
              
              47,000Transfer
                  of derivative liability due to debt conversion
              
              
              
              
              
              
              
              
              442,928
              
              
              
              
              
              442,928Options
                  Issued to employees
              
              
              
              
              
              
              
              
              98,847
              
              
              
              
              
              98,847Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (3,798,795
              )
              
              (3,798,795
              )Balance
                  - December 31, 2005
              
              
              124,479,677
              
              
              124,480
              
              
              8,455,968
              
              
              (11,223,001
              )
              
              (2,642,553
              )






See
      notes
      to consolidated financial statements.





F-4





**BSI
      2000, INC.**


**(A
      Development Stage Company)**


**Consolidated
      Statements of Cash Flows**





For
                the Years Ended
            
            Inception
              (July30,1993)
                toDecember
                31,
            
            December
                31,2005
            
            2004
            
            2005(Restated)
            
            (Restated)Cash
                flows from operating activitiesNet
                loss
            
            $
            (3,798,795
            )
            $
            (2,143,917
            )
            $
            (11,223,001
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                and amortization expense
            
            
            92,646
            
            
            19,152
            
            
            215,959Gain
                on forgiveness of debt
            
            
            --
            
            
            --
            
            
            (65,485
            )Gain
                on disposal of fixed assets
            
            
            --
            
            
            (250
            )
            
            (250
            )Change
                in fair value of derivative liabilities
            
            
            (415,953
            )
            
            (45,755
            )
            
            (461,708
            )Stock
                based compensation
            
            
            105,954
            
            
            20,148
            
            
            379,843Non-cash
                interest expense and financing costs
            
            
            1,739,201
            
            
            20,434
            
            
            1,767,748Changes
                in assets and liabilitiesInventories
            
            
            (35,498
            )
            
            (15,009
            )
            
            (85,868
            )Accounts
                receivable
            
            
            (64,216
            )
            
            
            
            
            (64,216
            )Other
                current assets
            
            
            (22,191
            )
            
            (3,432
            )
            
            (25,623
            )Other
                long-term assets
            
            
            --
            
            
            --
            
            
            (4,232
            )Accounts
                payable
            
            
            159,946
            
            
            (11,868
            )
            
            398,278Deferred
                revenue
            
            
            (6,375
            )
            
            19,583
            
            
            13,208Accrued
                liabilities
            
            
            193,675
            
            
            1,533
            
            
            266,4421,747,189
            
            
            4,536
            
            
            2,334,096Net
                cash used in operating activities
            
            
            (2,051,606
            )
            
            (2,139,381
            )
            
            (8,888,905
            )Cash
                flows from investing activitiesRedemption
                of certificates of deposit
            
            
            --
            
            
            --
            
            
            35,000Purchase
                of certificate of deposit
            
            
            --
            
            
            --
            
            
            (35,000
            )Proceeds
                from fixed asset disposals
            
            
            --
            
            
            250
            
            
            250Purchase
                of fixed assets
            
            
            (12,806
            )
            
            (10,755
            )
            
            (131,688
            )Cash
                paid for purchased technology
            
            
            (180,000
            )
            
            
            
            
            (180,000
            )Increase
                in Patent application costs
            
            
            (67,779
            )
            
            (120,585
            )
            
            (250,947
            )Net
                cash used in investing activities
            
            
            (260,585
            )
            
            (131,090
            )
            
            (562,385
            )Cash
                flows from financing activitiesProceeds
                from issuance of common stock
            
            
            --
            
            
            47,500
            
            
            3,324,341Proceeds
                from long-term debt
            
            
            --
            
            
            --
            
            
            919,500Net
                proceeds from convertible notes payable, net if issuance costs of
                $215,000
              (2005)
            
            
            1,635,000
            
            
            2,990,808
            
            
            5,542,751Repayment
                on long-term debt
            
            
            (240,473
            )
            
            --
            
            
            (321,989
            )Proceeds
                from note payable related party
            
            
            28,700
            
            
            --
            
            
            28,700Repayment
                on capital lease obligation
            
            
            --
            
            
            --
            
            
            (37,590
            )Net
                cash provided by financing activities
            
            
            1,423,227
            
            
            3,038,308
            
            
            9,455,713Net
                (decrease) increase in cash and cash equivalents
            
            
            (888,964
            )
            
            767,837
            
            
            4,423Cash
                and cash equivalents - beginning of year
            
            
            893,387
            
            
            125,550
            
            
            --Cash
                and cash equivalents - end of year
            
            $
            4,423
            
            $
            893,387
            
            $
            4,423





(Continued
      on following page.)





See
      notes
      to consolidated financial statements.





F-5





**BSI
      2000, INC.**


**(A
      Development Stage Company)**


**Consolidated
      Statements of Cash Flows**





(Continued
      from previous page.)




**Supplemental
      disclosure of cash flow information:**




Cash
      paid
      for interest during the years ended December 31, 2005 and 2004 was $10,187
      and
      $0, respectively. Cash paid for interest expense from Inception (July 30, 1993)
      through December 31, 2005 was $78,361.




**Supplemental
      disclosure of non-cash activity:**




During
      the year ended December 31, 2005, the Company acquired technology (MaxxNet)
      by
      issuing notes totaling $720,000 (Note 8).






During
      the year ended December 31, 2005, BSI effectively repaid $325,000 of notes
      payable and accrued interest pursuant to draw-downs under the Equity Line by
      issuing 8,984,557 shares of common stock.




During
      the year ended December 31, 2005, the Company converted $650,000 of convertible
      debt into 23,523,460 shares of common sock




During
      the year ended December 31, 2005, BSI issued 40,000,000 warrants to Cornell
      Capital Partners valued at $902,643.




During
      the year ended December 31, 2005, BSI issued options to employees valued at
      $98,847.




During
      the year ended December 31, 2005, BSI issued warrants for an agreement valued
      at
      $33,259.




During
      the year ended December 31, 2005, BSI acquired assets totaling $900,000 through
      agreement.




During
      the year ended December 31, 2005, the company issued 79,862 shares of common
      stock for services valued at $7,107.




During
      the year ended December 31, 2005, the Company recognized change in fair value
      for convertible debentures with conversion features in the amount of $415,954. During
      the year ended December 31, 2005, the Company issued 1,000,000 shares of common
      stock to Cornell Capital Partners valued at $47,000.




During
      the year ended December 31, 2004, the Company issued 250,000 warrants to a
      consultant valued at $20,148.




During
      the year ended December 31, 2004, the Company effectively repaid $2,290,529
      of
      notes payable and accrued interest pursuant to draw-downs under the Equity
      Line
      totaling 32,940,414 shares of common stock and converted $200,000 of convertible
      debentures into 3,009,558 shares of common stock.




During
      the year ended December 31, 2004, the Company issued convertible debentures
      with
      conversion features. The change in fair value of the conversion features from
      the date of issuance was valued at $45,755.





During
      the year ended December 31, 2003, the Company converted $50,000 of convertible
      debentures into 390,625 shares of common stock.




Effective
      March 31, 2003, the Company entered into a merger agreement, which has been
      accounted for as a reverse acquisition. No assets were acquired. As a result
      of
      the merger, there was an increase of 41,363,488 shares of common stock
      outstanding in the surviving company.




As
      part
      of the merger, the Company assumed an existing liability of $56,825, which
      has
      been funded through a note receivable from shareholders of the
      Company.




F-6


During
      the year ended December 31, 2002, the Company converted $812,326 of notes
      payable and $53,049 of accrued interest into 1,159,426 shares of common
      stock.




During
      the year ended December 31, 2002, the Company converted $25,500 of accounts
      payable and accrued liabilities into 25,000 shares of common stock.




During
      the year ended December 31, 2001, the Company converted accrued wages totaling
      $56,736 into 2,500,000 shares of common stock.




During
      the year ended December 31, 1999, the Company converted $29,063 from accounts
      payable to notes payable.




In
      September 1998, the Company obtained fixed assets totaling $37,590 through
      a
      capital lease. In addition, the Company financed leasehold improvements in
      the
      amount of $16,000 through a note payable.




F-7




**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**






**Note
      1 - Description of Business and Summary of Significant Accounting
      Policies**




BSI
      2000,
      Inc. was formed on July 30, 1993 and is a value-added reseller (“VAR”) of
      LaserCard’s® optical cards and optical card readers. As a VAR, BSI 2000, Inc.
      develops proprietary hardware and software adapting LaserCard’s® optical card
      technology for specific applications. BSI 2000 Inc.’s products are designed as
      turnkey solutions for identified commercial and governmental card-based
      information needs.




BSI
      2000,
      Inc. is a development stage company that has not had any significant revenue
      since inception. There is no assurance that the Company will generate
      significant revenue or earn a profit in the future.




**Principles
      of Consolidation**




The
      accompanying consolidated financial statements include the accounts of BSI
      2000,
      Inc. and its subsidiary, BSI Operating, Inc. (the Company). All intercompany
      accounts and transactions have been eliminated in consolidation.




**Cash
      and Cash Equivalents**




The
      Company considers all highly liquid instruments purchased with an original
      maturity of three months or less to be cash equivalents. The Company continually
      monitors its positions with, and the credit quality of, the financial
      institutions with which it invests. As of the balance sheet date, and
      periodically throughout the year, the Company’s cash and cash equivalents exceed
      federally insured limits.




**Inventories**




Inventories
      consist of raw materials and are stated at the lower of cost or market,
      determined using the first-in, first-out method (FIFO).




**Property
      and Equipment**




Property
      and equipment is stated at cost. Depreciation is provided utilizing the
      straight-line method over the estimated useful lives for owned assets of 5
      to 7
      years. Leasehold improvements are amortized over a 5 1/2 year
      period.




**Use
      of Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, disclosures of contingent assets and liabilities at the date of
      the
      financial statements and the reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those
      estimates.




**Revenue
      Recognition**




The
      Company recognizes revenue in compliance with SAB 104, “Revenue Recognition in
      Financial Statements.” Revenue is recognized when an order has been placed by
      the customer, the product has been shipped and collectibility is reasonably
      assured. Prices of the products are determined prior to entering into a purchase
      agreement. From inception through December 31, 2005, revenues earned represented
      sales to distributors of demonstration units of the Company’s products, as well
      as sales of products manufactured by the Company.




Transaction
      based revenue is recognized as transactions are completed and are billed monthly
      based on service agreement rates in effect.




Distribution
      rights revenue is recognized ratable over the life of each underlying
      distribution agreement.




F-8


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**






**Note
      1 - Description of Business and Summary of Significant Accounting Policies
      (continued)**




**Intangible
      Assets**




Intangibles
      include trademarks and patents, which are recorded at cost. These patents are
      awaiting approval from the U.S. Patent office. Once accepted, the Company will
      begin amortization over the life of the patent. If patents are not awarded,
      the
      related costs will be expensed.




Intangibles
      also include acquired software, at cost, which is being amortized over a usefull
      life of three years.




**Income
      Taxes**




The
      Company recognizes deferred tax liabilities and assets based on the differences
      between the tax basis of assets and liabilities and their reported amounts
      in
      the financial statements that will result in taxable or deductible amounts
      in
      future years.




**Advertising
      Costs**




The
      Company expenses advertising costs as incurred.




**Software
      and Research and Development Costs**




Expenditures
      made for research and development are charged to expense as
      incurred.




Costs
      incurred to date for the development of the Company’s products have been charged
      to expense as incurred. Future costs may be capitalized to the extent they
      meet
      the requirements of SFAS No. 86 “Accounting for the Costs of Computer Software
      to be Sold, Leased, or Otherwise Marketed.”




**Basic
      and Diluted Earnings Per Common Share**




Basic
      earnings per share are computed by dividing net income by the number of weighted
      average common shares outstanding during the year. Diluted earnings per share
      is
      computed by dividing net income by the number of weighted average common shares
      outstanding during the year, including potential common shares, which consisted
      of warrants, options and convertible debt, when such securities are dilutive.
      As
      all dilutve securities have an antidilutive effect on 2005 and 2004 earnings
      per
      share, the securities have been excluded from the earnings per share
      calculation.




**Stock-Based
      Compensation**




During
      the year ended December 31, 2005, the Company has issued options to employees
      to
      purchase 20,750,000 shares of common stock at an exercise prices ranging from
      $.027 to $0.11. Of the 20,750,000 options issued during 2005, 18,152,083 were
      vested at the date of grant with the remainder vesting in 2005 through
      2010.




Financing
      Costs




The
      Company includes in financing costs the
      amortization of loan fee discounts that are incurred on convertible debt. Any
      excess of discounts on convertible debt over proceeds received from convertible
      debt is also included in financing costs.




F-9




**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







The
      Company accounts for stock-based compensation in accordance with Accounting
      Principles Board Opinion (“APB”) No. 25 and has adopted the disclosure-only
      provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”
Accordingly, no compensation cost has been recognized for awards under the
      stock
      option plan as the exercise prices equaled or exceeded their fair value of
      the
      underlying stock as determined by the Board of Directors. Had compensation
      cost
      for the Company’s options issued to employees been determined based on the fair
      value at the grant date for awards consistent with the provisions of SFAS No.
      123, as amended by SFAS No. 148, the Company’s net loss would have been changed
      to the pro forma amount indicated below at December 31, 2005:




**[December
                31,**
              **2005]**
            
            **[December
                31,**
              **2004]**Net
                loss - as reported
            
            $
            (3,798,795
            )
            $
            (2,143,917
            )Deduct
                recorded employee compensation expense
            
            
            --
            
            
            --Add
                fair value of employee compensation expense
            
            
            (307,570
            )
            
            (86,899
            )Net
                loss - pro forma
            
            $
            (4,106,365
            )
            $
            (2,230,816
            )Net
                loss per share-pro forma
            
            $
            (.037
            )
            $
            (0.030
            )




The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions used at December 31, 2005:




December
                31,
              2005
            
            December
                31,
              2004Approximate
                risk free rate
            
            
            3.84-4.08
            %
            
            4.25
            %Average
                expected life
            
            
            5
                years
            
            
            5
                yearsDividend
                yield
            
            
            0
            %
            
            0
            %Weighted
                Average Volatility
            
            
            72.18-81.60
            %
            
            85.28
            %Estimated
                fair value of total options granted
            
            $
            307,570
            
            $
            86,899





**Recently
      Issued Accounting Pronouncements**




In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards No. 154, “Accounting Changes and Error
      Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3”
(“SFAS 154”). This Statement replaces APB Opinion No. 20, Accounting Changes,
      and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
      Statements, and changes the requirements for the accounting for and reporting
      of
      a change in accounting principle. This Statement applies to all voluntary
      changes in accounting principle. It also applies to changes required by an
      accounting pronouncement in the unusual instance that the pronouncement does
      not
      include specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. APB Opinion No.
      20
      previously required that most voluntary changes in accounting principle be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. This Statement requires
      retrospective application to prior periods’ financial statements of changes in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, this Statement requires
      that
      the new accounting principle be applied to the balances of assets and
      liablilities as of the beginning of the earliest period for which retrospective
      application is practicable and that a corresponding adjustment be made to the
      openining balance of retained earnings (or other appropriate components of
      equity or net assets in the statement of financial position) for that period
      rather than being reported in an income statement. When it is impracticable
      to
      determine the cumulative effect of applying a change in accounting princicple
      to
      all prior periods, this Statement requires that the new accounting principle
      be
      applied as if it were adopted prospectively from the earliest date practicable.
      This Statement shall be effective for accounting changes and corrections of
      errors made in fiscal years beginning after December 15, 2005. The Company
      does
      not believe that the adoption of SFAS 154 will have a significant effect on
      its
      financial statements.




F-10


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







In
      December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment,
      which supersedes Accounting Principles Board (“APB”) No. 25, Accounting for
      Stock Issued to Employees, and its related implementation guidance. Under SFAS
      No. 123 (revised), all share-based payments would be treated as other forms
      of
      compensation by recognizing the costs, generally measured as the fair value
      at
      the date of grant, in the income statement. The Company will adopt, as required,
      SFAS No. 123 (revised) for its fiscal year beginning January 1, 2006. Management
      expects that the impact of the adoption of SFAS No. 123 (revised) will be
      material to future operations.




**Note
      2 - Going Concern**




The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the ordinary course of business. The Company has experienced losses since
      inception (July 30, 1993) through December 31, 2005 of $11,223,001. The Company
      has working capital deficit of $591,013 and stockholder’s deficit of $2,642,553
      as of December 31, 2005 and negative cash flow from operations of $2,051,606.
      The Company is also delinquent in remitting $51,033 of payroll tax liabilities.
      These factors create substantial doubt about the Company’s ability to continue
      as a going concern.




The
      extended period over which losses have been experienced is principally
      attributable to two factors, lack of capital and the type of potential
      customers. Lack of capital has prevented the Company from quickly developing
      and
      aggressively marketing its products. In addition, most of the Company’s
      potential customers are large corporations or governments. Adopting the
      Company’s products will in many cases require changing the way business is
      done.




F-11


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Note
      3 - Furniture and Fixtures**




Property
      and equipment consist of the following at December 31, 2005:




Leasehold
                improvements
            
            $
            18,744Software
            
            
            7,919Equipment
            
            
            115,897Furniture
            
            
            36,588179,148Less
                accumulated depreciation
            
            
            (138,979
            )$
            40,169





Depreciation
      expense for 2005 and 2004 was $16,560 and $19,152 respectively.





**Note
      4-Intangible Assets**





Intangible
      assets consist of the following at December 31, 2005:





Subject
                to
              Amortization
            
            Not
                currently subject
              to
                Amortization
            
            TotalsPatent
                Applications-Approved
            
            $
            19,092
            
            $
            --
            
            $
            19,092Patent
                Applications-pending
            
            
            --
            
            
            231,855
            
            
            231,855Aquired
                Technology
            
            
            900,000
            
            
            --
            
            
            900,000919,092
            
            
            231,855
            
            
            1,150,947Less
                accumulated amortization
            
            
            (76,086
            )
            
            --
            
            
            (76,086
            )$
            843,006
            
            $
            231,855
            
            $
            1,074,861





Amortization
      expense for patents totaled $1,086 and $202 during 2005 and 2004 respectively.
      Amortization expense for aquired technology totaled $75,000 and $0 for 2005
      and
      2004 recpectively.





Pending
      patents not subject to amortization will begin to be amortized upon grant of
      approval by the U.SD. Patent Office and will be amortized over the shorter
      of
      the economic or legal life. Patents pending which are not successful in
      obtaining approval will be expenses upon notification of failure to receive
      approval.





Future
      expected amortization expense for intangible assets is as
      follows:




Years
                ended December 31,2006
            $301,0862007
            301,0862008
            226,0862009
            1,0862010
            1,086Thereafter
            12,576$843,006





F-12




**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Note
      5 - Equity Line of Credit**




On
      October 31, 2003, the Company entered into an Equity Line of Credit Agreement
      with Cornell. Under this agreement, the Company may issue and sell to Cornell
      common stock for a total purchase price of up to $15.0 million. Subject to
      certain conditions, the Company is entitled to commence drawing down on the
      Equity Line of Credit effective on December 9, 2003, the effective date of
      the
      registration statement filed with The Securities and Exchange commission, and
      will continue for two years thereafter. The purchase price for the shares will
      be equal to 99% of, or a 1% discount to, the market price, which is defined
      as
      the lowest closing bid price of the common stock during the five trading days
      following the notice date. The amount of each advance is subject to an aggregate
      maximum advance amount of $210,000, with no advance occurring within seven
      trading days of a prior advance. Cornell received 1,875,000 shares of the
      Company’s common stock as a one-time commitment fee and is entitled to retain a
      fee of 4.0% of each advance. In addition, the Company entered into a placement
      agent agreement with Newbridge Securities Corporation, a registered
      broker-dealer. Pursuant to the placement agent agreement, the Company paid
      a
      one-time placement agent fee of 35,714 shares of common stock equal to
      approximately $10,000 based on the Company’s stock price on July 7, 2003, the
      date the Company agreed to engage the placement agent.




A
      total
      of 33,930,513 shares in 2004 and 8,984,557 shares in 2005 were issued under
      the
      terms of the equity line of credit.




**The
      Equity Line of Credit Agreement was terminated October 30, 2005.**




**Note
      6-Convertible Debentures**




On
      October 7, 2004, the Company issued a 5% convertible debenture in the amount
      of
      $1,250,000 to Cornell Capital Partners. The Company received a $500,000 traunch
      on October 7, 2004, less a 10% fee of $50,000 and $10,000 for legal costs,
      a
      $500,000 traunch (net of 10% fee) on December 10, 2004 and $250,000 traunch
      (net
      of 10% fee) on January 20, 2005.




On
      June
      17, 2005, BSI issued a 5% convertible debenture in the amount of $1250,000
      to
      Cornell Capital Partners. BSI received a $125,000 traunch on June 15, 2005,
      less
      a 10% fee of $12,500, and $20,000 for legal costs, a $125,000 traunch (net
      of
      10% fee) on July 17, 2005 and a $1,000,000 traunch (net of 10% fee) on August
      5,
      2005.




On
      November 2, 2005, BSI issued a 12% convertible debenture in the amount of
      $1,000,000 to Cornell Capital Partners. BSI received a $350,000 traunch on
      November 2, 2005, net of fees and legal costs of $92,674 ($47,000 piad by
      issuance of 1,000,000 shares of common stock). The Company received a $300,000
      traunch on February 10, 2006 (net of a 10% fee of $32,500), and will receive
      $100,000 upon approval of its shareholders of an increase in authorized shares,
      and $250,000 upon effectiveness of a registration statement filed with The
      SEC
      covering shares to be issued under the debenture. The
      debentures are convertible into the Company’s common stock at either the fixed
      price of 120% of the Volume Weighted Average price on each respective traunch
      closing date or 80% of the average of the three (3) lowest daily Volume Weighted
      Average Price, as reported by Bloomberg, L.P., of the Company’s common stock for
      the five (5) trading days immediately preceding the conversion date (date on
      which the Company receives a notice of conversion from Cornell). The debentures
      will automatically convert into the Company’s common stock on the third
      anniversary of issuance. The Company has the right to redeem the debentures
      with
      three (3) days advance notice any or all of the outstanding debenture amount
      at
      its sole discretion.




The
      redemption price shall be 120% of the face amount redeem plus accrued interest.
      Once the redemption notice has been given, Cornell may continue to convert
      the
      remaining outstanding debenture.




In
      the
      event that the Company exercises it right of redemption as described above
      for
      either all or a portion of the outstanding debentures, Cornell shall receive
      for
      every $100,000 invested a warrant to purchase 50,000 shares of the Company’s
      common stock. The warrant will have “piggy-back” registration rights and will
      survive for two years from closing. The exercise price of the warrant shall
      be
      120% of the volume weighted average price on the closing date. In accordance
      with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to,
      and potentially Settled in, a Company’s Own Stock”, the conversion feature of
      each convertible debenture has been included as a long-term liability and were
      originally valued at fair value at the date of issuance. As a liability, the
      convertible features are revalued each period until and unless the debt is
      converted. During the year ended December 31, 2005, we recorded other income
      of
      $415,953 related to the change in fair value from the date of issuance of the
      debt or December 31, 2004, to December 31, 2005. This amount is included as
      a
      component of other income in the accompanying consolidated statement of
      operations. If the debt is converted prior to maturity, the carrying value
      will
      be transferred to equity.





F-13




Derivative
                Liabilities-conversion features
            Date
                of convertible debenture
            Value
                at 12-31-05December
                10, 2004
            $221,837January
                19, 2005
            $161,184June
                17, 2005
            $71,788July
                15, 2005
            $71,788August
                5, 2005
            $584,907November
                2, 2005
            $261,633Total
            $1,373,137Derivative
                Liabilities-WarrantsJune
                17, 2005
            $320,138November
                2, 2005
            $320,138Various
            $25,273


Total
              $665,549


Total
            
            $2,038,686




The
      following tables describe the valuation of the conversion feature of each
      traunch of each convertible debenture, using the Black Scholes pricing
      model:





F-14


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**






The
      fair
      value of the conversion features for the 2004 advances on the October 7, 2004
      convertible debt have been valued at $737,221 using the Black-Scholes Option
      Pricing Model with the following weighted-average assumptions used:




Approximate
                risk free rate
            3.01-3.25%Average
                expected life
            3
                yearsDividend
                yield
            0%Volatility
            77.56-82.80%Estimated
                fair value of conversion feature
            $737,221


The
      fair
      value of the conversion feature has been included as discount to debt in the
      accompanying balance sheet up to the proceeds received from each offering,
      with
      any excess or $0 charged to expense. The discounts are amortized over the life
      of each debenture traunch. Amortization of the discounts for each debenture
      traunch totaled $17,654 in 2004 and $521,106 in 2005.




The
      fair
      value of the conversion features for the January 2005 advances on the October
      7,
      2004 convertible debt have been valued at $177,953 using the Black-Scholes
      Option Pricing Model with the following weighted-average assumptions
      used:




Approximate
                risk free rate
            3.42-3.96%Average
                expected life
            3
                yearsDividend
                yield
            0%Volatility
            72.18-75.60%Estimated
                fair value of conversion feature
            $177,953


The
      value
      of the conversion feature has been included as discount to debt in the
      accompanying balance sheet up to the proceeds received from each offering,
      with
      any excess or $0 charged to expense. The discounts are amortized over the life
      of each debenture traunch. Amortization of the discounts for each debenture
      traunch totaled $32,431 in 2005.




The
      fair
      value of the conversion features for the June advance on the June 17, 2005
      convertible debt has been valued at $93,569 using the Black-Scholes Option
      Pricing Model with the following weighted-average assumptions used:




Approximate
                risk free rate
            3.75-3.88%Average
                expected life
            2-3
                yearsDividend
                yield
            0%Volatility
            79.26-81.60%Estimated
                fair value of conversion feature
            $93,569


The
      value
      of the conversion feature has been included as discount to debt in the
      accompanying balance sheet up to the proceeds received from each offering,
      with
      any excess or $1,069 charged to expense. The discounts are amortized over the
      life of each debenture traunch. Amortization of the discounts for each debenture
      traunch totaled $2,680 in 2005.





The
      fair
      value of the conversion features for the July and August advances on the June
      17, 2005 convertible debt have been valued at $722,183 using the Black-Scholes
      Option Pricing Model with the following weighted-average assumptions
      used:




Approximate
                risk free rate
            3.92-4.18%Average
                expected life
            2-3
                yearsDividend
                yield
            0%Volatility
            79.26-81.60%Estimated
                fair value of conversion feature
            $722,183


The
      fair
      value of the conversion feature has been included as discount to debt in the
      accompanying balance sheet up to the proceeds received from each offering,
      with
      any excess or $0 charged to expense. The discounts are amortized over the life
      of each debenture traunch. Amortization of the discounts for each debenture
      traunch totaled $94,576 in 2005.





F-15




The
      fair
      value of the conversion features for the November advance on the November 2,
      2005, 2005 convertible debt have been valued at $257,054 using the Black-Scholes
      Option Pricing Model with the following weighted-average assumptions
      used:




Approximate
                risk free rate
            4.46%Average
                expected life
            3
                yearsDividend
                yield
            0%Volatility
            77.96%Estimated
                fair value of conversion feature
            $257,054


The
      fair
      value of the conversion feature has been included as discount to debt in the
      accompanying balance sheet up to the proceeds received from each offering,
      with
      any excess or $0 charged to expense. The discounts are amortized over the life
      of each debenture traunch. Amortization of the discounts for each debenture
      traunch totaled $138 in 2005.





F-16




**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Convertible
      secured debentures consist of the following at December 31, 2005:**




Convertible
                secured debenture issued to Cornell Capital Partners, bearing interest
                at
                5% and due on December 10, 2007. The debenture is convertible at
                Cornell
                Capital Partners’ option at any time up to maturity at a conversion price
                equal to the lower of (i) 120% of the closing bid price of the common
                stock as of the closing date or (ii) 80% of the lowest closing bid
                price
                of the common stock for the five trading days immediately preceding
                the
                conversion date. At maturity, BSI has the option to either pay the
                holder
                the outstanding principal balance and accrued interest or to convert
                the
                debentures into shares of common stock at a conversion price previously
                described. BSI has the right to redeem the debentures upon 30 days
                notice
                for 120% of the amount redeemed. Discounts and fees paid to obtain
                the
                loan were $50,000, of which $20,415 is unamortized at December 31,
                2005.
                Amortization expense related to discounts and fees was $25,418 in
                2005 and
                $4,167 in 2004. A discount of $362,710 has been recorded on this
                debenture
                that relate to the conversion feature of this instrument, of which
                $198,461is unamortized at December 31, 2005. Amortization expense
                related
                to the conversion feature discount was $160,786 in 2005 and $3,463
                in
                2004.
            
            350,000Convertible
                secured debenture issued to Cornell Capital Partners, bearing interest
                at
                5% and due on January 19, 2008. The debenture is convertible at Cornell
                Capital Partners’ option at any time up to maturity at a conversion price
                equal to the lower of (i) 120% of the closing bid price of the common
                stock as of the closing date or (ii) 80% of the lowest closing bid
                price
                of the common stock for the five trading days immediately preceding
                the
                conversion date. At maturity, BSI has the option to either pay the
                holder
                the outstanding principal balance and accrued interest or to convert
                the
                debentures into shares of common stock at a conversion price previously
                described. BSI has the right to redeem the debentures upon 30 days
                notice
                for 120% of the amount redeemed. Discounts and fees paid to obtain
                the
                loan were $25,000, of which $16,668 is unamortized at December 31,
                2005.
                Amortization expense related to discounts and fees was $8,332 in
                2005. A
                discount of $177,953 has been recorded on this debenture that relate
                to
                the conversion feature of this instrument. The conversion feature
                is
                considered a derivative because it is not convertible into a fixed
                number
                of shares. Amortization expense related to the conversion feature
                discount
                was $32,431in 2005.
            
            250,000Convertible
                secured debenture issued to Cornell Capital Partners, bearing interest
                at
                5% and due on June 17, 2008. The debenture is convertible at Cornell
                Capital Partners’ option at any time up to maturity at a conversion price
                equal to the lower of (i) 120% of the closing bid price of the common
                stock as of the closing date or (ii) 80% of the lowest closing bid
                price
                of the common stock for the five trading days immediately preceding
                the
                conversion date. At maturity, BSI has the option to either pay the
                holder
                the outstanding principal balance and accrued interest or to convert
                the
                debentures into shares of common stock at a conversion price previously
                described. BSI has the right to redeem the debentures upon 30 days
                notice
                for 120% of the amount redeemed. Discounts and fees paid to obtain
                the
                loan were $32,500, of which $23,020 is unamortized at December 31,
                2005.
                Amortization expense related to discounts and fees was $9,480 in
                2005. A
                discount of $93,569 has been recorded on this debenture that relates
                to
                the conversion feature of this instrument. The conversion feature
                is
                considered a derivative because it is not convertible into a fixed
                number
                of shares. Amortization expense related to the conversion feature
                discount
                was $2,680 in 2005. BSI granted warrants to purchase 20,000,000 shares
                of
                common stock to Cornell Capital Partners. The warrants are exercisable
                at
                $0.05 per share for a period of five years, and were fully vested
                during
                June 2005. The warrants have been valued at $301,827 using the
                Black-Scholes Option Pricing Model. The value of the warrants has
                been
                treated as a financing cost which represents the excess of discounts
                related to this debenture in excess of proceeds has been charged
                to
                operations for 2005.
            
            125,000




F-17




Convertible
                secured debenture issued to Cornell Capital Partners, bearing interest
                at
                5% and due on July 15, 2007. The debenture is convertible at Cornell
                Capital Partners’ option at any time up to maturity at a conversion price
                equal to the lower of (i) 120% of the closing bid price of the common
                stock as of the closing date or (ii) 80% of the lowest closing bid
                price
                of the common stock for the five trading days immediately preceding
                the
                conversion date. At maturity, BSI has the option to either pay the
                holder
                the outstanding principal balance and accrued interest or to convert
                the
                debentures into shares of common stock at a conversion price previously
                described. BSI has the right to redeem the debentures upon 30 days
                notice
                for 120% of the amount redeemed. Discounts and fees paid to obtain
                the
                loan were $12,500, of which $9,374 is unamortized at December 31,
                2005.
                Amortization expense related to discounts and fees was $3,126 in
                2005. A
                discount of $81,352 has been recorded on this debenture that relate
                to the
                conversion feature of this instrument. The conversion feature is
                considered a derivative because it is not convertible into a fixed
                number
                of shares. Amortization expense related to the conversion feature
                discount
                was $11,961 in 2005
            
            $
                125,000Convertible
                secured debenture issued to Cornell Capital Partners, bearing interest
                at
                5% and due on August 5, 2007. The debenture is convertible at Cornell
                Capital Partners’ option at any time up to maturity at a conversion price
                equal to the lower of (i) 120% of the closing bid price of the common
                stock as of the closing date or (ii) 80% of the lowest closing bid
                price
                of the common stock for the five trading days immediately preceding
                the
                conversion date. At maturity, BSI has the option to either pay the
                holder
                the outstanding principal balance and accrued interest or to convert
                the
                debentures into shares of common stock at a conversion price previously
                described. BSI has the right to redeem the debentures upon 30 days
                notice
                for 120% of the amount redeemed. Discounts and fees paid to obtain
                the
                loan were $100,000, of which $79,167 is unamortized at December 31,
                2005.
                Amortization expense related to discounts and fees was $20,833 in
                2005. A
                discount of $640,831has
                been recorded on this debenture that relate to the conversion feature
                of
                this instrument. The conversion feature is considered a derivative
                because
                it is not convertible into a fixed number of shares. Amortization
                expense
                related to the conversion feature discount was $82,615 in 2005.
            
            1,000,000Convertible
                secured debenture issued to Cornell Capital Partners, bearing interest
                at
                12% and due on November 2, 2008. The debenture is convertible at
                Cornell
                Capital Partners’ option at any time up to maturity at a conversion price
                equal to the lower of (i) 120% of the closing bid price of the common
                stock as of the closing date or (ii) 80% of the lowest closing bid
                price
                of the common stock for the five trading days immediately preceding
                the
                conversion date. At maturity, BSI has the option to either pay the
                holder
                the outstanding principal balance and accrued interest or to convert
                the
                debentures into shares of common stock at a conversion price previously
                described. BSI has the right to redeem the debentures upon 30 days
                notice
                for 120% of the amount redeemed. Discounts and fees paid to obtain
                the
                loan were $92,000 of which $86,889 is unamortized at December 31,
                2005.
                Amortization expense related to discounts and fees was $5,111 in
                2005. A
                discount of $257,054 has been recorded on this debenture that relate
                to
                the conversion feature of this instrument. The conversion feature
                is
                considered a derivative because it is not convertible into a fixed
                number
                of shares. Amortization expense related to the conversion feature
                discount
                was $138 in 2005 BSI granted warrants to purchase 20,000,000 shares
                of
                common stock to Cornell Capital Partners. The warrants are exercisable
                at
                $0.05 per share for a period of five years, and were fully vested
                during
                November 2005. The warrants have been valued at $600,816 using the
                Black-Scholes Option Pricing Model. The value of the warrants has
                been
                treated as a discount on debt. An amount equal to $507,870, which
                represents the excess of discounts related to this debenture in excess
                of
                proceeds has been charged to operations for 2005. The Company also
                issued
                1,000,000 shares if common stock to Cornell Capital Partners, which
                have
                been valued at $47,000 and have been recorded as a discount on this
                debenture.
            
            350,000Fees
                and discounts
            
            (1,552,148)Less
                current portion
            
            -$647,852





F-18


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Note
      7 - Commitments and Contingencies**





**Litigation**




In
      the
      normal course of business, the Company is party to litigation from time to
      time.
      The Company maintains insurance to cover certain actions and believes that
      resolution of such litigation will not have a material adverse effect on the
      Company.




During
      October 2005, the Company was notified of a potential claim that relates to
      its
      purchase of the MAXX-NETTM assets from NSI. The claim involves copyright issues
      that relate to third party software that is used in certain MAXX-NETTM
installations. The Company believes that this claim does not have merit, and
      will defend its position in this matter vigorously. The Company believes that
      this claim will not have a significant financial impact and therefore has made
      no allowance nor established any reserve for this claim in the financial
      statements appearing elsewhere in this Report.




**Consulting
      Agreement**




In
      September 2003, the Company entered into a consulting agreement for a term
      of
      six months. Under the term of the agreement, the Company paid a monthly fee
      of
      $3,500 for services performed. As of December 31, 2004, this agreement had
      been
      terminated.




In
      February 2004, the Company entered into a consulting agreement through July
      31,
      2004. The Company is obligated to pay $7,000 per month plus expenses for
      services performed. The Company granted five-year warrants to purchase 250,000
      shares of the Company’s common stock at the closing price on February 1, 2004.
      This agreement was terminated during October 2005.




**Payroll
      Tax Liabilities**




On
      February 15, 2006, the Company paid past due payroll tax liabilities totaling
      $28,014. This amount represents payroll liabilities due at December 31, 2005.
      As
      of March 31, 2006, the Company was delinquent on payroll liabilities of
      $51,033.




**Note
      8 - Stockholders’ Equity**




**Stock
      Issued to Founders**




During
      the period from Inception (July 30, 1993) through December 31, 1993, the Company
      issued shares of common stock to the founders for prior services at $4.34 per
      share, which was the value consistent with the cash sales of stock immediately
      preceding the issuance.




**Stock
      Issued to an Officer and Employee**




On
      September 11, 2001, BSI issued 2,500,000 shares of common stock to Jack Harper,
      president and director, for $2,500 ($0.001 per share) and forgiveness of accrued
      wages. Also in 2001, BSI issued 212,045 shares of common stock to Robert B.
      Lumen for $212 ($0.001 per share). When these shares were issued, BSI was
      insolvent with negative working capital, and unable to pay salaries to
      employees.




**Private
      Offerings**




On
      September 13, 2004, the Company issued 990,099 shares of common stock under
      the
      Equity Line of Credit Agreement to Cornell Capital for $50,000 cash. Costs
      associated with this transaction were $2,500.




During
      2003, the Company sold 134,500 and 1,000,000 shares of common stock in private
      placement offerings at $1.00 and $.25 per share, respectively




During
      2002, the Company sold 937,886 and 515,869 shares of common stock in private
      placement offerings at $1.00 and $.625 per share, respectively. The shares
      issued under the private placement for $1.00 per share include 371,104 shares
      issued in satisfaction of long-term debt.




F-19


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Stock
      Options**




In
      September 1998, BSI formally adopted an incentive stock option plan which
      provides for certain employees and non-employees to acquire up to 1,750,000
      shares of BSI’s common stock upon terms and conditions determined by the Board
      of Directors. Options granted under the plan vest in accordance with a vesting
      schedule determined by BSI’s Board of Directors. Stock options that are
      forfeited or cancelled revert back to the plan and may be reissued. During
      the
      quarter ended June 30, 2005 BSI cancelled 2,350,000 options issued to employees
      and reissued to the employees 4,000,000 options with new terms. The options
      were
      valued at $98,847 with the assumption of 81.60% volatility, 3.88% risk free
      rate, 5 years average expected life and no dividend yield. The expense for
      the
      options issued is recorded in the accompanying financial statements. For the
      quarter ended June 30, 2005 BSI recognized compensation expense of approximately
      $76,000, which represented the difference between the fair value of BSI’s common
      stock and the exercise price of the options at the date the options were
      repriced. During the fourth quarter , as a result of a decline in the Company’s
      stock price the Company reversed $76,000 of previously recorded compensation
      expenses. These options are accounted for under the variable method of
      accounting.




The
      following table summarizes stock option activity for the year ended December
      31,
      2005:




**Incentive
                Stock Options**
            
            **Non-Qualified**
              **Stock
                Options**
            
            **Weighted
                Average Exercise Price****Outstanding-December
                31, 2003**
            
            
            4,310,000
            
            
            --
            
            $
            0.105**Granted**
            
            
            --
            
            
            --
            
            
            --Outstanding
                - December 31, 2004
            
            
            4,310,000
            
            
            --
            
            $
            0.105Granted
            
            
            18,250,000
            
            
            3,500,000
            
            
            0.028Forfeited/canceled
            
            
            (3,862,500
            )
            
            (1,000,000
            )
            
            (0.089
            )Exercised
            
            
            --
            
            
            --
            
            
            --Outstanding-December
                31, 2005
            
            
            18,697,500
            
            
            2,500,000
            
            $
            0.044





The
      following table summarizes options outstanding and exercisable at December
      31,
      2005:




**Options
                Outstanding**
            
            **Exercisable****Range
                of Exercise Prices**
            
            **Number**
            
            **Price***
            
            **Life***
            
            **Number**
            
            **Price***$0.027
            
            
            1,000,000
            
            $
            0.027
            
            
            1.97
            
            
            50,000
            
            $
            0.027$0.030
            
            
            18,000,000
            
            
            0.030
            
            
            4.89
            
            
            18,000,000
            
            
            0.030$0.040
            
            
            10,000
            
            
            0.040
            
            
            3.95
            
            
            10,000
            
            
            0.04$0.042
            
            
            250,000
            
            
            0.042
            
            
            3.66
            
            
            50,000
            
            
            0.042$0.047
            
            
            1,250,000
            
            
            0.047
            
            
            4.90
            
            
            31,250
            
            
            0.047$0.052
            
            
            250,000
            
            
            0.052
            
            
            2.97
            
            
            20,833
            
            
            0.052$0.089
            
            
            50,000
            
            
            0.089
            
            
            4.04
            
            
            50,000
            
            
            0.089$0.110
            
            
            387,500
            
            
            0.110
            
            
            3.70
            
            
            287,500
            
            
            0.11021,197,500
            
            $
            0.044
            
            
            4.22
            
            
            18,499,583
            
            $
            0.035


___________________




*Price
      and Life reflect the weighted average exercise price and weighted average
      remaining contractual life, respectively.




F-20


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Warrant
      LiabilitiesWarrants Issued to Consultants**




During
      February 2004, the Company granted warrants to purchase 250,000 shares of common
      stock to a consulting firm. The warrants are exercisable at $.12 per share
      for a
      period of five years, and were fully vested on May 31, 2004. The warrants have
      been valued at $20,148 using the Black-Scholes option pricing model with the
      following weighted-average assumptions used at December 31, 2004:




Value
                at
              inception
            Value
                at
              12-31-05Approximate
                risk free rate
            4.25%
            4.37%Average
                expected life
            5
                years
            5
                YearsDividend
                yield
            0
                %
            0%Volatility
            80.85%
            77.96%Estimated
                fair value of total warrants granted
            $20,147
            $2,717


The
      value
      at issuance has been recorded as a liability on the balance sheet at issuance,
      with any change in value from the date of issuance to 12-31-04 or $15,099
      recorded as a increase to other income, and to 12-31-05, or $2,331 recorded
      as
      an increase to other income.




**Warrants
      Issued in Conjunction with MaxxNet Purchase**




During
      April 2005, BSI granted warrants to purchase 500,000 shares of common stock
      in
      conjunction with the Cyber Country purchase. The warrants are exercisable at
      $0.029 per share for a period of five years, and were fully vested during April
      2005. The warrants have been valued at $10,174 using the Black-Scholes Option
      Pricing Model with the following weighted-average assumptions used:




Value
                at
              issuance
            Value
                at
              12-31-05Approximate
                risk free rate
            3.88%
            4.37%Average
                expected life
            5
                years
            5
                YearsDividend
                yield
            0%
            0%Volatility
            81.60%
            77.96%Estimated
                fair value of total warrants granted
            $10,174
            $9,438


The
      value
      at issuance has been recorded as a liability on the balance sheet at issuance,
      with any change in value from the date of issuance to 12-31-05, or $736 recorded
      as an increase to other income.




During
      August 2005, BSI granted warrants to purchase 1,000,000 shares of common stock
      in conjunction with the Maxx Net purchase. The warrants are exercisable at
      $0.043 per share for a period of three years, and vest during August 2006.
      The
      warrants have been valued at $23,085 using the Black-Scholes Option Pricing
      Model with the following weighted-average assumptions used:




Value
                at
              issuance
            Value
                at
              12-31-05Approximate
                risk free rate
            4.03%
            4.37%Average
                expected life
            3
                years
            3
                yearsDividend
                yield
            0%
            0%Volatility
            79.26%
            77.96%Estimated
                fair value of total warrants granted
            $23,085
            $13,118




F-21


The
      value
      at issuance has been recorded as a liability on the balance sheet at issuance,
      with any change in value from the date of issuance to 12-31-05, or $9,967
      recorded as an increase to other income.




**Warrants
      Issued in Conjunction with Convertible Debentures**




During
      June 2005, BSI granted warrants to purchase 20,000,000 shares of common stock
      to
      Cornell Capital Partners. The warrants are exercisable at $0.05 per share for
      a
      period of five years, and were fully vested during June 2005. The warrants
      have
      been valued at $301,827 using the Black-Scholes Option Pricing Model with the
      following weighted-average assumptions used.




Value
                at
              inception
            Value
                at
              12-31-05Approximate
                risk free rate
            3.88%
            4.37%Average
                expected life
            5
                years
            5
                yearsDividend
                yield
            0%
            0Volatility
            81.60%
            77.96%Estimated
                fair value of total warrants granted
            $301,821
            $320,138


The
      value
      at issuance has been recorded as a liability on the balance sheet at issuance,
      with any change in value from the date of issuance to 12-31-05 or $18,317
      recorded as a decrease to other income.









During
      November 2005, BSI granted warrants to purchase 20,000,000 shares of common
      stock to Cornell Capital Partners. The warrants are exercisable at $0.05 per
      share for a period of five years, and were fully vested during November 2005.
      The warrants have been valued at $600,816 using the Black-Scholes Option Pricing
      Model with the following weighted-average assumptions used.




Value
                at
              inception
            Value
                at
              12-31-05Approximate
                risk free rate
            4.5%
            4.37%Average
                expected life
            5
                years
            5
                yearsDividend
                yield
            0%
            0Volatility
            76.59%
            77.96%Estimated
                fair value of total warrants granted
            $600,816
            $320,138


The
      value
      at issuance has been recorded as a liability on the balance sheet at issuance,
      with any change in value from the date of issuance to 12-31-05 or $280,678
      recorded as a increase to other income.




The
      Company currently does not have enough shares authorized to satisfy the
      conversion features of the Cornell debentures in the event the price per share
      of the Company’s common stock drops below $.01 per share. As a result of this
      condition, warrants issued by the company must be accounted as a liability
      instead of equity. As a result, warrants issued by the Company during 2004
      and
      2005 have been recorded as long term liabilities as described below.




The
      Company issued warrants to purchase 2,250,000 shares common stock to consulting
      firms that are exercisable at $.061 per share for a period of five years. These
      warrants vest according to specific performance criteria that were not met
      as of
      December 31, 2004. Accordingly, no expense has been recorded in these financial
      statements with respect to these warrants.




F-22


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Number
                of Warrants**
            
            **Weighted
                Average Exercise Price**Outstanding-December
                31, 2003
            
            
            --
            
            $
            --Granted
            
            
            2,500,000
            
            $
            .0665Outstanding
                - December 31, 2004
            
            
            2,500,000
            
            
            0.0665Granted
            
            
            41,500,000
            
            
            0.0490Forfeited/cancelled
            
            
            (2,250,000
            )
            
            (0.0610
            )Exercised
            
            
            -
            
            
            -Outstanding
                - December 31, 2005
            
            
            41,750,000
            
            $
            0
                .050


Included
      in the above warrants, 1,000,000 warrants are exercisable once a contract is
      completed or one year after the issuance of the warrants.




All
      of
      the remaining warrants are exercisable and have a weighted average remaining
      contractual life of approximately 4 1/2 years.




On
      September 13, 2004, BSI issued 990,009 shares of common stock under the Equity
      Line of Credit Agreement to Cornell Capital Partners for $50,000 cash. Costs
      associated with this transaction were $2,500.




During
      September 2004, the Board of Directors approved an amendment of the Articles
      of
      Incorporation to increase the authorized number of common shares from
      100,000,000 to 200,000,000.




During
      November 2005, the Company issued 1,000,000 shares of common stock to Cornell
      Capital Partners valued at $47,000. The value of these shares has been included
      as financing costs in the accompanying balance sheet as a reduction of long-term
      debt at December 31, 2005.




On
      July
      20, 2005, the shareholders of the Company, at a special shareholders meeting,
      approved the increase in the authorized $0.001
      par value common stock of the company from 200,000,000 shares to 400,000,000
      shares.




During
      May 2004, BSI granted warrants to purchase 1,250,000 shares of common stock
      to a
      consulting firm. The warrants are exercisable at $0.12 per share for a period
      of
      five years, and vest upon the award of at least a $1,000,000 contract to BSI
      that was introduced by the consultant. This contract has been cancelled by
      BSI,
      with a settlement between the parties resulting in cancellation of the warrants.




F-23


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Earnings
      Per Share**




The
      following table sets forth the computation for basic and diluted earnings per
      share:




Inception
              (July
                30, 1993)
              throughDecember
                31,
            
            December
                31,
            
            December
                31,2005
            
            2004
            
            2005Numerator
                for basic earnings per share
            
            $
            (3,798,795
            )
            $
            (2,143,917
            )
            $
            (11,223,001
            )Numerator
                for diluted income per common share
            
            $
            (3,798,795
            )
            $
            (2,143,917
            )
            $
            (11,223,001
            )Denominator
                for basic earnings per share - weighted average shares
            
            
            110,853,987
            
            
            72,506,696
            
            
            27,303,207Denominator
                for diluted earnings per share - adjusted weighted average
                shares
            
            
            110,853,987
            
            
            72,506,696
            
            
            27,303,207Diluted
                income per common share
            
            $
            (0.033
            )
            $
            (0.03
            )
            $
            (0.411
            )




**NOTE
      9 -** **PURCHASE
      OF MAXX-NET** **TM
      SYSTEM**




On
      April
      22, 2005, BSI acquired all right, title and interest in certain claims to the
      Maxx Net system as held by Cyber Country Systems, LLC for up to $371,152 and
      500,000 warrants to purchase common stock in BSI. The purchase price consists
      of
      cash consideration, payable $30,000 at closing along with twenty-four, $5,000
      installments, royalty payments equal to 5% of all gross sales of the Maxx Net
      System by BSI over a three year period (capped at $100,000), and $121,152 which
      represents the balance of the sellers biometric development contract at Denver
      International Airport, to the extent contract proceeds are received by BSI.
      The
      balance due Cyber Country at 12-31-05 was $190,000, with $60,000 classified
      as
      current portion of long-term debt. On August 2, 2005, the Company entered into
      an option to purchase, pursuant to a private sale, all right, title and interest
      in the MAXX-NETTM system from The New Sytron, Inc. The cost of the option, paid
      by BSI on August 2, 2005 was $12,000. The Company purchased the assets on August
      25, 2005 for $650,000 payable $150,000 at closing along with a 6% promissory
      note in the amount of $500,000. The note is payable in 48 monthly installments
      of $11,743, and will be due September 1, 2009. In addition, the Company issued
      at closing 1,000,000 warrants for the purchase of BSI’s common stock. The
      warrants have a term of four years, and will have an exercise price equal to
      the
      trading price for BSI’s common stock as of the close of trading on the date BSI
      exercises the option.




The
      balance due MAXX-NETTM at 12-31-05 was $464,527, with $117,096 classified as
      current portion of long-term debt.




**Note
      10 - Income Taxes**




The
      Company did not provide a current or deferred federal or state income tax
      provision or benefit for any of the periods presented because it has experienced
      recurring operating losses. The Company has provided a full valuation allowance
      on the deferred tax asset, consisting primarily of the net operating loss,
      because of uncertainty regarding its realization.




At
      December 31, 2004, the Company had federal net operating losses of approximately
      $6.3 million. Utilization of the net operating loss, which expires at various
      times starting in 2009, may be subject to certain limitations under Section
      382
      of the Internal Revenue Code of 1986, as amended, and other limitations under
      state tax laws.




F-24


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company’s deferred tax assets are approximately as follows:




For
                the Years Ended
              December
                31,2005
            
            2004Net
                operating loss
            
            $
            3,799,000
            
            $
            2,144,000Total
                deferred tax assets
            
            
            3,799,000
            
            
            2,140,000Valuation
                allowance
            
            
            (3,799,000
            )
            
            (2,140,000
            )Net
                deferred tax asset
            
            $
            --
            
            $
            --


The
      following is a reconciliation of the statutory federal income tax rate applied
      to pre-tax accounting net income compared to the income taxes in the statements
      of income:




For
                the Years Ended
            
            Inception
              (July
                30, 1993)
              throughDecember
                31,
            
            December
                31,
            
            December
                31,2005
            
            2004
            
            2005Federal
                tax benefit at statutory rates
            
            $
            1,202,000
            
            $
            762,000
            
            $
            2,201,000State
                tax benefit at statutory rates
            
            
            115,000
            
            
            72,000
            
            
            195,000Valuation
                allowance
            
            
            (1,317,000
            )
            
            (834,000
            )
            
            (2,396,000
            )Reported
                income tax benefit
            
            $
            --
            
            $
            --
            
            $
            --





**Note
      11 - Subsequent Event**




On
      February 10, 2006, BSI issued a 12% secured convertible debenture in the amount
      of $300,000 to Cornell Capital Partners that is due February 10, 2009. The
      debenture is convertible into BSI’s common stock at either the fixed price of
      120% of the Volume Weighted Average Price on the closing date or 80% of the
      average of the three lowest daily Volume Weighted Average Price, as reported
      by
      Bloomberg, L.P., of BSI’s common stock for the five trading days immediately
      preceding the conversion date. The debenture will automatically convert into
      BSI’s common stock on the third anniversary of issuance. BSI has the right to
      redeem the debenture with three days advance notice any or all of the
      outstanding debenture amount at its sole discretion. The conversion feature
      of
      each convertible debenture traunch will be accounted for as a derivative
      included as a long-term liability valued at fair value at the date of issuance
      and revalued each period until and unless the debt is converted. If the debt
      is
      converted prior to maturity, the carrying value will be transferred to
      equity.




During
      January 2006, the Company issued 2,150,000 shares of restricted common stock
      to
      two vendors as payment for outstanding accounts payable totaling
      $64,500.




F-25


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**







**Note
      12 - Restatement Associated with Accounting for Derivative Instruments in
      Connection with Issuance of Debentures**





On
      June
      27, 2005, BSI was contacted by the Staff of the United States Securities and
      Exchange Commission during the course of a routine review of its periodic
      filings and made inquiries regarding certain of BSI’s accounting policies. As a
      result of this inquiry, management re-evaluated BSI’s accounting for certain
      items on the consolidated balance sheet, consolidated statements of operations,
      consolidated statement of changes in stockholders' equity(deficit) and
      consolidated statements of cash flows. Following the evaluation, BSI determined
      that the consolidated balance sheet, consolidated statements of operations,
      consolidated statement of changes in stockholders' equity(deficit) and
      consolidated statements of cash flows for the fiscal year ended December 31,
      2004 and fiscal quarters ended March 31, 2005, June 30, 2005 and September
      30,
      2005 should be restated in the Form 10-KSB for the fiscal year ended December
      31, 2004 and Form 10QSB’s for the fiscal quarters ended March 31, 2005, June 30,
      2005 and September 30, 2005.. The effect of these errors on the consolidated
      balance sheet, consolidated statements of operations, consolidated statement
      of
      changes in stockholders' equity(deficit) and consolidated statements of cash
      flows was considered material.




This
      error arose as a result of BSI issuing secured convertible debentures to Cornell
      Capital Partners, LP in October 2004, June 2005 and November 2005, which
      debentures by their terms were immediately convertible into shares of BSI common
      stock at a conversion price per share that was not fixed and less than the
      then-current market price of BSI’s common stock. In accordance with EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and potentially
      Settled in, a Company’s Own Stock”, the conversion feature of each convertible
      debenture should have been accounted for as a derivative instrument at fair
      value, originally valued at fair value at the date of issuance. As a derivative
      instrument, the convertible features are revalued each period until and unless
      the debt is converted. If the debt is converted prior to maturity, the carrying
      value will be transferred to equity. The remeasurement of the conversion feature
      to fair value from the date of issuance to the end of each reporting period
      is
      recorded in earnings as the change in fair value of derivative instruments
      for
      each period. The liabilities created have been recorded as discounts to each
      convertible debenture, and are amortized over the life of each debenture for
      each period.




In
      addition, the Company currently does not have enough shares authorized to
      satisfy the conversion features of the Cornell debentures in the event the
      price
      per share of the Company’s common stock drops below $.01 per share.
      Additionally, the warrants contain liquidated damages provisions and as a result
      of these conditions, warrants issued by the company must be accounted as a
      derivative liability instead of equity. The warrants issued by the Company
      during 2004 have been recorded as a long term liability. The warrants were
      revalued at the end of the period (12-31-04), with the change being recorded
      as
      other income in the amount of $15,099 at 12-31-04.




The
      adjustments to each of the filings for the periods December 31, 2004, March
      31,
      2005, June 30, 2005 and September 30, 2005 result from the proper recording
      of
      long term liabilities related to the conversion features of each convertible
      debt, adjustments at the end of each respective period recording the change
      in
      fair value of each derivative liability from the prior period (or from initial
      fair valuation date, if later), and amortization of discounts to each
      convertible debenture recorded as a result of recording the derivative
      liability. In addition, warrants issued by the Company were properly recorded
      as
      long term liabilities, with adjustments made at the end of each accounting
      period recording the change in fair value of each warrant liability from the
      prior period (or from initial fair valuation date, if later).




Accordingly,
      BSI has restated their financial statements for the fiscal year ended
      December 31, 2004 as set forth below.









F-26


The
      following is a summary of the effects of these restatements on
      BSI's
      Consolidated Balance Sheet, Consolidated Statements of Operations, Consolidated
      Statement of Changes in Stockholders' Equity (Deficit) and Consolidated
      Statements of Cash Flows for the Fiscal Year ended December 31,
      2004








**As
                previously reported**
            
            **Adjustments**
            
            **As
                restated**Non-current
                Liabilities
            
            $
            909,597
            
            
            (18,381
            )
            $
            891,216Shareholders’
                Equity
            
            $
            (510,785
            )
            
            +$96,065
            
            $
            (414,720
            )Net
                Income (Loss)
            
            $
            (2,169,238
            )
            
            +25,321
            
            $
            (2,143,917
            )Earnings
                per share
            
            $
            (0.034
            )
            $
            --
            
            $
            (0.034
            )





F-27


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements**








In
      addition, BSI will restate its financial statements for the fiscal quarter
      ended
      March 31, 2005 as set forth below.





The
      following is a summary of the effects of these restatements on BSI's
      consolidated balance sheet, consolidated statements of operations, consolidated
      statement of changes in stockholders' equity (deficit) and consolidated
      statements of cash flows for the fiscal quarter ended March 31,
      2005.




**As
                previously reported**
            
            **Adjustments**
            
            **As
                restated**Non-current
                liabilities
            
            $
            1,094,254
            
            
            ($26,161
            )
            $
            1,068,093Shareholders’
                Equity
            
            $
            (847,512
            )
            
            +$116,159
            
            $
            (731,353
            )Net
                Income
            
            $
            (708,114
            )
            $
            (23,735
            )
            $
            (731,849
            )Earnings
                per share
            
            
            ($0.01
            )
            $
            --
            
            $
            (0.01
            )




In
      addition, BSI will restate its financial statements for the fiscal quarter
      ended June 30, 2005 as set forth below.




The
      following is a summary of the effects of these restatements on BSI's
      consolidated balance sheet, consolidated statements of operations, consolidated
      statement of changes in stockholders' equity (deficit) and consolidated
      statements of cash flows for the fiscal quarter ended June 30,
      2005.





**As
                previously reported**
            
            **Adjustments**
            
            **As
                restated**Non-current
                liabilities
            
            $
            1,266,065
            
            
            +$555,423
            
            $
            1,821,488Shareholders’
                Equity
            
            $
            (1,459,786
            )
            $
            (344,203
            )
            $
            (1,803,989
            )Net
                Income
            
            $
            (807,481
            )
            $
            (776,967
            )
            $
            (1,584,448
            )Earnings
                per share
            
            $
            (0.01
            )
            $
            (0.006
            )
            $
            (0.016
            )





F-28


**BSI2000,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Consolidated Financial Statements (Continued)**






In
      addition, BSI will restate its financial statements for the fiscal quarter
      ended
      September 30, 2005 as set forth below.




The
      following is a summary of the effects of these restatements.





**As
                previously reported**
            
            **Adjustments**
            
            **As
                restated**Non-current
                liabilities
            
            $
            2,684,645
            
            
            +$418,200
            
            $
            3,102,845Shareholders’
                Equity
            
            $
            (1,930,185
            )
            
            -$(130,443
            )
            $
            (2,060,628
            )Net
                Income
            
            $
            (725,059
            )
            
            -$(204,514
            )
            $
            (929,573
            )Earnings
                per share
            
            $
            (0.006
            )
            $
            (.003
            )
            $
            (0.009
            )




The
      Company anticipates that the amended filings
      referred to above will be filed within the next 30 days.


F-29