**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
 ****
 **FORM
10-KSB**
 
 [X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
 
 For the
fiscal year ended December 31, 2004
 
 TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
 
 For
transition period from to
 ---------------
-----------------
 
 Commission
file number 000-30244
 
 NEXICON,
INC.
 (Name of
small business issuer in its charter)
 
 
 NEVADA
    13-3389415(State
      or other jurisdiction of incorporation)
    (I.R.S.
      Employer Identification Number)
 
 400 Gold
SW, Suite 1000
 ALBUQUERQUE,
      NM
    87102(Address
      of principal executive offices)
    (Zip
      code)
 
 Issuer's
telephone number (505) 710-2190
 
 Securities
registered under Section 12(b) of the Exchange Act:
 
 None
 
 Securities
registered under Section 12(g) of the Exchange Act
 
 Title of
each class Common Stock, $0.001 par value
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. xYes oNo
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB 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
 
 The
registrant's operating revenues for its most recent fiscal year were
$495,990.
 
 The
aggregate market value of the registrant's voting and non-voting common equity
held by non-affiliates (computed based on the average bid and asked price of the
registrant's Common Stock on the bulletin board, and for the purpose of this
computation only, on the assumption that all of the registrant's directors and
officers are affiliates) was approximately $7.68 million on March 31,
2005.
 
 The
number of shares of Common Stock outstanding as of March 31, 2005 was
111,282,750.
 
 
  **FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004**
 
 **TABLE
OF CONTENTS**
 PART
      I
    1Forward-Looking
      Statements
    1Item
      1. Description of Business
    1Item
      2. Description Of Property
    9Item
      3. Legal Proceedings
    10Item
      4. Submission Of Matters To A Vote Of Security Holders
    10PART
      II
    11Item
      5. Market For Common Equity And Related Stockholder
Matters
    11Item
      6. Management’s Discussion And Analysis Or Plan Of
    Operation
    14Item
      7. Financial Statements
    19Item
      8. Changes In And Disagreements With Accountants On Accounting And
      Financial Disclosure
    19Item
      8A. Controls And Procedures
    19PART
      III
    21Item
      9. Directors and Executive Officers, Promotors and Control Persons;
      Compliance With Section 16(a) of the Exchange Act
    21Item
      10. Executive Compensation
    22Item
      11. Security Ownership Of Certain Beneficial Owners And Management and
      Related Stockholder Matters
    24Item
      12. Certain Relationships And Related Transactions
    25Item
      13. Exhibits And Reports On Form 8-K
    26Item
      14. Principal Accountant Fees and Services
    28EXHIBIT
      31.1
    31.1-1EXHIBIT
      31.2
    31.2-1EXHIBIT
      32.1
    32.1-1EXHIBIT
      32.2
    32.2-1Financial
      Statements
    F-1
 
  **PART
I**
  **INTRODUCTORY
NOTE**
  **Forward-Looking
Statements**
  This Form
10-KSB contains “forward-looking statements” relating to Nexicon, Inc., formerly
Cyco.net, Inc. (the “Company”) which represent the Company’s current
expectations or beliefs including, but not limited to, statements concerning the
Company’s operations, performance, financial condition and growth. For this
purpose, any statements contained in this Form 10-KSB that are not statements of
historical fact are forward-looking statements. Without limiting the generality
of the foregoing, words such as “may”, “anticipation”, “intend”, “could”,
“estimate”, or “continue” or the negative or other comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, such as credit losses,
dependence on management and key personnel, variability of quarterly results,
and the ability of the Company to continue its growth strategy and competition,
certain of which are beyond the Company’s control. Should one or more of these
risks or uncertainties materialize or should the underlying assumptions prove
incorrect, actual outcomes and results could differ materially from those
indicated in the forward-looking statements.
  Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Comany undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
 ****
 **Item
1. Description of Business**
  **Overview**
  Nexicon,
Inc., formerly Cyco.net, Inc. is the successor corporation to AVE, Inc. The
Company was an e-commerce business until July 2003 when it sold the assets of
its cigarette e-tail business. This decision was made after several states filed
civil lawsuits against the New Mexico subsidiary involved in the sale of
cigarettes over the internet. The Company’s management felt that although the
Company had a meritorious defense it would be much too costly to defend in a
court of law. The Company chose to pursue other business opportunities and on
November 19, 2003, Nexicon, Inc. purchased all of the outstanding common stock
of Orion Security Services, Inc., a Wisconsin corporation, in a stock for stock
purchase. On November 15, 2004, Nexicon, Inc. purchased all of the outstanding
common stock of Pluto Communications International, AS, a Norwegian corporation,
in a stock for stock purchase. On March 17, 2005, Nexicon, Inc. agreed to
repurchase 15 million shares of the Company’s common stock held by Robert Demson
in exchange for all right, title, and interest that the Company has in
agreements associated with the “SatSecure” technology and to the tradenames
“Orion Security Services, Inc.”, “OSSI”, “Ossi-Secure”, “SatSecure”, “SatWatch”
and “RECON 9000” (collectively, “Tradenames”) and all equipment, computers and
furniture valued at approximately $15,213.
  **Core
Business**
  The
Company’s wholly owned subsidiaries are Orion Security Services, Inc. (“OSSI”),
which provides secure computer network and management solutions and video
surveillance systems via satellite communication and Pluto Communications
International, AS (“Pluto”), which provides all-in-one or issue-specific
management solutions for computer network control, cyber security, operational
support systems and billing systems.
  OSSI’s
operations are in Oakton, Virginia and it was organized to deliver two products;
a new network security and management control system, OSSI
ComSecure© Controller and an
innovative, manned or unmanned, mobile video-voice-data and alarm transfer
surveillance system, OSSI SatSecure© Surveillance System.
  
 
 Pluto’s
operations are in Oslo, Norway. Pluto has developed a new billing software. The
Charon Billing System features low cost ownership, full integration, high volume
growth, total control of subscribers at all times and handles the requirements
of multinational service providers.
  **OSSI
ComSecure© Controller**
  The
ComSecure© Controller is designed to give a global network enterprise full
control of all traffic, devices and subscribers within an IP network. With
Internet inspired threats on the increase, government and commercial enterprises
are able to now gain full control of their IT infrastructure, maximizing network
performance and simultaneously offering an enhanced user experience. This
all-in-one rack mount device changes the way network security and management is
accomplished by managing what goes on both inside and outside the network, by
eliminating damaging content from ever entering the network and by automating
tasks for enhanced network performance.
  By
managing and inspecting every IP packet, through all 7 layers traversing the
network, ComSecure© Controller does not allow IP packets containing unauthorized
or malicious code to penetrate an enterprise.
  The
ComSecure© Controller breaks the network processing bottleneck and increases
total performance by executing tasks previously performed by firewalls and
routers, and by eliminating the need for additional control boxes such as
authentication servers, packet shapers, monitoring devices, intrusion detection
and protection servers and access control systems.
  The
Company is focused on two markets, consisting of the public and private sectors.
The Company is working to establish relationships with key departments and
agencies within the U.S. Government where we believe the ComSecure© Controller
will be deemed of strategic value and with integrator partners that control the
delivery mechanisms to government and commercial clients.
  The
ComSecure© Controller is a patent pending complete network control device
designed to give the administrator full control of all traffic, devices and
subscribers in an IP network .
  **OSSI
SatSecure© Surveillance System**
  OSSI has
introduced a surveillance technology in a rugged transceiver board-level design
that delivers bi-directional video, audio, alarm/sensor and data transfer
between virtually any two locations on earth with exceptional quality in limited
bandwidth environments from 9.6 to 384 KBPS. The SatSecure© Surveillance System
can use a variety of communication channels such as ISDN, IP, PSTN (Public
Switched Telephone Networks), INMARSAT SatPhones (64 KBPS) and GSM phones (9.6
KBPS) to transfer and remotely control video, audio, alarm/sensor and data
between two units at different locations. As of March 2005, Nexicon no longer
sells SatSecure.
  **Charon
Billing System**
  The
Charon Billing System consists of several standalone modules that can be
delivered separately or combined for maximum operational advantages. These
modules are grouped into three main brand names CHARON, CERBERUS and MINOS. Each
branded module is divided into segments focusing on different markets. Operators
and service providers can therefore use our system for other products and
services, and bundle products to increase revenue. Each module has capabilities
for the respective market segment, enabling it to be adapted to suit several
needs for multi-operational products and service.
  The
Charon Billing System offers a scalable range of billing and customer care
solutions. All systems are tested to ensure they capture and process all detail
records at a wide rate. We believe the result is that service providers and
network operators can trust Charon Billing Systems and Customer Care
Solutions.
  The
Charon Billing Systems support the billing processes for mobile, wireline,
satellite, internet, and energy. Offering flexibility, reliability and
scalability, Charon **** is a
constantly evolving, open, client/server system that meets the needs of
customers ranging from low volume start-ups to high volume Tier-1 operators.
  
 ****
 **Sources
of Supply**
 
 Nexicon
expects to contract with third party manufacturers to produce the ComSecure©
Controller. The Charon Billing products are developed and maintained inhouse.
  **Industry**
 
 The
Company will be entering the highly competitive industry of computer network
security with the ComSecure© Network Controller. Currently there are several
options for protecting a secure computer network. Most are comprised of a group
of components that collectively form a barrier between networks, commonly
referred to as Firewalls. Firewalls, which are not standardized, usually consist
of several layers of applications and hardware that work to ensure that no
single point of vulnerability exists. Firewalls often consist of a bastion host,
proxy servers, packet screening tools, multiple routers, a “demilitarized zone”,
virus detection and intrusion detection devices. Currently there are several
large corporations that provide these services to the market, including Cisco
Systems, Nortel Networks, Check Point Software, and IBM.
  The
Company believes the revenue assurance module of the Charon Billing and OSS will
create a competitive advantage for the Company.
 
 **Competition**
 
 Our
competitors have substantially greater resources that we do, and a large market
presence. These companies also have name and brand recognition which often
implies reliability to the customer. Currently, most network security platforms
are made up of several different devices and software, which are often
manufactured by different companies. We believe this translates into customers
having compatibility issues, and or the exclusion of one or more levels of
protection which will ultimately leave their network vulnerable to attack. The
ComSecure© Controller breaks the network processing bottleneck and increases
total performance by executing tasks previously performed by firewalls and
routers, and by eliminating the need for additional control boxes such as
authentication servers, packet shapers, monitoring devices, intrusion detection
and protection servers and access control systems. This all in one system
results in a smaller footprint, increased performance and capability and a
significantly lower cost of ownership. The Charon Billing Systems support the
billing processes for mobile, wireline, satellite, internet, and energy.
Charon **** is a
constantly evolving, open, client/server system that meets the needs of
customers ranging from low volume start-ups to very high volume Tier-1
operators.
  **Government
Regulation**
 
 The
Company does not know of any government regulations concerning either of its
products.
 
 **Employees**
 
 Nexicon,
Inc. currently has three full-time and one part-time employee in Albuquerque,
NM. Pluto in Norway has six full-time employees. OSSI had six full-time
employees through March 2005. Operations for OSSI have been moved to Nexicon’s
headquarters in Albuquerque.
  **Company
History**
 
 Nexicon,
Inc. formerly Cyco.net, Inc. is the successor to Deluxe Onyx Company, a company
incorporated in 1921 and which produced motion pictures. In 1987, Deluxe Onyx
Company changed to Walsh Communications Group, Inc and moved its domicile to
Nevada. On May 4, 1990, its name was changed to AVE, Inc. AVE, Inc. was
inactive from 1990 to April 1997 when it began to seek to acquire an operating
business. In December 1997, AVE, Inc. acquired Digital Manufacturing Inc. in a
reverse merger. Digital Manufacturing Inc. produced an antenna that could be
re-engineered to operate in the home satellite frequency spectrum. In February
1999, AVE, Inc. sold its antenna business.
  On July
22, 1999, AVE, Inc. acquired Cyco.net, Inc. of Albuquerque, New Mexico in a
transaction accounted for as a recapitalization of Cyco.net, Inc. Cyco.net was
established in December 1998 to develop a network of web-based companies. Under
the terms of the agreement, AVE, Inc. changed its name to Cyco.net, Inc. Mr. R.
Gene Klawetter, former Chairman and CEO of AVE, Inc. became a director of
Cyco.net, Inc. George Sullivan, former AVE Vice President of Operations
resigned, as did Henri Hornby, former Director of AVE, Inc. In the transaction,
Cyco.net, Inc. shareholders received 2.08 shares of AVE (now Nexicon, Inc.) for
each share of Cyco.net, Inc. stock. This provided the former AVE shareholders
with 15% ownership interest in the surviving company and Cyco.net shareholders
with 85% ownership interest of the surviving company. Effective January 2005,
Cyco.net, Inc. changed its name to Nexicon, Inc.
  
 ****
 **RISKS
RELATED TO OUR BUSINESS**
 
 We are
subject to various risks that may materially harm our business, financial
condition and results of operations. An investor should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline.
  **We
Have Historically Lost Money and Losses May Continue In The
Future**
 
 We have
historically lost money. The Company has experienced losses from operations as a
result of its investment necessary to achieve its operating plan, which is
long-range in nature. In the years ended December 31, 2004 and 2003, we had net
losses of $5,488,455 and $4,902,363, respectively. In addition the Company is
subject to legal action. Future losses are likely to occur. Accordingly, we may
experience significant liquidity and cash flow problems because historically our
operations have not been profitable. No assurances can be given that we will be
successful in reaching or maintaining profitable operations.
 
 **We
May Need To Raise Additional Capital To Finance Operations**
 
 We have
relied on significant external financing to fund our operations. Such financing
has historically come from a combination of borrowings, the Convertible
Debentures and notes to Cornell Capital, and sale of common stock from third
parties and funds provided by certain officers and directors. We cannot assure
you that financing, whether from external sources or related parties, will be
available if needed or on favorable terms. Our inability to obtain adequate
financing will result in the need to curtail business operations. Any of these
events would be materially harmful to our business and may result in a lower
stock price. We will need to raise additional capital to fund our anticipated
future expansion. Among other things, external financing may be required to
cover our operating costs.
  **We
Have Been the Subject Of A Going Concern Opinion From Our Independent Auditors,
Which Means That We May Not Be Able To Continue Operations Unless We Obtain
Additional Funding**
 
 Our
independent auditors have added an explanatory paragraph to their audit opinions
issued in connection with the years ended December 31, 2004 and 2003 financial
statements, which states that Nexicon has suffered recurring losses from
operations and has working capital and stockholder deficits. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
Our ability to 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. We expect to be able to continue operations for 12
months with the cash currently on hand, borrowings and sales of common stock
through Cornell Capital and cash anticipated from our operations. The Company
purchased two wholly-owned subsidiaries, OSSI and Pluto, and through sales of
their products hopes to attain profitable operations.
 
 **We
Are Subject To A Working Capital Deficit, Which Means That Our Current Assets On
December 31, 2004 Were Not Sufficient To Satisfy Our Current
Liabilities**
 
 We had a
working capital deficit of $1,029,045 at December 31, 2004, which means that our
current liabilities exceeded our current assets on December 31, 2004 by
$1,029,045. Current assets are assets that are expected to be converted to cash
within one year and, therefore, may be used to pay current liabilities as they
become due. Our working capital deficit means that our current assets on
December 31, 2004 were not sufficient to satisfy all of our current liabilities
on that date.







**Our
Obligations Under The Secured Convertible Debentures Are Secured By All of Our
Assets Which Cause Our Operations To Cease If We Default**
  Our
obligations under the secured convertible debentures, issued to Cornell Capital
Partners are secured by all of our assets. As a result, if we default under the
terms of the secured convertible debentures, Cornell Capital Partners could
foreclose its security interest and liquidate all of our assets. This would
cease operations.
  **Our
Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly**
 
 There has
been a limited public market for our common stock and there can be no assurance
that an active trading market for our common stock will develop. An absence of
an active trading market could adversely affect our shareholders’ ability to
sell our common stock in short time periods, or possibly at all. Our common
stock has experienced, and is likely to experience in the future, significant
price and volume fluctuations which could adversely affect the market price of
our common stock without regard to our operating performance. In addition, we
believe that factors such as quarterly fluctuations in our financial results and
changes in the overall economy or the condition of the financial markets could
cause the price of our common stock to fluctuate substantially.
  **Our
Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For
Investors To Sell Their Shares Due To Suitability
Requirements**
 
 Our
common stock is deemed to be “penny stock” as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are
stock:
  ·
    With
      a price of less than $5.00 per share;
  ·
    That
      are not traded on a “recognized” national exchange;
  ·
    Whose
      prices are not quoted on the NASDAQ automated quotation system (NASDAQ
      listed stock must still have a price of not less than $5.00 per share); or
  ·
    In
      issuers with net tangible assets less than $2.0 million (if the issuer has
      been in continuous operation for at least three years) or $5.0
      million (if in continuous operation for less than three years), or with
      average revenues of less than $6.0 million for the last three
      years.
  Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor.
  **We
Could Fail To Attract or Retain Key Personnel**
 
 Our
success largely depends on the efforts and abilities of key executives and
consultants, including Richard Urrea, our Chief Executive Officer, President and
sole director. The loss of the services of Mr. Urrea could materially harm our
business because of the cost and time necessary to replace and train a
replacement. Such a loss would also divert management attention away from
operational issues. We do not presently maintain a key-man life insurance policy
on Mr. Urrea.
  **Item
2. Description Of Property**
  On April
1, 2004, the Company moved its executive offices to 400 Gold SW, Suite 1000,
Albuquerque, New Mexico 87102. Nexicon entered into a two-year lease contract
with a monthly basic lease payment of $1,400. On January 28, 2004, Nexicon
entered into a three-year lease contract for the operations of OSSI at 8280
Greensboro Dr, McLean Virginia 22102. The basic monthly lease payment is
$5,590.
  
  **Item
3. Legal Proceedings**
  On
January 28, 2003, the Company’s subsidiary Cyco.net, Inc. was named in a civil
action filed in the United States District Court Southern District of New York
by the City of New York as one of approximately a dozen defendants who engaged
in the business of internet on-line cigarette sales. The suit alleges that
Cyco.net, Inc. failed to report the names and addresses of its customers to
taxing authorities. The extent of the City’s damages are to be determined at
trial.
  On April
1, 2003, the State of California filed a civil action in the Superior Court of
California, County of San Diego, against the Company’s subsidiary Cyco.net, Inc,
alleging sales of cigarettes to minors, deceptive failure to file Jenkins Act
reports and inform California consumers that they are required to pay sales
taxes to California. Based on these factual assertions, the suit’s three counts
alleged false or misleading advertising under California Business and Profession
Code 17500 and failure to notify California purchasers of their obligations
under California Revenue and Business and Professions Code 17200. The suit
sought injunctive relief and assessment of civil penalties of $2,500 for each
violation. This action was settled for $25,000 in May 2004.
  On April
1, 2003, the State of Washington filed a civil action in the State of
Washington, King County Superior Court against the Company’s subsidiary
Cyco.net, Inc. alleging sales of cigarettes to minors, deceptive failure to file
Jenkins Act reports and inform Washington consumers that they are required to
pay sales taxes to the State of Washington. Based on the factual assertions, the
suit’s four counts alleged unfair business practice, unfair method of
compensation and misrepresentation. The suit sought injunctive relief
restraining Cyco.net, Inc. from continuing to engage in unlawful conduct,
restitution to consumers and civil penalties of up to $2,000 per violation, plus
attorneys’ fees and costs. In March 2004, the parties agreed to settle for
$10,000.
  On April
1, 2003, the State of Oregon filed a civil action in the State of Oregon, Marion
County against the Company’s subsidiary Cyco.net, Inc. alleging the sale of one
carton of cigarettes to a minor using her mother’s name and credit card, in
violation of State Unlawful Trade Practices Act. The suit sought to enjoin
Cyco.net, Inc. from doing business in Oregon, $25,000 and attorney’s fees. This
suit was settled for $2,000.
  On July
10, 2003, the State of Vermont filed a civil action in the State of Vermont,
Chittenden County against the Company’s subsidiary alleging the sale of
cigarettes to a minor, deceptive failure to file Jenkins Act reports and inform
Vermont consumers that they are required to pay sales taxes to the State of
Vermont. The suit sought to enjoin the Company from doing business in Vermont,
pay civil penalties of up to $10,000 for each sale to a minor, plus attorney’s
fees and costs. This
suit was settled in April 2004 for $4,000.
  During
2003, the State District Court of Travis County, Texas, alleged that the Company
did not take effective measures to prevent the sale of tobacco products to
minors in violation of the Texas Deceptive Trade Practices - Consumer Protection
Act. This suit
was settled in September 2004 for $3,000.
  **Item
4. Submission Of Matters To A Vote Of Security Holders**
  On June
9, 2004, a majority of the security holders of the Company voted to amend the
Company’s Articles of Incorporation to increase the number of shares of
authorized common stock from 100,000,000 to 500,000,000. Those voting in favor
of the amendment were 57,476,000.
 
 On
January 25, 2005, a majority of the security holders of the Company voted to
amend the Articles of Incorporation to change the name of the Company to
Nexicon, Inc. Those voting in favor of the amendment were 57,476,000.
  
  **PART
II**
   **Item
5. Market For Common Equity And Related Stockholder
Matters**
  Nexicon’s
common stock has been quoted on the Over-the-Counter Bulletin Board maintained
by the NASD under the symbol “CYKE.OB”
  The
following table sets forth the range of high and low bid quotations for each
calendar quarter for Nexicon’s common stock for the prior two
years.
  **Bid
      Price Per Share****High**
    
    **Low**January
      2, 2003 - March 28, 2003
    
    $
    0.0500
    
    $
    0.0400April
      1, 2003 - June 30, 2003
    
    $
    0.0100
    
    $
    0.0050July
      1, 2003 - September 30, 2003
    
    $
    0.0100
    
    $
    0.0050October
      1, 2003 - December 31, 2003
    
    $
    0.4800
    
    $
    0.0100January
      2, 2004 - March 31, 2004
    
    $
    1.2300
    
    $
    0.2500April
      1, 2004 - June 30, 2004
    
    $
    0.4700
    
    $
    0.1800July
      1, 2004 - September 30, 2004
    
    $
    0.4000
    
    $
    0.1800October
      1, 2004 - December 31, 2004
    
    $
    0.2200
    
    $
    0.0700Jan
      2, 2005 - March 31, 2005
    
    $
    0.1100
    
    $
    0.0300
  The above
prices were obtained from Nasdaq, Inc. The quotations represent inter-dealer
quotations, without retail mark-up, markdown or commission, and may not
necessarily represent actual transactions.
  As of
March 31, 2005, Nexicon believes there were approximately 584 holders of record
of our common stock.
  We have
not paid dividends in the past on any class of stock and we do not anticipate
paying dividends in the foreseeable future.
  **Recent
Sales Of Unregistered Securities**
 
 During
the year ended December 31, 2004, the Company issued 6,600,000 shares of common
stock for cash consideration of $587,800. An additional 8,799,833 shares were
issued in exchange for services valued at $2,016,384, the fair market value of
the shares on the date the Company agreed to issue the stock. Included in those
issued for services were 3,800,000 shares issued to employees of the Company at
a value of $760,000. Deferred stock compensation at December 31, 2004 was
$543,996 to be amortized over the terms of certain consulting
agreements.
 
 Effective
December 10, 2004, the Company entered into a marketing and distribution
agreement with Central Solutions, Inc. (“Central”), a Delaware corporation,
whereby the Company granted Central the right to market, distribute and support
any and all technology directly or indirectly controlled, licensed, owned joint
ventured or otherwise approved for the Company, exclusively in the healthcare
markets in the U.S. and Canada. In connection with this, the Company issued
10,000,000 shares of its restricted common stock in exchange for 35% of
Central’s issued and outstanding common stock.
 
 
 
 
 On
November 15, 2004, Nexicon, Inc. purchased all of the outstanding common stock
of Pluto Communications International, AS (“Pluto”) a Norwegian company, that
provides a range of billing and customer care solutions for telecommunication
carriers and service providers via their “Charon” billing and customer care
real-time, client/server system. In the stock for stock purchase, Nexicon, Inc.
issued 5,010,496 shares of common stock in exchange for all of the issued and
outstanding common stock of Pluto Communications International, AS.
  Nexicon
acquired the stock of Pluto from the following people in exchange for the number
of shares of Nexicon’s common stock set forth opposite their names:
 **Number**
    
    
    
    **Number****Name**
    
    **of
      shares**
    
    **Name**
    
    **of
      shares**Teigland
      Eiendom AS
    
    
    1,117,043
    
    
    Nordea
      Liv Norge AS
    
    
    155,400Mercury
      Mobile AS
    
    
    827,820
    
    
    Holberg
      @
    
    
    133,980Frank
      Mjos
    
    
    656,250
    
    
    Tommy
      Eide
    
    
    105,000Toman
      Invest AS
    
    
    388,500
    
    
    Lie
      Invest AS
    
    
    38,850Tommy
      Stiansen
    
    
    262,500
    
    
    Rune
      Svendsen
    
    
    34,965Reidar
      Asphaug
    
    
    262,500
    
    
    Jens
      Petter Teigland
    
    
    31,248Svein
      Erik Fauskanger
    
    
    262,500
    
    
    Vest
      Kapital AS
    
    
    26,250Eiendomsgruppen
      Vest AS
    
    
    242,498
    
    
    Anders
      Giske
    
    
    7,770Holberg
      Norden
    
    
    235,200
    
    
    Eivind
      Bøe
    
    
    5,250Holberg
      Norge
    
    
    216,972Total
      Shares
    
    
    5,010,496
 In May
2004, the Company entered into a Securities Purchase Agreement, whereby up to
$500,000 of 5% secured, convertible debentures may be issued. During the year
ended December 31, 2004, the Company received net proceeds of $369,323 after
payment of expenses in the amount of $130,677, from the sale of $500,000 worth
of debentures. The Investor converted $75,000 worth of the debentures for
679,855 shares of its common stock. At December 31, 2004, the balance of the
debentures was $425,000 and the accrued interest was $12,801.
 
 In March
2004, Nexicon entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners, LP (“Cornell”). This agreement replaces the Equity Line of
Credit Agreement entered into in September 2001. Pursuant to this agreement,
Nexicon may, at its discretion for up to 2 years, periodically issue and sell
shares of common stock for a total purchase price of $20.0 million. If Nexicon
requests an advance under the Standby Equity Distribution Agreement, Cornell
will purchase shares of common stock for 99% of the volume weighted average
price on the Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the 5 days immediately following the notice date.
Cornell intends to sell any shares purchased under the Standby Equity
Distribution Agreement at the market price.  On June
10, 2004 the Company filed a registration statement on Form SB-2 under the
Securities Act of 1933, for the registration of 69,513,810 shares of the
Company’s common stock. The registration statement became effective on August
11, 2004. Effective March 23, 2004, upon the execution of the Standby Equity
Distribution Agreement, the Company issued 490,000 shares of its common stock to
Cornell at $0.48 per share, plus 20,833 shares of its common stock to Newbridge
Securities Corporation, the Placement Agreement, at $0.48 per share. The total
fees of $245,000 are capitalized as financing costs net of $85,200 amortization
of non-cash interest expense in the accompanying financial statements, in the
amount of $160,000 at December 31, 2004.
 
 On
November 19, 2003, Nexicon, Inc. purchased all of the outstanding common stock
of Orion Security Services, Inc. (“ OSSI ”), a
Wisconsin corporation. In the stock for stock purchase, Nexicon, Inc. issued
50,000,000 shares of common stock in exchange for all of the issued and
outstanding common stock of Orion Security Services, Inc. The shares were at
valued $0.09 per share, the fair market value at November 19, 2003.
 
 Nexicon
acquired the stock of OSSI from the following people in exchange for the number
of shares of Nexicon’s common stock set forth opposite their names:
 
 
  Name:
    
    No.
      of Shares:Robert
      V. Demson
    
    
    26,000,000Francisco
      Urrea, Jr.
    
    
    20,000,000Paul
      B. Goldberg
    
    
    1,800,000Harry
      A. Montefusco
    
    
    1,800,000John
      F. Morrison
    
    
    400,000
 
 In
October 2003, Nexicon issued 1,000,000 shares of common stock to Francisco
Urrea, Jr., a director, for consulting fees.
 
 Effective
July 1, 2003, Nexicon agreed to sell its Internet tobacco products business to
American Indian CigCo, LLC (“AIC”). In conjunction with this sale, AIC agreed to
purchase 2,000,000 shares of Nexicon’s common stock for $2,800,000 payable in
the form of a promissory note bearing interest at 7% per year. Interest payments
were originally are due annually commencing July 31, 2004 and the principal
was due July 31, 2008. In November 2004, the agreement was amended to
effect monthly interest-only payments at an annual rate of 4.223%, commencing
December 31, 2004, with the principal due on or before December 31, 2009, at
AIC’s option. To date, AIC has paid no interest on the note.
 
 In August
2002, Nexicon issued a total of 5,000,000 shares of common stock valued at
$150,000 as follows: 1,000,000 shares each to Richard Urrea, Daniel Urrea, Brent
Wolford, Lynnette Budagher and Trey Urrea.
 
 With
respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the “ 1933
Act ”), and
Regulation D promulgated under the 1933 Act. In each instance, the purchaser had
access to sufficient information regarding Nexicon so as to make an informed
investment decision. More specifically, Nexicon had a reasonable basis to
believe that each purchaser was either an “accredited investor” as defined in
Regulation D of the 1933 Act or otherwise had the requisite sophistication to
make an investment in Nexicon’s common stock.
  
  **Item
6. Management’s Discussion And Analysis Or Plan Of
Operation**
  *The
following information should be read in conjunction with the consolidated
financial statements of Nexicon and the notes thereto appearing elsewhere in
this filing. Statements in this Management’s Discussion and Analysis or Plan of
Operation and elsewhere in this filing that are not statements of historical or
current fact constitute “forward-looking statements.”*
  **Going
Concern**
 
 The
Company has experienced losses from operations as a result of its investment in
attempting to achieve its operating plan, which is long-range in nature. For the
years ended December 31, 2004 and 2003 the Company incurred net (losses) of
($5,488,455) and ($4,902,363), respectively. At December 31, 2004, the Company
had a working capital (deficit) of ($1,048,067) and stockholders’ (deficit) of
$(1,611,250). In addition the Company is subject to legal action.
 
 The
Company’s ability to continue as a going concern is contingent upon its ability
to secure financing and attain profitable operations. In addition, the Company’s
ability to continue as a going concern must be considered in light of the
problems, expenses and complications frequently encountered by entrance into
established markets and the competitive environment in which the Company
operates. The Company purchased two wholly-owned subsidiaries, OSSI and Pluto,
and through sales of their products hopes to attain profitable
operations.
 
 Our
independent auditors have added an explanatory paragraph to their audit opinions
issued in connection with the years ended December 31, 2004 and 2003 financial
statements, which states that Nexicon has suffered recurring losses from
operations and has working capital and stockholder deficits. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
Our ability to obtain additional funding will determine our ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
 
 **Critical
Accounting Policies**
 
 Nexicon’s
consolidated financial statements and related public financial information are
based on the application of accounting principles generally accepted in the
United States (“GAAP”). GAAP requires the use of estimates, assumptions,
judgments and subjective interpretations of accounting principles that have an
impact on the assets, liabilities, revenue and expense amounts reported. These
estimates can also affect supplemental information contained in our external
disclosures including information regarding contingencies, risk and financial
condition. We believe our use of estimates and underlying accounting assumptions
adhere to GAAP and are consistently and conservatively applied. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions. We
continue to monitor significant estimates made during the preparation of our
financial statements.
 
 Our
significant accounting policies are summarized in Note 1 of our consolidated
financial statements. While all these significant accounting policies impact its
financial condition and results of operations, the Company views certain of
these policies as critical. Policies determined to be critical are those
policies that have the most significant impact on the Company’s consolidated
financial statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates. Our management
believes that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report.
 
 Our
critical accounting policies are organization, revenue recognition, and deferred
offering costs.
  **Organization** .  Nexicon,
Inc. (the “Company”) is the successor to Cyco.Net, Inc, (formerly AVE, Inc. a
Nevada corporation) and operates through its wholly owned subsidiaries,
Cyco.net, a New Mexico corporation, Orion Security Systems (“OSSI”), a Wisconsin
corporation, and Pluto Communications International, AS (“Pluto”), a Norwegian
corporation, discussed below.
 
 
 
 Prior to
July 1, 2003, the Company’s primary line of business was the sale of cigarettes
through three websites to customers in the United States of America. Effective
July 1, 2003, the Company sold its internet tobacco products
division.
 
 On
November 19, 2003, the Company purchased all of the outstanding common stock of
Orion Security Systems, Inc., a Wisconsin corporation whose primary line of
business is the sale of its Satsecure© System and ComSecure© Controller, which
are designed to provide bi-directional video, audio, data and alarm transfer
between a wide variety of locations, including but not limited to land based
positions, airborn aircraft, ships at sea, and a command and control center. In
December 2004, management of the Company resolved to dispose of the Satsecure©
division of OSSI. As of March 2005, the Company no longer sells
Satsecure©.
 
 On
November 15, 2004, the Company acquired all of the outstanding common stock of
Pluto Communications International, AS, a Norwegian corporation which provides a
variety of billing and customer care solutions for telecommunication carriers
and other network service providers via its “Charon” billing and customer care
real-time client/server system. The
“Charon” system provides a high-end Operational Support System (“OSS”) and
billing system to improve customer service.
 
 **Revenue
recognition** **.** Prior to
July 1, 2003, the Company’s sole source of revenue was the sale of cigarettes
through its primary website (Nexicon), which was designed as an “e-zine”, and
two ancillary websites (cycocigs.com and aabakismokes.com). The terms of sale
were FOB shipping point and the Company recorded revenue from cigarette sales
when the product shipped. Effective July 1, 2003, the Company sold its internet
tobacco products division, accordingly revenues and costs associated with the
internet tobacco products division are presented as discontinued
operations.
 
 Effective
November 19, 2003 through November 14, 2004, the Company’s sole source of
revenue was the sale of the SatSecure© and ComSecure© systems discussed above.
The terms of sale are FOB shipping point and the Company records revenue when
the product is shipped. In December 2004, the Company determined to dispose of
the SatSecure© division of its business, which was consummated in March 2005.
Accordingly, the revenues and costs associated with the SatSecure© division are
presented as discontinued operations in the accompanying financial
statements.
 
 In
November 2004, the Company through Pluto, its wholly-owned Norwegian subsidiary,
added the service revenues from the sale of the “Charon” Billing and Operational
Support Systems in Norway and Sweden. Revenues are recognized at the completion
of the related services, and where they are earned.
 
 **Deferred
offering costs.** The
Company defers costs associated with the raising of capital until such time as
the offering is completed, at which time the costs are charged against the
capital raised. Should the offering be terminated the costs are charged to
operations during the period when the offering is terminated.
  **Plan
of Operation**
 
 In the
next 12 months, Nexicon plans to pursue sales of its two products; ComSecure©
Controller and Charon Billing System by:
  ·
    Partnering
      with major integrators.
  ·
    Pursuing
      product certification and pilot program evaluation contracts.
  ·
    Continuing
      funding efforts.
  **Results
Of Operations**
 
 Effective
July 1, 2003, Nexicon, Inc. sold its tobacco operations to American Indian
CigCo, LLC. In conjunction with this sale AIC agreed to purchase 2,000,000
shares of the Company’s common stock. The purchase price aggregated $3,000,000
in the form of 2 notes payable as follows: (1) payment for the assets of the
business in the form of a note in the amount of $200,000 payable in 12 equal
monthly installments of $16,667 commencing on August 1, 2003 and (2) payment for
the 2,000,000 common shares is payable in the form of a $2,800,000 note with
interest at 7% per annum, on an interest only basis. The interest payments were
originally due annually commencing on August 31, 2004 and the principal balance
was due on July 31, 2008. Accrued interest receivable of $294,000 has not been
reflected in the accompanying financial statements, as recognition will occur as
proceeds are received. In November 2004, the agreement was amended to effect
monthly interest-only payments at an annual rate of 4.223%, commencing December
31, 2004, with the principal due on or before December 31, 2009, at AIC’s
option. To date, AIC has paid no interest on the note.
 
 
 
 Because
the sale of the business and the common shares were made to a thinly capitalized
entity and significant uncertainties exist related to the collectibility of the
amounts due, the gain from the sale of the business will be deferred until such
time as the proceeds are collected or until such time as the cash flows from the
operating activities of the business sold are sufficient to fund the debt
service. The deferred portion of the gain on the sale of the business
aggregating $46,925 at December 31, 2004 is reflected as deferred
revenue.
 
 On a go
forward basis, revenues and expenses from tobacco sales will be shown as
operating results of discontinued operations and are shown separately in the
accompanying statements of operations.
 
 On
November 19, 2003, Nexicon, Inc. purchased Orion Security Systems, Inc., a
corporation in the development stage, which provides secure computer network and
management solutions, and video surveillance systems via satellite
communication. The business combination has been accounted for as a purchase.
The results of operations of OSSI have been included in the accompanying
financial statements since the effective date of the acquisition. In exchange
for all of the issued and outstanding common shares of OSSI, the Company issued
50,000,000 shares of its common stock valued at $4,500,000. The shares were
valued at $.09 per share, the fair market value at November 19, 2003. As of
December 31, 2003, the Company recorded a loss on asset impairment related to
this investment, in the amount of $4,500,000, which was charged to
operations.
 
 On March
17, 2005, the Company agreed to repurchase 15 million shares of the Company’s
common stock held by Robert Demson in exchange for all  right,
title, and interest that the Company has in agreements associated with the
“SatSecure” technology and to the tradenames “Orion Security Services, Inc.”,
“OSSI”,  “Ossi-Secure”,
“SatSecure”, “SatWatch” and “RECON 9000” and all equipment, computers and
furniture valued at approximately $15,213. The results of operations of OSSI
related to SatSecure have been accounted for as discontinued operations in the
accompanying financial statements.
 
 On
November 15, 2004, the Company purchased all of the outstanding common stock of
Pluto Communications International, AS (“Pluto”) a Norwegian company, that
provides a range of billing and customer care solutions for telecommunication
carriers and service providers via their “Charon “ billing and customer care
real-time, client/server system. Pursuant to a Share Exchange Agreement between
the Company and Pluto, Inc., dated June 16, 2004 and amended on November 15,
2004, the Company issued 5,010,496 shares of common stock to Pluto in exchange
for all of the issued and outstanding common stock of Pluto. Pluto will continue
its operations in Norway and will operate as a 100% wholly owned subsidiary of
the Company. The results of operations of Pluto from November 15, 2004 through
December 31, 2004 are included in the accompanying financial
statements.
  **Results
of Operations for Year Ended December 31, 2004 Compared To The Year Ended
December 31, 2003**
 
 
 Revenues
for the year ended December 31, 2004 were $495,990 and was attributable to sale
of a ComSecure System and billing revenues from the Charon Billing system.
Revenues for the year ended December 31, 2003 were attributable to the sale of a
SatSecure System which has been included in discontinued operations.
 
 Cost of
goods sold for the year ended December 31, 2004 was $355,766 and was
attributable to the sale of a ComSecure System and billing revenues from the
Charon Billing system. Cost of goods sold for the year ended December 31, 2003
were attributable to the sale of a SatSecure System which has been included in
discontinued operations.
 
 General
and administrative expenses for the year ended December 31, 2004 were
$1,471,697, which primarily consisted of $17,969 in advertising, $665,914 in
payroll expenses, $396,741 in professional fees, $51,532 in rent, $22,829 in
amortization and depreciation, $58,841 bad debt expense, $186,529 in travel
expense and $71,342 in miscellaneous other expenses.
 
 General
and administrative expenses for the year ended December 31, 2003 were $723,527,
which primarily consisted of $10,060 in advertising, $429,721 in payroll
expenses, $197,277 in professional fees, $15,666 in rent, $11,012 in
amortization and depreciation, $12,500 for website maintenance, $12,232 in
travel expense and $35,059 in miscellaneous other expenses.
  The
increase of $748,170 in general and administrative expenses in the year ended
December 31, 2004, was primarily due to the operations of OSSI for 10 months of
the year and to the operations of Pluto for 1 1⁄2 months.
 
 Research
and development costs for the year ended December 31, 2004, were $75,138.
 
 For the
year ended December 31, 2004, purchased research and development was $1,503,260
the cost was non-cash as common stock was issued in lieu of cash. The Company
recorded purchased research and development pursuant to the write down of its
investments in Pluto ($601,260) and Central Solutions, Inc. ($902,000), in
excess of the value of the assets acquired.
 
 Non-cash
stock compensation for the year ended December 31, 2004 was $1,850,105. The
Company issued stock in lieu of cash for various services included in this was
stock issued to employees valued at $760,000 other services were valued at
$1,090,105.
 
 During
the year ended December 31, 2003,  the
Company recorded a loss on asset impairment related to the purchase of OSSI, as
discussed above, in the amount of $4,500,000, which was charged to
operations.
 
 Nexicon
had an operating loss of $4,759,976 for the 12 months ended December 31, 2004,
compared to $5,223,527 in the comparable period in the prior year.
 
 Other
income and (expense) for the year ended December 31, 2004, resulted in net
expense of ($2,745) which included interest income of $7,510, gain on sale of
Cyconet of $75,716 offset by interest expense of ($771) and non-cash interest
expense of ($85,200). Other income and (expense) for the same period last year
resulted in net income of $56,394 which included interest income of $5,100, gain
on sale of Cyconet of $53,897 and interest expense of ($2,603).
 
 Net
income (loss) from discontinued operations for the year ended December 31, 2004
and 2003 was a (loss) of ($972,734) net of income tax (benefit) of ($247,000)
and income of $362,770 net of income tax of $99,000, respectively. This relates
primarily to Nexicon’s former cigarette business which was sold in July 2003 and
in 2004 Nexicon’s sale of the SatSecure product line.
 
 Nexicon
had a net loss for the year ended December 31, 2004 of $5,488,455, compared to a
net loss of $4,902,363 for the same period last year. The comprehensive net loss
for the year ended December 31, 2004, was $5,444,133.
 
 **Liquidity
And Capital Resources**
 
 For the
year ended December 31, 2004, cash used in operations was $1,406,298, cash used
in investing activities was $135,955, and cash provided by financing activities
was $1,562,516. This resulted in a net increase in cash of $20,263 in the year
ended December 31, 2004. Cash used in operations consisted of a net loss of
$5,488,455, a decrease in deferred gain of sale of discontinued operations of
$75,716, an increase in receivables of $20,138 and an increase in other assets
of $5,451, which was partially offset by amortization and depreciation expenses
of $22,829, non-cash interest of $85,200, common stock issued for services of
$3,353,365, a currency translation adjustment of $44,322, an increase in
accounts payable of $407,575, an increase in net liabilities of discontinued
operations of $170,834 and an increase in related party accrued expenses of
$99,337. Cash used by investing activities consisted of purchase of property and
equipment of $12,994, the purchase of an interest in Mercury Mobile of $147,851
offset by cash received in the Pluto acquisition of $24,890. Cash provided by
financing activities consisted of proceeds from the sale of common stock of
$587,800, proceeds from notes and debentures of $900,000, proceeds from American
Indian Cigco receivable of $75,716 offset by payment of related party note of
$1,000. As of December 31, 2004, Nexicon had cash-on-hand of
$29,562.
 
 Nexicon’s
primary need for cash during the next 12 months are to satisfy current
liabilities of $1,260,650, as well as to support Nexicon’s current operations.
Nexicon’s current operations are expected to be $170,000 per month, including
payroll, rent, utilities and litigation costs. Nexicon in the next twelve months
expects to receive the balance of $64,036 of the current receivable from ACC and
hopes to attain profitable operations through its ComSecure Controller and
Charon Billing System sales. However, Nexicon will need to raise additional
capital to finance growth. Such capital is expected to come from the sale of
securities, including the sale of common stock under the Standby Equity
Distribution Agreement. Other than the Standby Equity Distribution Agreement,
Nexicon does not have any commitments for financing.
 
 
 
 In March
2004, Nexicon entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners, LP. This agreement replaces the Equity Line of Credit
Agreement entered into in September 2001. Pursuant to this agreement, Nexicon
may, at its discretion for up to 2 years, periodically issue and sell shares of
common stock for a total purchase price of $20.0 million. If Nexicon requests an
advance under the Standby Equity Distribution Agreement, Cornell Capital
Partners, LP will purchase shares of common stock for 99% of the volume weighted
average price on the Over-the-Counter Bulletin Board or other principal market
on which our common stock is traded for the 5 days immediately following the
notice date. Cornell Capital Partners, L.P. intends to sell any shares purchased
under the Standby Equity Distribution Agreement at the market price.
 
 The
Company cannot predict the total number of shares to be issued or the gross
proceeds to be derived from the sale of such shares pursuant to the Standby
Equity Distribution Agreement, as the purchase price of the shares will
fluctuate based on the prevailing market conditions. During the year ended
December 31, 2004, 2,177,290 shares of the Company’s common stock were issued.
In addition, the Company issued two promissory notes to Cornell Capital
Partners, LP totaling $400,000. As of December 31, 2004, the balance was
$150,000 and the accrued interest was $3,096.
 
 In May
2004, the Company entered into a Securities Purchase Agreement, whereby up to
$500,000 of 5% secured, convertible debentures may be issued. During the year
ended December 31, 2004, the Company received net proceeds of $369,323 after
payment of expenses in the amount of $130,677, from the sale of $500,000 worth
of debentures. The investor converted $75,000 worth of the debentures for
679,855 shares of its common stock. At December 31, 2004, the balance of the
debentures was $425,000 and the accrued interest was $12,801.
 
 **Recent
Accounting Pronouncements**
 
 In
December 2004, the Financial Accounting Standards Board issued FASB
Interpretation Number 46-R “Consolidation of Variable Interest Entities”. FIN
46-R, which modifies certain provisions and effective dates of FIN 46, sets for
the criteria to be used in determining whether an investment is a variable
interest entity should be consolidated. These provisions are based on the
general premise that if a company controls another entity through interests
other than voting interests, that the company should consolidate the controlled
entity. The Company currently has no investments that qualify for consolidation
under the provisions of FIN 46-R.
 
 In
November 2004, the FASB issued SFAS 151, “Inventory Costs.” SFAS 151 amends the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) under the guidance in ARB 43, Chapter 4,
“Inventory Pricing.” Paragraph 5 of ARB 43, Chapter 4, previously stated that
“...under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges....” This Statement requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition, this Statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Management
does not expect adoption of SFAS 151 to have a material impact on the Company’s
financial statements.
 
 In
December 2004, the FASB issued SFAS 152, “Accounting for Real Estate
Time-Sharing Transactions.” The FASB issued this Statement as a result of the
guidance provided in AICPA Statement of Position (SOP) 04-2, “Accounting for
Real Estate Time-Sharing Transactions.” SOP 04-2 applies to all real estate
time-sharing transactions. Among other items, the SOP provides guidance on the
recording of credit losses and the treatment of selling costs, but does not
change the revenue recognition guidance in SFAS 66, “Accounting for Sales of
Real Estate,” for real estate time-sharing transactions. SFAS 152 amends
Statement 66 to reference the guidance provided in SOP 04-2. SFAS 152 also
amends SFAS 67, “Accounting for Costs and Initial Rental Operations of Real
Estate Projects”, to state that SOP 04-2 provides the relevant guidance on
accounting for incidental operations and costs related to the sale of real
estate time-sharing transactions. SFAS 152 is effective for years beginning
after June 15, 2005, with restatements of previously issued financial statements
prohibited. Management does not expect adoption of SFAS 152 to have a material
impact on the Company’s financial statements.
 
 
 
 In
December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets,” an
amendment to Opinion No. 29, “Accounting for Nonmonetary Transactions.”
Statement 153 eliminates certain differences in the guidance in Opinion No. 29
as compared to the guidance contained in standards issued by the International
Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair
value exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring
in periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS 153 to have a material impact
on the Company’s financial statements.
 
 In
December 2004, the FASB issued SFAS 123(R), “Share-Based Payment.” SFAS 123(R)
amends SFAS 123, “Accounting for Stock-Based Compensation,” and APB Opinion 25,
“Accounting for Stock Issued to Employees.” SFAS 123(R) requires that the cost
of share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS 123(R) applies to
all share-based payment transactions in which an entity acquires goods or
services by issuing (or offering to issue) its shares, share options, or other
equity instruments (except for those held by an ESOP) or by incurring
liabilities (1) in amounts based (even in part) on the price of the entity’s
shares or other equity instruments, or (2) that require (or may require)
settlement by the issuance of an entity’s shares or other equity instruments.
This statement is effective (1) for public companies qualifying as SEC small
business issuers, as of the first interim period or fiscal year beginning after
December 15, 2005, or (2) for all other public companies, as of the first
interim period or fiscal year beginning after June 15, 2005, or (3) for all
nonpublic entities, as of the first fiscal year beginning after December 15,
2005. Management is currently assessing the effect of SFAS No. 123(R) on the
Company’s financial statements.
  **Item
7. Financial Statements**
  The
responses to this item are submitted in a separate section of this Annual Report
on Form 10-KSB. See Index to the Financial Statements on page F-1.
  **Item
8. Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure**
  There
were no changes in accountants or any disagreements with our accountants on
accounting and financial disclosures.
  **Item
8A. Controls And Procedures**
  **(a)**  **Evaluation
of Disclosure Controls and Procedures:**
  As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of the Company’s disclosure controls and procedures. The Company’s
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company’s disclosure control objectives. The
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that the Company’s disclosure controls and procedures are, in fact, effective at
this reasonable assurance level as of the period covered. In addition, the
Company reviewed its internal controls, and there have been no significant
changes in its internal controls or in other factors that could significantly
affect those controls subsequent to the date of their last evaluation or from
the end of the reporting period to the date of this
Form 10-KSB.
  
 ****
 **(b)**  **Changes
in Internal Controls:**
  In
connection with the evaluation of the Company’s internal controls during the
Company’s fourth fiscal quarter ended December 31, 2004, the Company’s Chief
Executive Officer and Chief Financial Officer have determined that there are no
changes to the Company’s internal controls over financial reporting that has
materially affected, or is reasonably likely to materially effect, the Company’s
internal controls over financial reporting.
  
  **PART
III**
  **Item
9. Directors and Executive Officers, Promotors and Control Persons; Compliance
With Section 16(a) of the Exchange Act**
  Nexicon’s
present directors and executive officers are as follows:
  **Name**
    
    **Age**
    
    **Position**Richard
      Urrea
    
    40
    
    Chief
      Executive Officer, President and DirectorDaniel
      Urrea
    
    33
    
    Chief
      Financial Officer
 The
directors and executive officers of Nexicon are not directors or executive
officers of any company that files reports with the SEC, nor have they been
involved in any bankruptcy proceedings, criminal proceedings, any proceeding
involving any possibility of enjoining or suspending Nexicon’s directors and
officers from engaging in any business, securities or banking activities, and
have not been found to have violated, nor been accused of having violated, any
federal or state securities or commodities laws.
  The
following is a brief description of the background of the directors and
executive officers of Nexicon.
  ***RICHARD
URREA*** has been
President and Chief Executive Officer of Nexicon since inception in January 1999
and has been our sole director since December 2004. He served as President of
Sycom International, Inc. from 1997 to 1999. Sycom is a data communications
company. Mr. Urrea led the company from start up through national marketing plan
and implementation of its manufacturing plan. The company currently manufactures
its products and markets them throughout the U.S. and is in the process
expanding into foreign markets. From 1996 to 1997, Mr. Urrea was President of
Klaire International Ltd., an export company distributing automotive parts in
Mexico. From 1995-1996, Mr. Urrea served as the managing member of Toltec Fruit,
L.C., a limited liability company involved in the importation of fruit into the
United States from Mexico and South America. From 1993 to 1995, Mr. Urrea worked
on the development and marketing plan for Septima Enterprises Inc. From 1991 to
1993, Mr. Urrea managed the Albuquerque Office of White Discount Securities. In
1990, Mr. Urrea was contract administrator for Foresight, Inc., an Albuquerque,
laser-optics, government contractor. In 1989, Mr. Urrea served as marketing
director for HDI System, Inc. where he devised and implemented an international
marketing plan for an ignition system for marine application. In 1985 and 1986,
Mr. Urrea owned and operated Shannon Euro Motorcars, a European automobile
importing and maintenance company. Mr. Urrea sold the business in 1986 to attend
Baylor University. Mr. Urrea received his Bachelor of Business Administration in
Marketing and Business Broadcasting from Baylor University’s Hankammer School of
Business in 1989.
  ***DANIEL
URREA*** has been
Chief Financial Officer with Nexicon since inception in January 1999. Prior to
his involvement with the Nexicon, Mr. Urrea worked with Sycom International,
manufacturer and distributor of Radio Telemetry Units. During that time Mr.
Urrea was responsible for the maintenance of the accounting records for the
company, and was instrumental in the development of the company’s business plan.
Before this, Mr. Urrea worked for Klaire International, an exporter of
automotive accessories to Mexico, in the same capacity. From January 1996
thorough August 1996 Mr. Urrea worked with Equinox International, an
international marketing and distribution company, where he was involved in sales
and talent recruiting activities. In the Spring of 1995, Mr. Urrea received a
Bachelors in Business Administration with a concentration in Finance from the
Anderson Schools of Management at the University of New Mexico. Mr. Urrea has
also spent several months out of the country where he studied business and other
cultures.
  **Family
Relationships**
 
 Richard
Urrea, our President, Chief Executive Officern and sole director, is the brother
of Daniel Urrea, our Chief Financial Officer.
  **Committees**
 
 Nexicon’s
Board of Directors serves as the audit committee. The Board of Directors does
not have a “financial expert” due to the lack of capital needed to attract a
qualified expert.
 ****
 
 ****
 **Code
of Ethics**
 
 On April
8, 2004, the Board of Directors of the Company 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. This Code of Ethics has been
filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Form 10-KSB for the year ended December 31, 2003.
  **Item
10. Executive Compensation**
  The
following table shows all the cash compensation paid by Nexicon, as well as
certain other compensation paid or accrued, during the fiscal years ended
December 31, 2004, 2003 and 2002 to Nexicon’s three highest paid executive
officers. No restricted stock awards, long-term incentive plan payouts or other
types of compensation, other than the compensation identified in the chart
below, were paid to these executive officers during these fiscal years. Except
as indicated below, no executive officer earned a total annual salary and bonus
for any of these years in excess of $100,000.
  **Annual
      Compensation**
    
    **Long-Term
      Compensation****Awards**
    
    **Payouts****Name
      and**
      **Principal
      Position**
    
    **Year**
    
    **Salary**
      **($)**
    
    **Bonus**
      **($)**
    
    **Other**
      **Annual**
      **Compensation**
      **($)**
    
    **Restricted**
      **Stock**
      **Award(s)**
      **($)**
    
    **Options****/**
      **SARs**
      **(#)**
    
    **LTIP**
      **Payouts**
      **($)**
    
    **All
      Other**
      **Compensation**
      **($)**Richard
      Urrea,
      Chief
      Executive Officer,
    
    
    2004
    
    $
    108,634
    
    
    --
    
    
    **--**
    
    
    --
    
    
    --
    
    
    --
    
    
    --President
      and Director
    
    
    2003
      2002
    
    $
      $
    42,100
      110,750
    
    $
    75,000(3)
      --
    
    
    **--**
      **--**
    
    
    --
      $30,000(1
    )
    
    --
      --
    
    
    --
      --
    
    
    --
      --Daniel
      Urrea,
      Chief
      Financial Officer
    
    
    2004
      2003
    
    $
      $
    49,896
      30,333
    
    
    --
      $75,000(3
    )
    
    **--**
      **--**
    
    
    --
      --
    
    
    --
      --
    
    
    --
      --
    
    
    --
      --And
      Secretary/Treasurer
    
    
    2002
    
    $
    57,822
    
    
    --
    
    
    **--**
    
    $
    30,000(1
    )
    
    --
    
    
    --
    
    
    --Robert
      V Demson,
      Chief
      Operating Officer OSSI
    
    
    2004
      2003
      2002
    
    $
      $
      $
    206,250
      156,000(2
      54,000(2
    )
      )
    
    --
      --
    
    
    **--**
      **--**
    
    
    --
      --
    
    
    --
      --
    
    
    --
      --
    
    
    --
      --
 
 (1)  These
represent 1,750,000 shares of common stock issued to each of Richard Urrea and
Daniel Urrea. These shares were valued at $0.03 per share on the date of
grant.
  (2)  During
the years ended December 31, 2003 and 2002, Robert Demson’s salary was
accrued.
  (3)  A bonus
of $75,000 each was accrued for Richard Urrea and Daniel Urrea for reduced
salaries paid in the year ended December 31, 2003.
  
 ****
 **Employment
Agreements**
 
 Effective
January 1, 2004, Nexicon entered into a 5-year employment agreement with Richard
Urrea. Mr. Urrea is employed as the President and Chief Executive Officer of
Nexicon. Mr. Urrea’s annual salary is $120,000. Mr. Urrea is also entitled to
discretionary bonuses to be determined by the Company’s board of directors and
the use of a Company car.
 
 Effective
January 1, 2004, Nexicon entered into a 5-year employment agreement with Daniel
Urrea. Mr. Urrea is employed as the Chief Financial Officer of Nexicon. Mr.
Urrea’s annual salary is $90,000. Mr. Urrea is also entitled to discretionary
bonuses to be determined by the Company’s board of directors and the use of a
Company car.
 
 **Securities
Authorized for Issuance Under Equity Compensation Plan**
  The
following table sets forth the securities that have been authorized under equity
compensation plans as of December 31, 2004.
  **Number**
      **Of
      Securities**
      **To
      Be Issued**
      **Upon
      Exercise**
      **Of
      Outstanding Options, Warrants And Rights**
    
    **Weighted-Average**
      **Exercise
      Price**
      **Of
      Outstanding Options,**
      **Warrants
      And Rights**
    
    **Number**
      **Of
      Securities**
      **Remaining
      Available**
      **For
      Future Issuance**
      **Under
      Equity Compensation Plans**
      **(Excluding
      Securities Reflected**
      **In
      Column (a))****(a)**
    
    **(b)**
    
    **(c)**Equity
      compensation plans approved by security holders
    
    
    750,000
    
    $
    0.06
    
    
    750,000Equity
      compensation plans not approved by security holders
    
    
    0
    
    $
    0
    
    
    0TOTAL
    
    
    750,000
    
    $
    0.08
    
    
    750,000
 
 No
options have been granted to the named officers and directors.
  
 ****
 **Item
11. Security Ownership Of Certain Beneficial Owners And Management and Related
Stockholder Matters**
  **Voting
Securities And Principal Holders Thereof**
 
 The
following table sets forth, as of March 31, 2005, information with respect to
the beneficial ownership of our common stock by (i) persons known by us to
beneficially own more than five percent of the outstanding shares,
(ii) each director, (iii) each executive officer and (iv) all
directors and executive officers as a group.
  **Common
      Stock**
      **Beneficially
      Owned****Name/Address**
    **Number**
    **Percent****(1)**Robert
      V Demson
      11702
      Saddle Crescent Circle
      Oakton,
      Virginia 22124
    11,000,000
    9.88%Central
      Solutions Inc.
      10
      East Baltimore Street, Suite 1404
      Baltimore,
      Maryland 21202
    10,000,000
    8.97%Mathew
      Urrea - Tres Santos Limited Partnership(2)
      7850
      Jefferson NE Suite 140
      Albuquerque,
      New Mexico 87109
    10,000,000
    8.97%Mathew
      Urrea - Urrea Family Limited Partnership(2)
      7850
      Jefferson NE Suite 140
      Albuquerque,
      New Mexico 87109
    8,000,000
    7.12%Daniel
      Urrea
      3009
      Charleston NE
      Albuquerque,
      New Mexico 87110
    5,046,000
    4.53%Richard
      Urrea
      600
      Alcalde SW #4D
      Albuquerque,
      New Mexico 87104
    4,721,000
    4.24%**ALL
      OFFICERS AND DIRECTORS**
      **AS
      A GROUP (2 PERSONS)**
    27,767,000
    25.0%
 
 (1)
    Applicable
      percentage of ownership is based on 111,282,750 shares of common stock
      outstanding as of March 31, 2005, together with applicable options for
      each shareholder. 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
      options that are currently exercisable or exercisable within 60 days of
      March 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. The common stock
      is the only outstanding class of equity securities of
    Nexicon.
  (2)
    Mathew
      Urrea is the Trustee for and has beneficial ownership of the common stock
      held by the Urrea Family through these two partnerships. Mathew Urrea is a
      brother to Richard Urrea and Daniel Urrea.
  
 ****
 **Item
12. Certain Relationships And Related Transactions**
  During
the years ended December 31, 2004 and 2003, the Company paid $0 and $12,500,
respectively, in consulting fees to related parties for services.
 
 At
December 31, 2004, the Company has recorded notes payable and accrued interest
payable to the president of its subsidiary OSSI, in the aggregate amount of
$21,741, including interest of $8,741. In addition, the Company owes this
individual $249,276 including $210,000 of prior year accrued and unpaid wages,
$19,022 of current year accrued wages and $20,054 of expense reimbursement. All
of these liabilities are included in Net Liabilities of Discontinued Operations
related to the SatSecure© System division at December 31, 2004, and payment of
these obligations is incorporated into the Stock Repurchase Agreement.
 
 Accrued
expenses - related party includes an aggregate of $300,000 of unpaid prior year
bonuses to employees and the Company’s website designer, all of whom are also
shareholders, plus $93,380 of current year accrued wages and $5,957 of expense
reimbursements payable to the Company’s employees/shareholders.
 
 During
the year ended December 31, 2004, the Company paid $100,200 to its affiliate
Mercury, as well as $74,864 to a company affiliated with certain shareholders,
for the cost of materials related to its ComSecure Controller product, which
amounts are included in cost of goods sold.
 
 
 On
November 19, 2003, Nexicon, Inc. purchased all of the outstanding common stock
of Orion Security Services, Inc. (“ OSSI ”), a
Wisconsin corporation. In the stock for stock purchase, Nexicon, Inc. issued
50,000,000 shares of common stock in exchange for all of the issued and
outstanding common stock of Orion Security Services, Inc.
 
 Nexicon
acquired the stock of OSSI from the following people in exchange for the number
of shares of Nexicon’s common stock set forth opposite their names:
 
 Name:
    
    No.
      of Shares:Robert
      V. Demson
    
    
    26,000,000Francisco
      Urrea, Jr.
    
    
    20,000,000Paul
      B. Goldberg
    
    
    1,800,000Harry A.
      Montefusco
    
    
    1,800,000John
      F. Morrison
    
    
    400,000
  
  **Item
13. Exhibits And Reports On Form 8-K**
  (a)  The
following exhibits are filed as part of this filing:
  **Exhibit
      No.**
    
    **Description**
    
    **Location**2.1
    
    Acquisition
      Agreement between AVE and DMI
    
    Incorporated
      by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.1
    
    Certificate
      of Amendment to Change name to AVE, Inc. dated May 7, 1990
    
    Incorporated
      by reference to Exhibit 2.7 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.2
    
    Certificate
      of Agreement of Merger of DeLuxe Onyx Company dated January 23,
      1987
    
    Incorporated
      by reference to Exhibit 2.8 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.3
    
    Certificate
      Amending Certificate of Incorporation dated January 23,
    1987
    
    Incorporated
      by reference to Exhibit 2.10 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.4
    
    Articles
      in Incorporation of Nexicon, Inc. the Wholly Owned Subsidiary of Nexicon,
      Inc. (formerly Ave, Inc.)
    
    Incorporated
      by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.5
    
    Certificate
      of Amendment to Articles of Nexicon, Inc. to change name from Ave, Inc. to
      Nexicon, Inc.
    
    Incorporated
      by reference to Exhibit 21.2 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.6
    
    Certificate
      of Amendment to Articles of Nexicon, Inc.
    
    Incorporated
      by reference to Exhibit 21.3 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.7
    
    By-Laws
      of Nexicon, Inc.
    
    Incorporated
      by reference to Exhibit 21.5 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      20013.8
    
    Certificate
      of Amendment to Articles of Incorporation of Nexicon, Inc. filed with
      Nevada Secretary of State on August 9, 2001
    
    Incorporated
      by reference to Exhibit 3.11 to Nexicon’s Registration Statement on
      Form SB-2 filed with the Securities and Exchange Commission on
      September 13, 20014.1
    
    Stock
      Specimen
    
    Incorporated
      by reference to Exhibit 2.4 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      200110.1
    
    Promissory
      note from Nexicon, Inc. to Francisco Urrea, Jr.
    
    Incorporated
      by reference to Exhibit 99 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 16,
      2001
  
  **Exhibit
      No.**
    
    **Description**
    
    **Location**
 10.2
    
    Asset
      Purchase and Investment agreement dated
      June
      13, 2003 between Nexicon, Inc. and
      American
      Indian Cigco, LLC.
    
    Incorporated
      by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form
      10QSB as filed with the Securities and Exchange Commission on August 19,
      2003.10.3
    
    Five
      Year Capital Note dated June 13, 2003,
      among
      Nexicon, Inc., American Indian Cigco, LLC
      and
      CigCo-Epic Venture.
    
    Incorporated
      by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form
      10QSB as filed with the Securities and Exchange Commission on August 19,
      200310.4
    
    Purchase
      Agreement dated November 19, 2003 between Nexicon, Inc. and Orion Security
      Services, Inc.
    
    Incorporated
      by reference to Exhibit 10.11 to the Company’s 8K dated November 19, 2003
      filed with the Securities and Exchange Commission on December 4,
      2003.10.5
    
    Standby
      Equity Distribution Agreement dated as March 2004 between Nexicon and
      Cornell Capital Partners, LP
    
    Incorporated
      by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10KSB
      as filed with the Securities and Exchange Commission on April 13,
      200410.6
    
    Registration
      Rights Agreement dated as of March 2004 between Nexicon and Cornell
      Capital Partners, LP
    
    Incorporated
      by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10KSB
      as filed with the Securities and Exchange Commission on April 13,
      200410.7
    
    Placement
      Agent Agreement dated as of March 2004 between Nexicon and Cornell Capital
      Partners, LP
    
    Incorporated
      by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10KSB
      as filed with the Securities and Exchange Commission on April 13,
      200410.8
    
    Employment
      Agreement dated as of January 1, 2004 between Nexicon and Richard
      Urrea
    
    Incorporated
      by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10KSB
      as filed with the Securities and Exchange Commission on April 13,
      200410.9
    
    Employment
      Agreement dated as of January 1, 2004 between Nexicon and Daniel
      Urrea
    
    Incorporated
      by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10KSB
      as filed with the Securities and Exchange Commission on April 13,
      200410.10
    
    Securities
      Purchase Agreement dated as of May 2004 between Cyco.net and Cornell
      Capital Partners, LP
    
    Incorporated
      by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form
      10QSB as filed with the Securities and Exchange Commission on May 18,
      200410.11
    
    Secured
      Debenture dated as of May 2004 given by Cyco.net to Cornell Capital
      Partners, LP
    
    Incorporated
      by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form
      10QSB as filed with the Securities and Exchange Commission on May 18,
      200410.12
    
    Investor
      Registration Rights Agreement dated as of May 2004 between Cyco.net and
      Cornell Capital Partners, LP
    
    Incorporated
      by reference to Exhibit 10.22 to the Company’s Quarterly Report on Form
      10QSB as filed with the Securities and Exchange Commission on May 18,
      2004
  
  **Exhibit
      No.**
    
    **Description**
    
    **Location**
 10.13
    
    Share
      Exchange Agreement between Nexicon, Inc. and the board of directors of
      Pluto Communications International, AS
    
    Incorporated
      by reference to Exhibit 10.24 to the Company’s Report on Form 8K as filed
      with the Securities and Exchange Commission on November 19,
      2004.14.1
    
    Code
      of Ethics
    
    Incorporated
      by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB
      as filed with the Securities and Exchange Commission on April 13,
      200431.1
    
    Certification
      by Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
    
    Provided
      herewith31.2
    
    Certification
      by Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
    
    Provided
      herewith32.1
    
    Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
    
    Provided
      herewith32.2
    
    Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
    
    Provided
      herewith
 (b) On
November 15, 2004, Nexicon, Inc. filed a report on Form 8K announcing the
acquisition of Pluto Communications International, AS.
  **Item
14. Principal Accountant Fees and Services**
  ***Audit
Fees.*** The
aggregate fees billed for professional services rendered was $35,254 and $15,575
for the audit of the Company’s annual financial statements for the fiscal years
ended December 31, 2004 and 2003, respectively, and the reviews of the financial
statements included in the Company’s Forms 10-QSB and 8K for those fiscal
years.
  ***Audit-Related
Fees.*** The
aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit or review of the Company’s financial statements and not
reported under the caption “Audit Fee.”
  ***Tax
Fees*** . No fees
were billed in each of the last two fiscal years for professional services
rendered by the principal accountant for tax compliance, tax advice and tax
planning services.
  ***All
Other Fees.*** Other
than the services described above, the aggregate fees billed for services
rendered by the principal accountant was $0 and $0, respectively, for the fiscal
years ended December 31, 2004 and 2003. These fees related to the review of the
Company’s Registration Statement.
 
 ***Audit
Committee Policies and Procedures.*** The Board
of Directors performs the duties of an audit committee. The Board of Directors
must pre-approve all auditing services and permitted non-audit services
(including the fees and terms thereof) to be performed for Nexicon by its
independent auditors, subject to the de minimus exceptions for non-audit
services described in Section 10A(i)(1)(B) of the Securities Exchange Act of
1934, which should be nonetheless be approved by the Board of Directors prior to
the completion of the audit. Each year the independent auditor’s retention to
audit our financial statements, including the associated fee, is approved by the
committee before the filing of the previous year’s annual report on Form 10-KSB.
At the beginning of the fiscal year, the Board of Directors will evaluate other
known potential engagements of the independent auditor, including the scope of
work proposed to be performed and the proposed fees, and approve or reject each
service, taking into account whether the services are permissible under
applicable law and the possible impact of each non-audit service on the
independent auditor’s independence from management. At each such subsequent
meeting, the auditor and management may present subsequent services for
approval. Typically, these would be services such as due diligence for an
acquisition, that would not have been known at the beginning of the
year.
 
 
 
 Since May
6, 2003, the effective date of the Securities and Exchange Commission rules
stating that an auditor is not independent of an audit client if the services it
provides to the client are not appropriately approved, each new engagement of
Stark Winter Schenkein & Co., LLP, has been approved in advance by the Board
of Directors, and none of those engagements made use of the de minimus exception
to the pre-approval contained in Section 10A(i)(1)(B) of the Securities Exchange
Act of 1934.




**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.




**NEXICON,
      INC.**Date:May
      6, 2005
    By:s/
      RICHARD URREARichard
      UrreaPresident
      and Chief Executive OfficerBy:/s/
      DANIEL URREADaniel
      UrreaChief
      Financial Officer





In
accordance with the Exchange 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:May
      6, 2005
    By:/s/
      RICHARD URREARichard
      UrreaDirector









**Nexicon,
Inc.**
 **Table
of Contents**
 
 PageReport
      of Independent Auditors
    F-1Consolidated
      Balance Sheet
    F-2Consolidated
      Statements of Operations
    F-3Consolidated
      Statements of Changes in Stockholders’ (Deficit)
    F-4Consolidated
      Statements of Cash Flows
    F-6Notes
      to Consolidated Financial Statements
    F6-F26
  
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Shareholders
and Board of Directors
 Nexicon,
Inc.
 
 We have
audited the accompanying consolidated balance sheet of Nexicon, Inc. (formerly
Cyco.Net, Inc.) as of December 31, 2004, and the related consolidated statements
of operations, stockholders' (deficit), and cash flows for the years ended
December 31, 2004 and 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates 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 financial statements referred to above present fairly, in all
material respects, the financial position of Nexicon, Inc. as of December 31,
2004, and the results of its operations, and its cash flows for the years ended
December 31, 2004 and 2003, in conformity with accounting principles generally
accepted in the United States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered recurring losses from operations
and has working capital and stockholders’ deficits. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
  Stark w Winter w Schenkein
& Co., LLP
 Denver,
Colorado
 April 14,
2005
  F-1
  NEXICON,
      INC.CONSOLIDATED
      BALANCE SHEETDECEMBER
      31, 2004ASSETSCURRENT
      ASSETSCash
    
    $
    5,874Restricted
      cash
    
    
    23,688Receivables,
      net of allowance for doubtfulaccounts
      of $40,297
    
    
    11,813Receivables
      - related parties
    
    
    8,325Receivable
      - AIC
    
    
    64,036Financing
      costs
    
    
    117,600Prepaid
      expense
    
    
    269Total
      current assets
    
    
    231,605PROPERTY
      AND EQUIPMENT, net of accumulateddepreciation
      of $127,196
    
    
    24,628OTHER
      ASSETSFinancing
      cost, net
    
    
    42,400Investment
      in Mercury
    
    
    147,851Deposits
    
    
    7,087Total
      other assets
    
    
    197,338$
    453,571LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
    
    $
    664,388Notes
      payable - Cornell Partners
    
    
    150,000Accrued
      expenses - shareholders
    
    
    399,337Deferred
      gain
    
    
    46,925Total
      current liabilities
    
    
    1,260,650CONVERTIBLE
      DEBENTURES
    
    
    425,000NET
      LIABILITIES OF DISCONTINUED OPERATIONS
    
    
    379,171STOCKHOLDERS'
      (DEFICIT)Common
      stock, $0.001 par value, 500,000,000 sharesauthorized,
      119,494,238 shares issued and outstanding
    
    
    119,494Additional
      paid-in capital
    
    
    12,719,552Deferred
      stock compensation
    
    
    (543,996
    )Stock
      subscription receivable
    
    
    (2,800,000
    )Accumulated
      (deficit)
    
    
    (11,233,530
    )(1,738,480
    )Other
      comprehensive income:Currency
      translation adjustment
    
    
    127,230(1,611,250
    )$
    453,571
  See
accompanying notes to the consolidated financial statements.
 F-2
 NEXICON,
      INC.CONSOLIDATED
      STATEMENTS OF OPERATIONSYEAR
      ENDED DECEMBER 31,2004
    
    2003REVENUES
    
    $
    495,990
    
    $
    -COSTS
      OF GOODS SOLD
    
    
    355,766
    
    
    -GROSS
      PROFIT
    
    
    140,224
    
    
    -OTHER
      COSTS AND EXPENSESGeneral
      and administrative
    
    
    1,471,697
    
    
    723,527Research
      and development
    
    
    75,138
    
    
    -Purchased
      research and development
    
    
    1,503,260
    
    
    -Non-cash
      stock compensation
    
    
    1,850,105
    
    
    -Loss
      on asset impairment
    
    
    -
    
    
    4,500,0004,900,200
    
    
    5,223,527OPERATING
      INCOME (LOSS)
    
    
    (4,759,976
    )
    
    (5,223,527
    )OTHER
      INCOME (EXPENSE)Interest
      income
    
    
    7,510
    
    
    5,100Interest
      expense
    
    
    (771
    )
    
    (2,603
    )Interest
      expense - non cash
    
    
    (85,200
    )Gain
      on sale of assets of discontinued operations
    
    
    75,716
    
    
    53,897(2,745
    )
    
    56,394(LOSS)
      BEFORE INCOME TAXES (BENEFIT)
    
    
    (4,762,721
    )
    
    (5,167,133
    )INCOME
      TAXES (BENEFIT)
    
    
    (247,000
    )
    
    99,000(LOSS)
      BEFORE DISCONTINUED OPERATIONS
    
    
    (4,515,721
    )
    
    (5,266,133
    )DISCONTINUED
      OPERATIONSNet
      income (loss) from discontinued operations, net of incometaxes
      (benefit) of ($247,000) and $99,000, respectively
    
    
    (972,734
    )
    
    362,770NET
      (LOSS)
    
    
    (5,488,455
    )
    
    (4,903,363
    )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
    
    
    44,322
    
    
    -NET
      COMPREHENSIVE (LOSS)
    
    $
    (5,444,133
    )
    $
    (4,903,363
    )WEIGHTED
      AVERAGE SHARES OUTSTANDING -BASIC
      AND DILUTED
    
    
    96,573,504
    
    
    39,499,292NET
      (LOSS) PER COMMON SHARE(Loss)
      from operations
    
    $
    (0.05
    )
    $
    (0.13
    )Income
      from discontinued operations
    
    
    (0.01
    )
    
    0.01Foreign
      currency translation adjustment
    
    
    -
    
    
    -$
    (0.06
    )
    $
    (0.12
    )
  See
accompanying notes to the consolidated financial statements.
 F-3
 NEXICON,
      INC.CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' (DEFICIT)YEARS
      ENDED DECEMBER 31, 2003 AND 2004Additional
    
    Deferred
    
    Stock
    
    
    
    CurrencyCommon
      Stock
    
    Paid
      in
    
    Stock
    
    Subscription
    
    Accumulated
    
    TranslationShares
    
    Amount
    
    Capital
    
    Compensation
    
    Receivable
    
    (Deficit)
    
    Adjustment
    
    TotalBalance
      at December 31, 2002
    
    
    31,496,419
    
    $
    31,496
    
    $
    668,309
    
    $
    -
    
    $
    -
    
    $
    (842,712
    )
    $
    -
    
    $
    (142,907
    )Shares
      issued at $.005 per share, pursuantto
      Equity Line of Credit draw
    
    
    1,219,512
    
    
    1,220
    
    
    4,228
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    5,448Shares
      issued for stock subscription at $1.40 per share
    
    
    2,000,000
    
    
    2,000
    
    
    2,798,000
    
    
    
    
    
    (2,800,000
    )
    
    -
    
    
    -
    
    
    -Shares
      issued for services at $.01 per share
    
    
    1,000,000
    
    
    1,000
    
    
    9,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    10,000Shares
      issued at OSSI purchase at $.09 per share
    
    
    50,000,000
    
    
    50,000
    
    
    4,218,432
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    4,268,432Purchase
      of OSSI
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Net
      (loss) for the year
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (4,902,363
    )
    
    -
    
    
    (4,902,363
    )Balance
      at December 31, 2003
    
    
    85,715,931
    
    
    85,716
    
    
    7,697,969
    
    
    -
    
    
    (2,800,000
    )
    
    (5,745,075
    )
    
    -
    
    
    (761,390
    )Shares
      issued for cash at $.05 - $.17 per share
    
    
    6,600,000
    
    
    6,600
    
    
    581,200
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    587,800Shares
      issued at $.07 - $.21 per share, pursuantto
      Equity Line of Credit repayments
    
    
    2,177,290
    
    
    2,177
    
    
    247,823
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    250,000Shares
      issued at $.07 - $.17 per share, pursuantto
      debenture conversions
    
    
    679,855
    
    
    680
    
    
    74,320
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    75,000Shares
      issued for services at $.12 - $.61 per share
    
    
    8,799,833
    
    
    8,800
    
    
    2,551,580
    
    
    (543,996
    )
    
    -
    
    
    -
    
    
    -
    
    
    2,016,384Shares
      issued for financing costs, pursuantto
      debenture issue at $.48 per share
    
    
    510,833
    
    
    511
    
    
    244,689
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    245,200Shares
      issued at Pluto purchase at $.12 per share,
    
    
    5,010,496
    
    
    5,010
    
    
    513,342
    
    
    -
    
    
    -
    
    
    -
    
    
    82,908
    
    
    601,260Liabilities
      assumed at Pluto purchase
    
    
    -
    
    
    -
    
    
    (83,371
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (83,371
    )Shares
      issued at Central Solutions investment at$.12
      per share pursuant to stock purchase agreement
    
    
    10,000,000
    
    
    10,000
    
    
    892,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    902,000Currency
      translation adjustment
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    44,322
    
    
    44,322Net
      (loss) for the year
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (5,488,455
    )
    
    -
    
    
    (5,488,455
    )Balance
      at December 31, 2004
    
    
    119,494,238
    
    $
    119,494
    
    $
    12,719,552
    
    $
    (543,996
    )
    $
    (2,800,000
    )
    $
    (11,233,530
    )
    $
    127,230
    
    $
    (1,611,250
    )
 See
accompanying notes to the consolidated financial statements.
 F-4
  NEXICON,
      INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSYEAR
      ENDED DECEMBER 31,2004
    
    2003OPERATING
      ACTIVITIESNet
      (loss)
    
    $
    (5,488,455
    )
    $
    (4,902,363
    )Adjustments
      to reconcile net (loss) to net cash(used
      in) operating activities:Amortization
    
    
    -
    
    
    10,000Depreciation
    
    
    22,829
    
    
    1,283Non-cash
      interest expense
    
    
    85,200
    
    
    -Loss
      on asset impairment
    
    
    -
    
    
    4,500,000Gain
      on sale of assets of discontinued operations
    
    
    (75,716
    )
    
    (53,897
    )Common
      stock issued for services and other non-cashitems,
      net of deferred compensation
    
    
    3,353,365
    
    
    10,000Currency
      translation adjustment
    
    
    44,322
    
    
    -Changes
      in assets and liabilities:(Increase)
      decrease in receivables
    
    
    (20,138
    )
    
    25,292Decrease
      in inventory
    
    
    -
    
    
    22,576(Increase)
      in other assets
    
    
    (5,451
    )
    
    -Increase
      in accounts payable and accrued expenses
    
    
    407,575
    
    
    23,180Increase
      in net assets of discontinued operations
    
    
    170,834
    
    
    208,337Increase
      in accounts and notes payable to related party
    
    
    -
    
    
    612Increase
      in accrued expenses - related party
    
    
    99,337
    
    
    106,400Net
      cash provided by (used in) operating activities
    
    
    (1,406,298
    )
    
    (48,580
    )INVESTING
      ACTIVITIES(Purchase)
      disposal of property and equipment
    
    
    (12,994
    )
    
    9,342Acquisition
      of Mercury
    
    
    (147,851
    )
    
    -Cash
      received in Pluto acquisition
    
    
    24,890
    
    
    -Cash
      received in OSSI acquisition
    
    
    -
    
    
    1,057Net
      cash (used in) investing activities
    
    
    (135,955
    )
    
    10,399FINANCING
      ACTIVITIESProceeds
      from sale of common stock
    
    
    587,800
    
    
    5,448Payments
      on notes payable - related party
    
    
    (1,000
    )
    
    (17,500
    )Proceeds
      from notes and debentures
    
    
    900,000
    
    
    -Proceeds
      from receivable - ACC
    
    
    75,716
    
    
    53,897Net
      cash provided by (used in) financing activities
    
    
    1,562,516
    
    
    41,845Net
      increase (decrease) in cash
    
    
    20,263
    
    
    3,664CASH
      AT BEGINNING OF YEAR
    
    
    9,299
    
    
    5,635CASH
      AT END OF YEAR
    
    $
    29,562
    
    $
    9,299SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid for interest
    
    $
    -
    
    $
    -Cash
      paid for income taxes
    
    $
    -
    
    $
    -
 See
accompanying notes to the consolidated financial statements.
 F-5
  NEXICON,
      INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSYEAR
      ENDED DECEMBER 31,2004
    
    2003SUPPLEMENTAL
      DISCLOSURE OF SIGNIFICANT NON-CASH FINANCING AND INVESTING
      ACTIVITIESIssuance
      of stock for services
    
    $
    -
    
    $
    10,000Account
      receivable - ACC, net of discount of $6,351
    
    $
    -
    
    $
    (193,649
    )Stock
      subscription receivable
    
    $
    -
    
    $
    (2,800,000
    )Sale
      of net assets of discontinued operations
    
    $
    -
    
    $
    17,112Issuance
      of stock for purchase of assets
    
    $
    -
    
    $
    4,268,432Issuance
      of common stock for financing costs
    
    $
    245,200
    
    $
    -Issuance
      of common stock for conversion of debt
    
    $
    325,000
    
    $
    -
  F-6
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 **Note
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Organization**
 
 Nexicon,
Inc. (the “Company”) is the successor to Cyco.Net, Inc, (formerly AVE, Inc. a
Nevada corporation) and operates through its wholly owned subsidiaries, Cyco.net
(a New Mexico corporation), Orion Security Systems (“OSSI”, a Wisconsin
corporation), and Pluto Communications International, AS (“Pluto”, a Norwegian
corporation), discussed below.
 
 Prior to
July 1, 2003, the Company’s primary line of business was the sale of cigarettes
through three websites to customers in the United States of America. Effective
July 1, 2003, the Company sold its internet tobacco products division, as more
fully discussed in Notes 6 and 12.
 
 On
November 19, 2003, the Company purchased all of the outstanding common stock of
Orion Security Systems, Inc., a Wisconsin corporation whose primary line of
business is the sale of its Satsecure© System and ComSecure© Controller, which
are designed to provide bi-directional video, audio, data and alarm transfer
between a wide variety of locations, including but not limited to land based
positions, airborn aircraft, ships at sea, and a command and control center (see
Note 13). In December 2004, management of the Company resolved to dispose of the
Satsecure© division of OSSI, as more fully discussed in Notes 6 and
12.
 
 On
November 15, 2004, the Company acquired all of the outstanding common stock of
Pluto Communications International, AS, a Norwegian corporation which provides a
variety of billing and customer care solutions for telecommunication carriers
and other network service providers via its “Charon” billing and customer care
real-time client/server system. The
“Charon” system provides a high-end Operational Support System (“OSS”) and
billing system to improve customer service (see Note 13).
 
 **Principles
of consolidation**
 
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
 
 **Equity
method of accounting for investments**
 
 Investments
in which the Company has a 20% to 50% interest are carried at cost, adjusted for
the Company’s proportionate share of their undistributed earnings or
loss.
 
 **Reclassifications**
 
 Certain
amounts presented in the previous year’s financial statements have been
reclassified to conform to the current year presentation.
 
 **Revenue
recognition**
 
 Prior to
July 1, 2003, the Company’s sole source of revenue was the sale of cigarettes
through its primary website (cyco.net), which has been designed as an “e-zine”,
and two ancillary websites (cycocigs.com and aabakismokes.com). The terms of
sale were FOB shipping point and the Company recorded revenue from cigarette
sales when the product shipped. As discussed in Notes 6 and 12, effective July
1, 2003, the Company sold its internet tobacco products division, accordingly
revenues and costs associated with the internet tobacco products division are
presented as discontinued operations.
 
 Effective
November 19, 2003 through November 14, 2004, the Company’s sole source of
revenue was the sale of the SatSecure© and ComSecure© systems discussed above.
The terms of sale are FOB shipping point and the Company records revenue when
the product is shipped. In December 2004, the Company determined to dispose of
the SatSecure© division of its business, which was consummated in March 2005
(see Note 12). Accordingly, the revenues and costs associated with the
SatSecure© division are presented as discontinued operations in the accompanying
financial statements.
 
 F-7
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 In
November 2004, the Company through Pluto, its wholly-owned Norwegian subsidiary,
added the service revenues from the sale of the “Charon” Billing and Operational
Support Systems in Norway and Sweden. Revenues are recognized at the completion
of the related services, when they are earned (see Note 13).
 
 **Discount
and fees related to the equity line of credit**
 
 The
discount and any related fees on the shares issued pursuant to the equity line
of credit agreement or the standby equity distribution agreement described in
Note 3 are treated as though they were commissions and are deducted from
additional paid in capital at the time the shares are issued.
 
 **Inventory**
 
 Inventory,
consisting of products available for sale, is stated at the lower of cost or
market. Cost is determined on a first-in, first-out basis.
 
 **Advertising**
 
 The
Company expenses all costs of advertising as incurred. Advertising costs
included in general and administrative expenses aggregated $17,961 in 2004 and
$10,060 in 2003.
 
 **Cash
and cash equivalents**
 
 For
purposes of balance sheet classification and the statements of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
 
 **Trade
and other receivables**
 
 Trade
receivables and other current receivables are stated on the balance sheet at
estimated net realizable value. Accounts receivable are comprised of balances
due from customers net of estimated allowances for uncollectible accounts. In
determining collectibility, historical trends are evaluated and specific
customer issues are reviewed to arrive at appropriate allowances. During 2004,
an allowance of $40,297 was recorded.
 
 **Fair
value of financial instruments**
 
 Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 2004. The
respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash and
cash equivalents, receivables, accounts payable and accrued expenses, and notes
payable. Fair values were assumed to approximate carrying values for these
financial instruments because they are short term in nature, their carrying
amounts approximate fair values, or they are receivable or payable on demand.
The fair value of long-term debt is based at current rates at which the Company
could borrow funds with similar remaining maturities.
 
 **Property
and equipment**
 
 Property
and equipment consists of furniture and office equipment, is stated at cost and
is being depreciated using the straight-line method over the estimated economic
lives of 3 to 5 years.
 
 **Impairment
of long-lived assets**
 
 The
Company periodically reviews the carrying amount of property, plant and
equipment and its identifiable intangible assets to determine whether current
events or circumstances warrant adjustments to such carrying amounts. If an
impairment adjustment is deemed necessary, such loss is measured by the amount
that the carrying value of such assets exceeds their fair value. Considerable
management judgment is necessary to estimate the fair value of assets;
accordingly, actual results could vary significantly from such estimates. Assets
to be disposed of are carried at the lower of their financial statement carrying
amount or fair value less costs to sell. The Company recorded an impairment loss
during 2003, as discussed in Note 13.
 
 F-8
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 ****
 **Deferred
offering costs**
 
 The
Company defers costs associated with the raising of capital until such time as
the offering is completed, at which time the costs are charged against the
capital raised. Should the offering be terminated the costs are charged to
operations during the period when the offering is terminated.
 
 **Net
(loss) per common share**
 
 The
Company calculates net income (loss) per share as required by Statement of
Financial Accounting Standards (“SFAS”) 128, “Earnings Per Share”. Basic
earnings (loss) per common share calculations are determined by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings (loss) per common share
calculations are determined by dividing net income (loss) by the weighted
average number of common shares and dilutive common share equivalents
outstanding. During the periods when they are anti-dilutive, common stock
equivalents, if any, are not considered in the computation.
 
 **Stock-based
compensation**
 
 The
Company accounts for equity instruments issued to employees for services based
on the fair value of the equity instruments issued and accounts for equity
instruments issued to other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable.
 
 The
Company accounts for stock based compensation in accordance with SFAS 123,
"Accounting for Stock-Based Compensation." The provisions of SFAS 123 allow
companies to either expense the estimated fair value of stock options or to
continue to follow the intrinsic value method set forth in Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" (“APB 25") but
disclose the pro forma effects on net income (loss) had the fair value of the
options been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans.
 
 **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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
 
 **Research
and development**
 
 Research
and development costs are expensed as incurred.
 
 **Segment
information**
 
 The
Company follows SFAS 131, “Disclosure about Segments of an Enterprise and
Related Information”. Certain information is disclosed, per SFAS 131, based on
the way management organizes financial information for making operating
decisions and assessing performance. The Company currently operates in one
business segment as it has disposed of certain of its business operations during
2003 and 2004, and will evaluate additional segment disclosure requirements as
it expands operations.
 
 **Concentrations**
 
 There
have been a number of adverse legislative, regulatory, political and other
developments concerning the tobacco industry that have received widespread media
attention. These developments have negatively affected the perception of
potential and current customers with respect to the tobacco industry, and
therefore had a significant influence in the Company’s decision to sell its
internet tobacco products division as discussed in Notes 6 and 12.
 
 F-9
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 ****
 **Translation
of financial statements**
 
 The
Company’s wholly-owned subsidiary Pluto (Note 13) operates in Norway. The
financial statements are translated from a functional currency (the Norwegian
Krǿner) which is not the U.S. dollar, in the following manner: assets and
liabilities at the year-end rate; stockholders’ (deficit) at historical rates
and results of operations at the daily average exchange rates for the
period.
 
 **Comprehensive
income**
 
 The
Company follows SFAS 130, “Reporting Comprehensive Income”. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements.
 
 **Recent
pronouncements**
 
 In
December 2004, the Financial Accounting Standards Board issued FASB
Interpretation Number 46-R “Consolidation of Variable Interest Entities”. FIN
46-R, which modifies certain provisions and effective dates of FIN 46, sets for
the criteria to be used in determining whether an investment is a variable
interest entity should be consolidated. These provisions are based on the
general premise that if a company controls another entity through interests
other than voting interests, that the company should consolidate the controlled
entity. The Company currently has no investments that qualify for consolidation
under the provisions of FIN 46-R.
 
 In
November 2004, the FASB issued SFAS 151, “Inventory Costs.” SFAS 151 amends the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) under the guidance in ARB 43, Chapter 4,
“Inventory Pricing.” Paragraph 5 of ARB 43, Chapter 4, previously stated that
“...under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges....” This Statement requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition, this Statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Management
does not expect adoption of SFAS 151 to have a material impact on the Company’s
financial statements.
 
 In
December 2004, the FASB issued SFAS 152, “Accounting for Real Estate
Time-Sharing Transactions.” The FASB issued this Statement as a result of the
guidance provided in AICPA Statement of Position (SOP) 04-2, “Accounting for
Real Estate Time-Sharing Transactions.” SOP 04-2 applies to all real estate
time-sharing transactions. Among other items, the SOP provides guidance on the
recording of credit losses and the treatment of selling costs, but does not
change the revenue recognition guidance in SFAS 66, “Accounting for Sales of
Real Estate,” for real estate time-sharing transactions. SFAS 152 amends
Statement 66 to reference the guidance provided in SOP 04-2. SFAS 152 also
amends SFAS 67, “Accounting for Costs and Initial Rental Operations of Real
Estate Projects”, to state that SOP 04-2 provides the relevant guidance on
accounting for incidental operations and costs related to the sale of real
estate time-sharing transactions. SFAS 152 is effective for years beginning
after June 15, 2005, with restatements of previously issued financial statements
prohibited. Management does not expect adoption of SFAS 152 to have a material
impact on the Company’s financial statements.
 
 In
December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets,” an
amendment to Opinion No. 29, “Accounting for Nonmonetary Transactions.”
Statement 153 eliminates certain differences in the guidance in Opinion No. 29
as compared to the guidance contained in standards issued by the International
Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair
value exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring
in periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS 153 to have a material impact
on the Company’s financial statements.
 
 F-10
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 In
December 2004, the FASB issued SFAS 123(R), “Share-Based Payment.” SFAS 123(R)
amends SFAS 123, “Accounting for Stock-Based Compensation,” and APB Opinion 25,
“Accounting for Stock Issued to Employees.” SFAS 123(R) requires that the cost
of share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS 123(R) applies to
all share-based payment transactions in which an entity acquires goods or
services by issuing (or offering to issue) its shares, share options, or other
equity instruments (except for those held by an ESOP) or by incurring
liabilities (1) in amounts based (even in part) on the price of the entity’s
shares or other equity instruments, or (2) that require (or may require)
settlement by the issuance of an entity’s shares or other equity instruments.
This statement is effective (1) for public companies qualifying as SEC small
business issuers, as of the first interim period or fiscal year beginning after
December 15, 2005, or (2) for all other public companies, as of the first
interim period or fiscal year beginning after June 15, 2005, or (3) for all
nonpublic entities, as of the first fiscal year beginning after December 15,
2005. Management is currently assessing the effect of SFAS No. 123(R) on the
Company’s financial statements.
 
 **Note
2. GOING CONCERN**
 
 The
Company’s financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.
 
 The
Company has experienced losses from operations as a result of its investment
necessary to achieve its operating plan, which is long-range in nature. For the
years ended December 31, 2004 and 2003 the Company incurred net (losses) of
($5,488,455) and ($4,902,363), respectively. At December 31, 2004, the Company
had a working capital (deficit) of $(1,029,045) and stockholders’ (deficit) of
$(1,611,250). In addition the Company is subject to legal action (see Note
11).
 
 The
Company’s ability to continue as a going concern is contingent upon its ability
to secure financing and attain profitable operations. In addition, the Company’s
ability to continue as a going concern must be considered in light of the
problems, expenses and complications frequently encountered by entrance into
established markets and the competitive environment in which the Company
operates. As discussed in Note 13, the Company purchased a wholly-owned
subsidiary, Pluto and through its “Charon“ Billing and Operational Support
System sales, in conjunction with ComSecure© Controller sales, through its
wholly-owned subsidiary OSSI, hopes to attain profitable
operations.
 
 The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
 
 **Note
3. STANDBY EQUITY DISTRIBUTION AGREEMENT**
 
 On August
16, 2001 the Company entered into an Equity Line of Credit agreement with
Cornell Capital Partners, L.P. (“Cornell”) which would have enabled the Company
to periodically issue and sell up to 40,000,000 shares of common stock for a
total purchase price of $5,000,000. As of December 31, 2003, the Company had
requested one advance under the terms of the Equity Line of Credit, resulting in
the issuance of 1,219,512 shares of common stock, for net cash proceeds of
$5,448.
 
 On March
23, 2004, the Company and Cornell entered into a Standby Equity Distribution
Agreement (“Standby Agreement”), pursuant to which the Company may, at its
discretion, periodically issue and sell to Cornell, up to $20,000,000 of the
Company’s common stock. The previous Equity Line of Credit agreement was
terminated upon execution of the Standby Agreement. As a condition precedent to
the execution of the Standby Agreement, the Company and Cornell entered into a
Registration Rights Agreement, whereby the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, related to the
shares issuable under the Standby Agreement. The commitment period for the
Standby Agreement extends through the earlier of such time as Cornell has made
aggregate advances of $20,000,000 or two years from the effective date of the
registration statement.
 
 F-11
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 The
Company is obligated to pay a cash commitment fee to Cornell equal to 5% of each
advance, payable directly from the gross proceeds of each advance, to be held in
escrow, pursuant to the Escrow Agreement entered into with Cornell. Effective
March 23, 2004, upon the execution of the Standby Agreement, the Company issued
490,000 shares of its common stock to Cornell at $.48 per share, $235,200. The
“Commitment” shares were valued at the fair market value of the shares at March
23, 2004, the date of execution of the Standby Agreement, and are capitalized as
financing costs and amortized as interest expense over the two year commitment
period of the Standby Agreement. Interest expense associated with the financing
costs amounted to $75,200 for the year ended December 31, 2004, at which date
the unamortized balance of the financing costs was $160,000. An additional
$10,000 of the Company’s common stock was issued to Newbridge Securities
Corporation (“Newbridge”), valued at the fair market value of the shares as of
March 23, 2004 (20,833 shares at $0.48 per share).
 
 On June
10, 2004, the Company filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, for the registration of 69,513,810 shares of
the Company’s common stock. The registration statement became effective on
August 11, 2004.
 
 As of
December 31, 2004, the Company has issued 510,833 shares of its common stock to
Cornell and Newbridge, with an aggregate value of $245,200 in connection with
these agreements.
 
 The
Company cannot predict the total number of shares to be issued or the gross
proceeds to be derived from the sale of such shares pursuant to the Standby
Agreement, as the purchase price of the shares will fluctuate based on the
prevailing market conditions. During the year ended December 31, 2004, 2,177,290
shares of the Company’s common stock with a fair market value of $250,000 were
issued pursuant to the Standby Agreement. In addition, the Company issued two
unsecured promissory notes to Cornell, bearing interest at 12% per annum,
totaling $400,000, and due within one year. The Company received $363,843, net
of financing costs of $36,157. As of December 31, 2004, after repayments of
$250,000 the balance due is $150,000 and the accrued interest is $3,096.
Subsequent to year end this obligation and the associated accrued interest were
paid in full.
 
 Subsequent
to December 31, 2004, the Company entered into additional unsecured promissory
notes bearing interest at 12% per annum and due November 26, 2005 in the
aggregate amount of $1,250,000. The Company received $1,140,132 net of financing
costs of $109,868. The Company has repaid $300,000 of these promissory notes. In
addition, pursuant to the Standby Agreement, the Company issued an additional
7,579,034 shares of its common stock for gross proceeds of $300,000 which was
used for partial repayment of the promissory notes. An additional 40,000,000
shares were issued and held in escrow in connection with the $1,000,000
promissory note effective March 3, 2005, as more fully discussed in Note 16.
 
 **Note
4. DEBENTURE AGREEMENT**
 
 In May
2004, the Company entered into a Securities Purchase Agreement, whereby up to
$500,000 of 5% secured, convertible debentures were issued. During the year
ended December 31, 2004, the Company received net proceeds of $369,323 after
payment of expenses in the amount of $130,677, from the sale of $500,000 worth
of debentures. The investor converted $75,000 worth of the debentures for
679,855 shares of the Company’s common stock. At December 31, 2004, the balance
of the debentures was $425,000 and the accrued interest was $12,801.
 
 The
debentures bear interest at 5% per annum and are secured by a security agreement
covering substantially all business assets. Principal plus accrued interest are
either payable in full two years after the date of issue, or convertible at the
Holder’s option, into shares of the Company’s common stock. The conversion
provision entitles the Holder at any time, and from time to time, to convert all
or any part of the principal plus accrued interest into the Company’s $.001 par
value common stock (the “Conversion Shares”), at a per share price equal to the
lesser of an amount equal to (i) 120% of the quoted closing bid price of the
stock on the date of the debenture, or (ii) 80% of the lowest quoted closing bid
price during the five trading days immediately preceding the conversion date.
Interest is payable at maturity or conversion, either in cash or shares of the
Company’s common stock, at the Holder’s option. If payment is made in the form
of common stock, the value will be calculated based on the quoted closing bid
price on the day the payment is due, or the day of payment, if later than the
due date.
 
 F-12
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 The
Company, at its option, may redeem all or a portion of the outstanding
debentures at a rate of 120% of the amount redeemed plus interest. In the event
of redemption, the Holder will receive a warrant to purchase 50,000 shares of
the Company’s common stock for every $100,000 redeemed, on a pro-rata basis.
Such warrants will be exercisable on a cash basis, at 120% of the quoted closing
bid price on the closing date. The warrants will have “piggy back” and demand
registration rights and will remain in effect for two years after the closing
date. The Company was required to register the resale of the Conversion Shares
under the Securities Act of 1933, as amended, pursuant to the terms of an
Investor Registration Rights Agreement, attendant to the Debenture Agreement.
Any discounts from the fair market value related to the above conversions will
be charged to interest at the time of conversion.
 
 Subsequent
to December 31, 2004, the Company converted an additional $20,000 worth of
debentures, resulting in the issuance of 417,000 shares of its common stock (see
Note 16).
 
 **Note
5. STOCKHOLDERS’ (DEFICIT)**
 
 On June
9, 2004, the Company filed an Amendment to its Articles of Incorporation to
increase its authorized capital to 500,000,000 shares of $.001 par value common
stock.
 
 During
the year ended December 31, 2004, the Company issued 6,600,000 shares of common
stock for cash consideration of $587,800. An additional 8,799,833 shares were
issued in exchange for services valued at $2,016,384, the fair market value of
the shares on the date the Company agreed to issue the stock. Included in those
issued for services were 3,800,000 shares issued to employees of the Company at
a value of $760,000. An additional 2,177,290 shares were issued in connection
with the Standby Agreement discussed in Note 3 and an additional 679,855 issued
in connection with the conversion of $75,000 worth of convertible debentures, as
described in Note 4. Deferred stock compensation at December 31, 2004 was
$543,996 to be amortized over the terms of certain consulting agreements
discussed more fully in Note 15.
 
 On June
10, 2004 the Company filed a registration statement on Form SB-2 under the
Securities Act of 1933, for the registration of 69,513,810 shares of the
Company’s common stock. Of these, 60,513,810 shares are offered pursuant to the
terms of the Standby Agreement discussed in Note 3 and 900,000 shares are for
the Secured Debentures discussed in Note 4. The registration statement became
effective on August 11, 2004.
 
 In
connection with the acquisition of Pluto, effective November 15, 2004, the
Company issued 5,010,496 shares of its common stock for all of the issued and
outstanding shares of Pluto. The shares were valued at their fair market value
as of November 15, 2004 (see Note 13).
 
 Effective
December 10, 2004 the Company issued 10,000,000 shares of its common stock in
exchange for 35% of the issued and outstanding shares of Central Solutions, Inc.
(“Central”). The shares were valued at their fair market value as of December
10, 2004 (see Note 13). The investment in Central is accounted for under the
equity method of accounting.
 
 Subsequent
to December 31, 2004, and as more fully described in Note 12, on March 17, 2005,
the Company entered into a Stock Repurchase Agreement with the President of
wholly-owned subsidiary OSSI, pursuant to which the Company agreed to repurchase
15,000,000 shares of the Company’s common stock in exchange for $20,000 in cash
and a promissory note in the amount of $220,000, plus all equipment, furniture
and computers located in the OSSI offices in McClean, Virginia, as well as
relinquishing all right title and interest the Company might have in certain
agreements related to the SatSecure© technology and various associated
tradenames.
 
 Subsequent
to December 31, 2004, the Company issued 5,338,000 shares of its common stock,
for cash of $230,000, debenture conversion of $20,000, and in connection with
the Standby Agreement (see Note 16).
 
 During
the periods covered by these financial statements the Company has issued shares
of common stock without registration under the Securities Act of 1933. Although
the Company believes that the sales did not involve a public offering of its
securities and that the Company did comply with the “safe harbor” exemptions
from registration, it could be liable for rescission of the issuances if such
exemptions were found not to apply and this could have a material negative
impact on the Company .
 
 F-13
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 ****
 **Note
6. DISCONTINUED OPERATIONS**
 
 Effective
July 1, 2003 the Company reached an agreement to sell its Internet tobacco
products division (See Note 12). The Company agreed to dispose of the division
due to the lack of working capital required to resolve the litigation issues as
discussed in Note 11.
 
 In
December 2004, the Company, through its wholly-owned subsidiary OSSI, decided to
discontinue its SatSecure© Systems division, pursuant to the terms of a Stock
Repurchase Agreement with the President of OSSI, which was consummated on March
17, 2005 (see Note 12).
 
 Operating
results of discontinued operations for the years ended December 31, 2004 and
2003 are shown separately in the accompanying statements of
operations.
 
 Net sales
and net income (loss) from discontinued operations are as follows:
 
 2004
    
    2003Net
      sales
    
    $
    174,810
    
    $
    2,887,704Net
      income (loss)
    
    $
    (972,734
    )
    $
    362,770
 
 Assets
related to discontinued operations, which were included in the sale, were as
follows as of December 31, 2003:
 
 Inventory
    
    $
    2,070Property
      and equipment - net
    
    
    3,295Intangible
      assets - net
    
    
    11,746Net
      assets of discontinued operations
    
    $
    17,111
 
 Net
liabilities of discontinued operations, which were included in the Stock
Repurchase Agreement, were as follows as of December 31, 2004:
 
 Property
      and equipment - net
    
    $
    16,020Deposits
    
    
    11,179Accounts
      payable and accrued expenses
    
    
    (135,353
    )Notes
      payable and accrued interest - related
    
    
    (21,741
    )Accrued
      expenses - shareholder
    
    
    (249,276
    )Net
      liabilities of discontinued operations
    
    $
    (349,171
    )
  **Note
7. RELATED PARTY TRANSACTIONS**
 
 During
the years ended December 31, 2004 and 2003, the Company paid $0 and $12,500,
respectively, in consulting fees to related parties for services.
 
 At
December 31, 2004, the Company has recorded notes payable and accrued interest
payable to the president of its subsidiary OSSI, in the aggregate amount of
$21,741, including interest of $8,741. In addition, the Company owes this
individual $249,276 including $210,000 of prior year accrued and unpaid wages,
$19,022 of current year accrued wages and $20,054 of expense reimbursement. All
of these liabilities are included in Net Liabilities of Discontinued Operations
related to the SatSecure© System division at December 31, 2004 (see Note 6), and
payment of these obligations is incorporated into the Stock Repurchase Agreement
discussed in Notes 5 and 12.
 
 F-14
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 Accrued
expenses - related party includes an aggregate of $300,000 of unpaid prior year
bonuses to employees and the Company’s website designer, all of whom are also
shareholders, plus $93,380 of current year accrued wages and $5,957 of expense
reimbursements payable to the Company’s employees/shareholders.
 
 During
the year ended December 31, 2004, the Company paid $100,200 to its affiliate
Mercury (Note 14), as well as $74,864 to a company affiliated with certain
shareholders, for the cost of materials related to its ComSecure Controller
product, which amounts are included in cost of goods sold.
  **Note
8. INCOME TAXES**
 
 The
Company accounts for income taxes under SFAS 109, "Accounting for Income Taxes”,
which requires use of the liability method. SFAS 109 provides that deferred tax
assets and liabilities are recorded based on the differences between the tax
bases of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences. Deferred tax assets
and liabilities at the end of each period are determined using the currently
enacted tax rates applied to taxable income in the periods in which the deferred
tax assets and liabilities are expected to be settled or realized. The types of
temporary differences between the tax basis of assets and their financial
reporting amounts that give rise to a significant portion of the deferred tax
asset are as follows:
 
 Reconciling
    
    TaxItem
    
    EffectNet
      operating loss carryforward
    
    $
    4,617,000
    
    $
    1,570,000
 
 A capital
loss carryforward of $25,000 expired in 2004 and the net operating loss
carryforward will expire through 2024.
 
 The
deferred tax asset has been fully reserved as of December 31, 2004. The change
in the valuation allowance for the deferred tax asset during the year ended
December 31, 2004 was an increase of $(292,000). The principal difference
between the net operating loss for financial reporting purposes and income tax
purposes results from non-cash interest, services and other non—cash interest
and services.
 
 **Note
9. STOCK BASED COMPENSATION**
 
 **Stock
Options**
 
 The
Company has a compensatory stock option plan. Under the plan, the Company may
grant options for up to 4,000,000 shares of common stock. The exercise price of
each option shall be determined by the Compensation Committee or by the CEO with
reference to factors such as current fair market value of the common stock, net
book value per share, regular or other remuneration already being received by
the optionee. The maximum term of the options is five years and they vest on the
date granted. All options outstanding at December 31, 2004 have been granted to
employees.
 
 Summarized
information relative to the Company’s stock option plan is as
follows:
 
 Number
      of
    
    Weighted
      AverageShares
    
    Exercise
      PriceOutstanding
      at January 1, 2004
    
    
    1,350,000
    
    
    0.08Granted
    
    
    -
    
    
    -Exercised
    
    
    -
    
    
    -Forfeited
    
    
    (600,000
    )
    
    -Outstanding
      at December 31, 2004
    
    
    750,000
    
    $
    0.08
 
 F-15
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 An option
for 600,000 shares expired in 2004 and an option for 750,000 shares expires in
2006.
 
 The
effect of applying SFAS 123 pro forma net (loss) is not necessarily
representative of the effects on reported net income (loss) for future years due
to, among other things, the vesting period of the stock options and the fair
value of additional stock options in future years.
 
 **NOTE
10. STOCK PURCHASE WARRANT**
 
 During
the year ended December 31, 2001 the Company issued a stock purchase warrant,
exercisable for 300,000 shares of common stock, expiring on August 16, 2006. The
exercise price of the warrant is the lower of (i) 120% of the closing price of
the Company’s stock on August 16, 2001, or (ii) the lowest price at which the
Company issues or sells common stock subsequent to August 16, 2001. After such
adjustment, the number of shares is also adjustable by the former exercise price
multiplied by the number of shares divided by the new exercise
price.
 
 During
the year ended December 31, 2002 the Company was required to change the terms of
the warrant. As of December 31, 2004 the warrant is exercisable into 1,440,000
shares of common stock at $0.03 per share. The warrant expires on August 16,
2006.
 
 **Note
11. CONTIGENT LIABILITY**
 
 On April
1, 2003, the State of California filed a civil action in the Superior Court of
California, County of San Diego, against the Company’s subsidiary, alleging
sales of cigarettes to minors, deceptive failure to file Jenkins Act reports and
inform California consumers that they are required to pay sales taxes to
California. Based on these factual assertions, the suit’s three counts allege
false or misleading advertising under California Business and Profession Code
17500: failure to notify California purchasers of their obligations under
California Revenue and Business and Professions Code 17200. The suit sought
injunctive relief and assessment of civil penalties of $2,500 for each
violation, and the State of California was settled for $25,000 in May
2004.
 
 On April
1, 2003, the State of Washington filed a civil action in the State of
Washington, King County Superior Court against the Company’s subsidiary alleging
sales of cigarettes to minors, deceptive failure to file Jenkins Act reports and
inform Washington consumers that they are required to pay sales taxes to the
State of Washington. The suit’s four counts alleged unfair business practice,
unfair method of compensation and misrepresentation. The suit sought injunctive
relief restraining Nexicon, Inc. from continuing to engage in unlawful conduct,
restitution to consumers and civil penalties of up to $2,000 per violation, plus
attorneys’ fees and costs. Subsequent to December 31, 2005, the parties settled
for $10,000 in April 2004.
 
 On April
1, 2003, the State of Oregon filed a civil action in the State of Oregon, Marion
County against the Company’s subsidiary alleging the sale of one carton of
cigarettes to a minor using her mother’s name and credit card, in violation of
State Unlawful Trade Practices Act. The suit sought to enjoin the Company from
doing business in Oregon, and was settled in the fall of 2003, for $2,000, with
no admission of liability.
 
 On
January 28, 2003, the Company was named in a civil suit filed by the City of New
York as one of approximately a dozen defendants who are engaged in the business
of internet online tobacco sale. The suit alleges that the Company failed to
report the names and addresses of its customers to taxing authorities. The
extent of the city’s damages is yet to be determined at trial. The
Company has contested the allegations and believes it has meritorious defenses.
Outside counsel for the Company has advised that at this stage in the
proceedings they cannot offer an opinion as to the probable outcome of the
case. ****
 
 On July
10, 2003, the State of Vermont, filed a civil action in Chittenden County
against the Company’s subsidiary, alleging the sale of cigarettes to a minor in
violation of seven Vermont Statutes, deceptive failure to file Jenkins Act
reports and inform the Vermont consumers they are required to pay Vermont sales
taxes. The suit sought to enjoin the Company from doing business in the State of
Vermont, pay civil damages of up to $10,000 for each sale to a minor, plus
attorney’s fees and expenses. The State of Vermont settled for $4,000 in April
2004.
 
 F-16
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 During
2003, the State District Court of Travis County, Texas alleged that the Company
did not take effective measures to prevent the sale of tobacco products to
minors, in violation of the Texas Deceptive Trade Practices - Consumer
Protection Act. This case was settled in September 2004 for $3,000.
 
 **Note
12. SALE OR DISPOSITION OF BUSINESS**
 
 **Internet
tobacco products**
 
 Effective
on July 1, 2003 the Company agreed to sell its Internet tobacco products
business to American Indian CigCo, LLC (AIC). In conjunction with this purchase
AIC agreed to purchase 2,000,000 shares of the Company’s common stock. The
purchase price aggregated $3,000,000 in the form of 2 notes payable as
follows:
 
 ·
    Payment
      for the assets of the business in the form of a note in the amount of
      $200,000 payable in 12 equal monthly installments of $16,667 commencing on
      August 1, 2003. The balance of the note is $64,036 at December 31,
      2004.
 
 ·
    Payment
      for the 2,000,000 common shares is payable in the form of a $2,800,000
      note with interest at 7% per annum, on an interest only basis. The
      interest payments are due annually commencing on July 31, 2004 and the
      principal balance is due on July 31, 2008. Accrued interest receivable of
      $98,000 has not been reflected in the accompanying financial statements,
      as recognition will occur as proceeds are
received.
 
 Because
the sale of the business and the common shares were made to a thinly capitalized
entity and significant uncertainties exist related to the collectibility of the
amounts due, the gain from the sale of the business will be deferred until such
time as the proceeds are collected or until such time as the cash flows from the
operating activities of the business sold are sufficient to fund the debt
service. The deferred portion of the gain on the sale of the business
aggregating $46,925 at December 31, 2004 is reflected as deferred revenue (see
discontinued operations at Note 6).
 
 In
addition, interest income from the $2,800,000 note receivable will be recognized
as the proceeds are collected and the unpaid portion of the principal balance
will be recorded as a reduction of stockholders’ equity.
 
 **SatSecure©
Systems**
 
 In
December 2004, the Company decided to discontinue operations of its OSSI
SatSecure© Systems business, pursuant to the terms of a Stock Repurchase
Agreement which was consummated March 17, 2005. The Company agreed to repurchase
15,000,000 shares of its common stock held by the president of OSSI for a total
purchase price of $240,000 payable as $20,000 at closing and a note payable for
$220,000 payable in successive $20,000 increments on or before the
15 th of the
month for 11 consecutive months, plus equipment located in the OSSI facility
with a net book value of $16,020, which is included in net liabilities of
discontinued operations at December 31, 2004. In addition, the Company
relinquished all right title and interest in any agreements associated with the
SatSecure© technology and to various associated tradenemes. Accordingly, all
revenues and associated costs related to the SatSecure© product are reflected as
discontinued operations in the accompanying financial statements (Note
6).
 
 **NOTE
13. ACQUISITION OF ASSETS AND LOSS ON ASSET IMPAIRMENT**
 
 **OSSI**
 
 Effective
November 19, 2003, Nexicon, Inc. entered into a merger agreement with Orion
Security Services, Inc. (“OSSI”), a Wisconsin corporation in the development
stage, that provides secure computer network and management solutions, and video
surveillance systems via satellite communication. The business combination has
been accounted for as a purchase. The results of operations of OSSI have been
included in the accompanying financial statements since the effective date of
the acquisition. In exchange for all of the issued and outstanding common shares
of OSSI, the Company issued 50,000,000 shares of its common stock valued at
$4,500,000. The shares were valued at $.09 per share, the fair market value at
November 19, 2003. As of December 31, 2003, the Company recorded a loss on asset
impairment related to this investment, in the amount of $4,500,000, which was
charged to operations.
 
 F-17
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 The
purchase price was allocated as follows:
 
 Current
      assets
    
    $
    1,057Property
      and equipment
    
    
    9,613Current
      liabilities
    
    
    (242,238
    )Net
      liabilities acquired
    
    $
    (231,568
    )
 
 The
assets acquired and liabilities assumed were recorded at the historical basis of
OSSI. The excess of the purchase price paid over the value of the assets
acquired was recorded as impairment of assets of $4,500,000 in
2003.
 **Pluto**
 
 Effective
November 15, 2004, the Company entered into a share exchange agreement with
Pluto Communications International, AS (“Pluto”) a Norwegian company, that
provides a range of billing and customer care solutions for telecommunication
carriers and service providers via their “Charon” billing and customer care
real-time, client/server system. Pursuant to a Share Exchange Agreement between
the Company and Pluto, Inc., dated June 16, 2004 and amended on November 15,
2004 to change the date of Closing to the date thereof, the Company issued
5,010,496 shares of common stock to Pluto in exchange for all of the issued and
outstanding common stock of Pluto, which consists of 2,385,950 shares of common
stock. The business combination has been accounted for as a purchase. The shares
were valued at $.12 per share, the fair market value at November 15, 2004
($601,260). The results of operations of Pluto have been included in the
accompanying financial statements since the effective date of the acquisition.
Pluto will continue its operations in Norway and will operate as a 100% wholly
owned subsidiary of the Company.
 
 The
purchase price was allocated as follows:
 
 Current
      assets
    
    $
    93,327Property
      and equipment 37,283Other
      assets
    
    
    7,221Current
      liabilities
    
    
    (221,202
    )Net
      liabilities acquired
    
    $
    (
      83,371
    )
 
 The
assets acquired and liabilities assumed were recorded at the historical basis of
Pluto, translated from the functional currency of Norwegian Krǿner into U.S.
dollars as of the date of acquisition, November 15, 2004. Included in restricted
cash, is $23,688 temporarily restricted to cover a portion of the Pluto
employees’ payroll tax withholdings, as required by Norwegian law. Since the
funds are periodically remitted to the related taxing authorities, this amount
is presented as a current asset at December 31, 2004. The excess of the purchase
price paid over the value of the assets acquired, has been recorded as purchased
research and development in the amount of $601,260 and charged to operations
during the period ended December 31, 2004.
 
 The
following unaudited summarized pro forma information assumes the acquisition had
occurred on January 1, 2004:
 
 Net
      sales
    
    $
    731,385Net
      (loss)
    
    $
    (6,039,227
    )(Loss)
      per share:basic
      and diluted
    
    $
    (0.06
    )
 
 F-18
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 ****
 **Central
Solutions**
 
 Effective
December 10, 2004, the Company entered into a marketing and distribution
agreement with Central Solutions, Inc. (“Central”), a Delaware corporation,
whereby the Company granted Central the right to market, distribute and support
any and all technology directly or indirectly controlled, licensed, owned joint
ventured or otherwise approved for the Company, exclusively in the healthcare
markets in the U.S. and Canada. In connection with this, the Company issued
10,000,000 shares of its restricted common stock in exchange for 35% of
Central’s issued and outstanding common stock. The excess of the purchase price
paid over the value of the assets acquired, has been recorded as purchased
research and development in the amount of $902,000 and charged to operations
during the period ended December 31, 2004.
 
 **Mercury
Mobile**
 
 Effective
May 18, 2004, the Company entered into a Stock Purchase Agreement with Mercury
Mobile AS (“Mercury”), a Norwegian Corporation, whereby the Company purchased
58,845 shares (2.5% of the then issued and outstanding Mercury shares) of
Mercury for cash in the amount of $147,851. Management of the Company believes
this investment to be fully realizable, therefore no impairment has been
recorded as of December 31, 2004. During the year ended December 31, 2004, the
Company paid $100,200 to Mercury for certain materials related to its ComSecure
Controller product, which amount is included in cost of goods sold (see Note
7).
 
 **NOTE
14. EXCLUSIVE PURCHASE AND SUPPLY AGREEMENT**
 
 Effective
October 27, 2003, the Company through its wholly-owned subsidiary OSSI, entered
into an exclusive purchase and supply agreement for certain specialized
equipment, with the manufacturer, a foreign entity. The term of the agreement
extends through December 31, 2006 and provides for two automatic two-year
extensions. The agreement calls for an annual minimum purchase quota of
£160,000, denominated in UK Pounds. Pursuant to the terms of the Stock
Repurchase Agreement discussed in Note 12., this agreement transferred to the
president of OSSI, therefore as of March 17, 2005, the Company has no further
obligation under this agreement.
 
 **NOTE
15. COMMITMENTS**
 
 **Employment
agreements**
 
 As a
condition to the OSSI stock purchase agreement (Note 13), effective January 1,
2004, the Company has negotiated an employment agreement with the CEO/President
of OSSI. The agreement provides for an annual salary of $225,000 through
December 31, 2008. Effective March 17, 2005, this individual has resigned, as a
condition to the Stock Repurchase Agreement and discontinued operations related
to the OSSI SatSecure© Systems division (see Notes 6 and 12). Payment of prior
amounts owed to him for accrued salary and expenses are incorporated into the
payment structure of the Stock Repurchase Agreement.
 
 Effective
January 1, 2004, the Company has entered into employment agreements with its
three employees. The agreements call for aggregate annual salaries of $294,000,
through December 31, 2008. At December 31, 2003, $93,380 is included in accrued
expenses related to these employment agreements.
 
 **Distributor
agreement**
 
 Effective
January 1, 2004, the Company, through its wholly-owned subsidiary OSSI, entered
into an exclusive distributor agreement with a foreign entity. As per the terms
of the agreement, OSSI is granted an exclusive license to distribute, promote,
sell, install, service and otherwise maintain and reproduce by its own means,
certain surveillance equipment to the U.S. government as well as non-exclusive
rights to certain equipment for both the U.S. governmental and commercial
entities. The term of the agreement extends to December 31, 2007 and provides
for an automatic two-year renewal period. The agreement calls for the sale of a
minimum of fifty licenses, of which at least five must be “Advanced”. The cost
per license for both the Advanced and Basic systems is, $80,000 and $40,000,
respectively, with annual support agreement costs of $20,000 and $10,000,
respectively.
 
 F-19
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 ****
 **Operating
leases**
 
 On
January 29, 2004, the Company entered into an operating lease agreement for
office space for its subsidiary, OSSI. The term commences February 1, 2004 and
continues through April 30, 2007. The Company remains liable on the OSSI lease
through its term and is actively pursuing a sublessee, since the McClean, VA
operations have been discontinued (see Notes 6 and 12). Effective April 1, 2004,
the Company entered into an operating lease agreement for its corporate
headquarters in Albuquerque, NM, commencing April 1, 2004 and continuing through
March 31, 2006.
 
 Future
minimum lease payments pursuant to these agreements are as follows:
 
 Year
      endedDecember
      31
    
    Amount2005
    
    $
    85,7202006
    
    
    87,7812007
    
    
    24,253$
    197,754
 
 Aggregate
rent expense amounted to $74,040 and $18,968 for the years ended December 31,
2004 and 2003, respectively, of which $22,508 and $3,302, respectively are
included in discontinued operations (Note 6) and $51,532 and $15,666,
respectively, are included in general and administrative expenses.
 
 **Consulting
agreements**
 
 Effective
June 1, 2004, the Company entered into an agreement for financial consulting
services. As consideration for the services, the Company issued 3,000,000 shares
of its restricted common stock to this individual. The shares were valued at the
fair market value of the stock on the effective date of the agreement, and will
have piggy-back registration rights for a period of three years. As of December
31, 2004, $667,342 has been expensed as stock compensation and $472,658 is
reflected as deferred stock compensation. In addition, the Company has agreed to
issue 1,500,000 and 1,500,000 additional shares to the consultant at September
1, 2005 and 2006, respectively, at prices to be determined in the future, based
on the then fair market value of the stock.
 
 Effective
June 14, 2004, the Company entered into a one year agreement for research and
public relations services to be provided through June 15, 2005. As consideration
for these services, the Company issued 186,000 shares of its restricted common
stock. The shares were valued at the fair market value of the stock on the
effective date of the agreement. As of December 31, 2004, $33,673 has been
expensed as stock compensation and $20,267 is reflected as deferred stock
compensation.
 
 Effective
November 3, 2004, the Company entered into a twelve month agreement for investor
/media relations consulting services to be provided through November 30, 2005
and continuing on a month to month basis thereafter. The agreement calls for
monthly payments of $7,500 plus approved expenses. As a condition to the
agreement, the Company issued 499,500 shares of its restricted common stock to
the consultant. The shares were valued at the fair market value of the stock on
the effective date of the agreement. As of December 31, 2004, $8,869 has been
expensed as stock compensation and $51,071 is reflected as deferred stock
compensation. In addition, the Company has agreed to issue the consultant 45,500
shares of its restricted common stock per month, throughout the term of the
engagement. Further, and subject to certain performance objectives, the
consultant will be eligible for a discretionary bonus of up to 1,000,000 shares.
In the event the Company files a registration statement, the consultant shares
will have “piggy-back” and demand registration rights.
 
 F-20
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 ****
 **NOTE
16. SUBSEQUENT EVENTS**
 
 **Stock
issuance**
 
 Subsequent
to December 31, 2004, the Company issued an aggregate of 500,000 shares of its
common stock for cash in the amount of $30,000, 417,000 shares in connection
with the conversion of $20,000 worth of debentures, as well as 7,579,034 shares
in connection with the Standby Agreement (Note 3).
 
 On
January 14, 2005, the Company issued an unsecured promissory note to Cornell in
the amount of $250,000 and received net proceeds of $225,033 after payment of
financing costs of $24,967. Effective March 3, 2005, the Company issued an
additional unsecured promissory note to Cornell in the amount of $1,000,000 and
received net proceeds of $915,099, after payment of financing costs of $84,901.
The loan is evidenced by a promissory note dated March 3, 2005, which bears
interest at a rate of 12% per annum and is due within 296 days of the execution
of the note (November 26, 2005), unless otherwise mutually extended. As a
condition precedent to the loan, the Company agreed to issue and hold in escrow
40,000,000 shares of its common stock to be released in connection with
repayment of the loan.
  F-21
 NEXICON,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2004
 
 Nexicon,
Inc.
 Table of
Contents
 
 PageReport
      of Independent Auditors
    
    1Consolidated
      Balance Sheet
    
    2Consolidated
      Statements of Operations
    
    3Consolidated
      Statements of Changes in Stockholders’ (Deficit)
    
    4Consolidated
      Statements of Cash Flows
    
    5-6Notes
      to Consolidated Financial Statements
    
    7-21