UNITED
                STATES
              SECURITIES
                AND EXCHANGE COMMISSION
              WASHINGTON,
                D.C. 20549
              
              FORM
                10-QSB
              
              QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES
                EXCHANGE ACT OF 1934
              
              For
                the Quarter Ended September 30, 2006
              
              OR
              
              TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES
                EXCHANGE ACT OF 1934
              
              Commission
                file number 000-12382
              
              VERIDICOM
                INTERNATIONAL, INC.
              (Exact
                name of small business issuer as specified in its charter)Delaware
              (State
                or other jurisdiction of
              incorporation
                or organization)
            95-2577731
              (I.R.S.
                Employer Identification No.)21
                Water Street
              Vancouver,
                British Columbia
              (Address
                of principal executive offices)
            V6B
                1A1
              (Postal
                Code)(604)
                696-0633
              (Registrant's
                telephone number, including area code)
              
              __________________________________________
              (Former
                name or former address, if changed since last report)Indicate
                by check mark whether the registrant (1) has filed all reports required
                to
                be filed by Section 13 or 15(d) of the Securities Exchange Act of
                1934
                during the preceding 12 months (or for such shorter period that the
                registrant was required to file such reports), and (2) has been subject
                to
                such filing requirements for the past 90 days.Yes
                x
            No
                oIndicate
                by check mark whether the registrant is a shell company (as defined
                in
                Rule 12b-2 of the Exchange Act).Yes
                o
            No
                xThere
                were 55,362,364 shares outstanding of registrant's Common Stock,
                par value
                $.001 per share, as of November 17, 2006.Transitional
                Small Business Disclosure Format (check one): Yes o No x







VERIDICOM
                INTERNATIONAL, INC.
              FORM
                10-QSB INDEXPAGEPART
                IFINANCIAL
                INFORMATIONItem
                1
            Financial
                Statements (Unaudited):
            F-1a.
            Consolidated
                Balance Sheets as of September 30, 2006 and December 31, 2005
            F-1b.
            Consolidated
                Statements of Operations and Other Comprehensive Income (Loss) for
                the
                three and nine months ended September 30, 2006 and 2005
            F-2c.
            Consolidated
                Statements of Cash Flows for the three and nine months ended September
                30,
                2006 and 2005
            F-3d.
            Notes
                to Unaudited Consolidated Financial Statements
            F-4
                to F-15Item
                2
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            16Item
                3
            Controls
                and Procedures
            35PART
                II OTHER INFORMATION
            37Item
                1
            Legal
                Proceedings
            37Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            38Item
                3
            Defaults
                Upon Senior Securities
            38Item
                4
            Submission
                of Matters to a Vote of Security Holders
            39Item
                5
            Other
                Information
            39Item
                6
            Exhibits
            39SIGNATURES
            40










PART
      I
      - FINANCIAL INFORMATION




ITEM
      1
      FINANCIAL STATEMENTS




Veridicom
      International, Inc .


Consolidated
      Balance Sheets


(Expressed
      in U.S. dollars)


(Unaudited)





September
                30,
              2006
              $
            
            December
                31,
              2005
              $ASSETSCurrent
                AssetsCash
            
            
            476,619
            
            
            -Accounts
                receivable, net
            
            
            600,066
            
            
            47,358Accounts
                receivable, related parties (Note 3)
            
            
            160,931
            
            
            119,378Inventory
            
            
            283,390
            
            
            469,609Other
                current assets
            
            
            9,333
            
            
            18,457Total
                current assets
            
            
            1,530,339
            
            
            654,802Property
                & equipment, net (Note 4)
            
            
            38,465
            
            
            107,897Patents
            
            
            200,000
            
            
            200,000Goodwill
            
            
            2,570,806
            
            
            2,570,806Deferred
                finance costs, net
            
            
            619,647
            
            
            807,969Total
                Assets
            
            
            4,959,257
            
            
            4,341,474LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
                LiabilitiesBank
                indebtedness
            
            
            -
            
            
            769Accounts
                payable
            
            
            1,667,304
            
            
            1,456,722Accrued
                expenses
            
            
            6,032,070
            
            
            2,711,612Due
                to related parties (Note 5)
            
            
            102,830
            
            
            117,237Notes
                payable, current portion (Note 6)
            
            
            479,388
            
            
            80,050Notes
                payable - related parties, current portion (Note 7)
            
            
            89,812
            
            
            53,000Convertible
                notes payable, current portion
            
            
            1,847,987
            
            
            887,603Deferred
                revenue
            
            
            266,410
            
            
            -Other
                current liabilities
            
            
            37,799
            
            
            52,306Total
                current liabilities
            
            
            10,523,600
            
            
            5,359,299Notes
                payable, less current portion (Note 6)
            
            
            -
            
            
            366,214Notes
                payable - related parties, less current portion (Note 7)
            
            
            -
            
            
            36,812Other
                liabilities
            
            
            8,609
            
            
            89,044Total
                Liabilities
            
            
            10,532,209
            
            
            5,851,369Non-controlling
                interest
            
            
            45,226
            
            
            28,980Contingencies
                and Commitments (Notes 1 and 9)Stockholders’
                Equity (Deficit)Preferred
                stockAuthorized:
                2,000,000 shares, par value $0.001Issued
                and outstanding: nil shares
            
            
            -
            
            
            -Common
                stockAuthorized:
                60,000,000 shares, par value $0.001Issued
                and outstanding: 53,596,490 shares(December
                31, 2005 - 26,246,981 shares)
            
            
            53,596
            
            
            26,246Additional
                Paid-in Capital
            
            
            23,845,626
            
            
            20,804,835Accumulated
                Other Comprehensive Loss
            
            
            (442,220
            )
            
            (230,634
            )Deficit
                Accumulated
            
            
            (29,075,180
            )
            
            (22,139,322
            )Total
                Stockholders’ Equity (Deficit)
            
            
            (5,618,178
            )
            
            (1,538,875
            )Total
                Liabilities and Stockholders’ Equity (Deficit)
            
            
            4,959,257
            
            
            4,341,474




The
        accompanying notes are an integral part of these consolidated financial
        statements


F-1


Veridicom
      International, Inc.


Consolidated
      Statements of Operations and Other Comprehensive Loss


(Expressed
      in U.S. dollars)


(Unaudited)





For
                the
              Three
                Months Ended
              September
                30,
            
            For
                the
              Three
                Months
              Ended
              September
                30,
            
            For
                the
              Nine
                Months
              Ended
              September
                30,
            
            For
                the
              Nine
                Months
              Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005$
            
            $
            
            $
            
            $Revenues
            
            
            971,351
            
            
            130,879
            
            
            1,303,135
            
            
            339,686Cost
                of goods sold
            
            
            92,576
            
            
            27,215
            
            
            280,962
            
            
            172,728Gross
                Profit
            
            
            878,775
            
            
            103,664
            
            
            1,022,173
            
            
            166,958Operating
                ExpensesDepreciation
            
            
            9,472
            
            
            21,087
            
            
            36,590
            
            
            56,043General
                and administrative
            
            
            388,501
            
            
            789,673
            
            
            1,390,164
            
            
            2,597,551Impairment
                loss on tangible assets
            
            
            -
            
            
            -
            
            
            28,827
            
            
            -Research
                and development
            
            
            122,603
            
            
            387,349
            
            
            357,965
            
            
            944,243Total
                Operating Expenses
            
            
            520,576
            
            
            1,198,109
            
            
            1,813,546
            
            
            3,597,837Profit
                (Loss) from Operations
            
            
            358,199
            
            
            (1,094,445
            )
            
            (791,373
            )
            
            (3,430,879
            )Other
                income (expense):Financing
                costs
            
            
            (172,859
            )
            
            -
            
            
            (1,257,788
            )
            
            -Gain
                (loss) on forgiveness of debt
            
            
            -
            
            
            281,489
            
            
            -
            
            
            396,792Interest
                expense
            
            
            (1,142,547
            )
            
            (1,000,454
            )
            
            (2,607,605
            )
            
            (2,067,461
            )Liquidated
                damages (Note 10)
            
            
            (753,135
            )
            
            -
            
            
            (2,251,671
            )
            
            -Other
                income (loss)
            
            
            1,020
            
            
            157,880
            
            
            (72
            )
            
            261,556Loss
                before Non-controlling Interest
            
            
            (1,709,322
            )
            
            (1,655,530
            )
            
            (6,908,509
            )
            
            (4,839,992
            )Non-controlling
                interest
            
            
            (11,075
            )
            
            12,668
            
            
            (27,349
            )
            
            4,562Net
                Loss
            
            
            (1,720,397
            )
            
            (1,642,862
            )
            
            (6,935,858
            )
            
            (4,835,430
            )Other
                Comprehensive LossForeign
                currency translation
            
            
            (18,941
            )
            
            (128,855
            )
            
            (211,586
            )
            
            (102,288
            )Comprehensive
                Loss
            
            
            (1,739,338
            )
            
            (1,771,717
            )
            
            (7,147,444
            )
            
            (4,937,718
            )Net
                Loss Per Share - Basic and Diluted
            
            
            (0.03
            )
            
            (0.10
            )
            
            (0.19
            )
            
            (0.34
            )Weighted
                Average Shares Outstanding - Basic and Diluted
            
            
            53,596,000
            
            
            15,654,000
            
            
            36,360,000
            
            
            14,250,000


The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-2


Veridicom
      International, Inc.


Consolidated
      Statements of Cash Flows


(Expressed
      in U.S. dollars)


(Unaudited)




For
                the
              Nine
                Months Ended
              September
                30,
            
            For
                the
              Nine
                Months Ended
              September
                30,2006
            
            2005$
            
            $Operating
                Activities:Net
                loss
            
            
            (6,935,858
            )
            
            (4,835,430
            )Adjustment
                to reconcile net loss to net cash used in operating
                activities:Amortization
                of property and equipment
            
            
            36,590
            
            
            56,043Amortization
                of deferred financing costs
            
            
            258,322
            
            
            66,321Stock-based
                compensation
            
            
            199,298
            
            
            572,630Common
                shares issued for services and expenses
            
            
            243,750
            
            
            154,438Gain
                on forgiveness of debt
            
            
            -
            
            
            (396,792
            )Warrants
                issued for commission
            
            
            1,084,929
            
            
            -Accretion
                of interest expense on convertible debt
            
            
            1,223,547
            
            
            1,771,258Impairment
                loss on tangible assets
            
            
            28,827
            
            
            -Non-controlling
                interest
            
            
            16,246
            
            
            (4,562
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (552,709
            )
            
            (58,425
            )Related
                party receivables
            
            
            3,547
            
            
            (127,652
            )Inventory
            
            
            186,219
            
            
            (286,858
            )Other
                assets
            
            
            9,823
            
            
            38,542Bank
                indebtedness
            
            
            (769
            )
            
            -Accounts
                payable
            
            
            216,918
            
            
            (220,688
            )Accrued
                expenses
            
            
            3,350,566
            
            
            (204,059
            )Due
                to related parties
            
            
            (26,382
            )
            
            (218,552
            )Other
                current liabilities
            
            
            171,470
            
            
            104,831Net
                Cash Used in by Operating Activities
            
            
            (485,666
            )
            
            (3,588,955
            )Investing
                Activities:Purchase
                of property and equipment
            
            
            2,243
            
            
            (37,480
            )Net
                Cash Provided by (Used in) Investing Activities
            
            
            2,243
            
            
            (37,480
            )Financing
                Activities:Proceeds
                from convertible notes payable
            
            
            565,000
            
            
            4,820,000Payment
                on notes payable
            
            
            -
            
            
            (609,689
            )Deferred
                finance costs
            
            
            -
            
            
            (420,818
            )Payment
                of offering costs
            
            
            (24,000
            )
            
            -Proceeds
                from sale of common stock and warrants
            
            
            636,000
            
            
            515,650Net
                Cash Provided by Financing Activities
            
            
            1,177,000
            
            
            4,305,143Effect
                of Exchange Rate Changes on Cash
            
            
            (216,958
            )
            
            (161,549
            )Increase
                in Cash
            
            
            476,619
            
            
            517,159Cash
                - Beginning of Period
            
            
            -
            
            
            53,866Cash
                - End of Period
            
            
            476,619
            
            
            571,025Supplemental
                Disclosures:Interest
                paid
            
            
            -
            
            
            130,071Income
                taxes paid
            
            
            -
            
            
            -Non-cash
                investing and financing activitiesDeferred
                financing costs from issuance of notes payable
            
            
            70,000
            
            
            466,145Common
                shares issued for expenses
            
            
            243,750
            
            
            154,438Common
                shares issued for settlement of debt
            
            
            100,000
            
            
            -Common
                shares issued for settlement of convertible notes
            
            
            263,162
            
            
            -


The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-3


NOTE
      1 -
      NATURE OF OPERATIONS AND CONTINUANCE OF BUSINESS




Veridicom
      International, Inc., (the “Company”), formerly known as Alpha Virtual, Inc.
      ("Alpha"), is a Delaware Corporation formerly headquartered in California that
      was formed on September 9, 1987. The legal entity, Alpha, retained its name
      until it was changed to its’ current name in February 2004. The Company
      consolidated its corporate offices in April 2004 and is now headquartered in
      Vancouver, British Columbia.




The
      Company operates as one operating segment which is the development, manufacture
      and sale of capacitive fingerprint sensors, computer peripherals and software
      related to the use of its fingerprint authentication technology.




The
      Company has five subsidiaries: Esstec Inc. (“Esstec”), Veridicom Pakistan
      (Private) Limited (“Pakistan”), Veridicom Inc., Cavio Corporation (“Cavio”), and
      Veridicom International (Canada) Inc. ("Canada Inc").




Esstec
      is
      a professional services company that focuses on e-commerce initiatives,
      interactive multimedia, and mobile software applications for clients in various
      industries, including the telecommunications and entertainment industries.
      Since
      2004, Esstec has not had any significant revenues or incurred any significant
      expenses.




Pakistan
      was incorporated on April 19, 2000 to establish the business of software
      development for the international markets and to export software and technology.
      Esstec owns approximately 63.4% of Pakistan.




Veridicom
      Inc. designs, manufactures and delivers hardware and software products that
      enable strong authentication solutions based on fingerprint biometrics.
      Veridicom Inc. markets a complete fingerprint biometrics platform on which
      applications can be built.




Cavio
      produces technology tools designed to protect users from fraud,
      misrepresentation, security and privacy issues by allowing users to
      biometrically authenticate themselves to secure control access and confirm
      identity across a number of industries.




On
      January 21, 2004, Canada Inc. was formed to be the Canadian operating company
      to
      disburse expenses and payroll costs in Canada for the Company.




The
      Company's financial statements have been presented on the basis that it is
      a
      going concern, which contemplates the realization of assets and the satisfaction
      of liabilities in the normal course of business. As
      at
      September 30, 2006, t he
      Company has a working capital deficit of $8,993,261 and has accumulated losses
      of $29,075,180 since inception. These factors raise doubt regarding the
      Company’s ability to continue as a going concern. The Company is currently
      devoting its efforts to raising additional capital to finance on-going
      operations and for transitioning from research and development to manufacturing
      and sales of its products. The Company's ability to continue as a going concern
      is dependent upon its ability to secure additional sources of capital, and
      ultimately, achieve profitable operations. The accompanying financial statements
      do not include any adjustments that might result from the outcome of these
      uncertainties.




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




a)  Basis
      of
      Presentation




These
      consolidated financial statements reflect all adjustments that, in the opinion
      of management, are considered necessary for a fair presentation of the financial
      position, results of operations, and cash flows for the periods presented.
      The
      results of operations for such periods are not necessarily indicative of the
      results expected for the full fiscal year or for any future period.




The
      historical results for fiscal 2006 and 2005 include the Company and all its
      subsidiaries.




b)  Principles
      of Consolidation




These
      consolidated financial statements include the accounts of the Company and its
      subsidiaries Esstec, Pakistan, Veridicom Inc., Cavio, and Canada Inc. All
      significant intercompany balances and transactions have been eliminated upon
      consolidation. Non-controlling interest reflects the 36.6% ownership by
      non-controlling shareholders in the issued share capital of
      Pakistan.




c)  Cash
      and
      Cash Equivalents




For
      purposes of reporting cash flows, the Company considers all funds with original
      maturities of three months or less to be cash equivalents.




d)  Use
      of
      Estimates in the Preparation of Financial Statements




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


F-4


NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




e)  Inventory




Inventory
      consists primarily of various sensors, including VKIs, combos and parallel
      port
      units. Inventory is valued at lower of cost (first-in, first-out) or
      market.




Inventory
      also includes work in process, at cost, which consists of actual costs incurred
      by the Company to September 30, 2006, in respect of manufacturing and production
      costs for fingerprint sensors and VKIs which were in production and unfinished
      as at September 30, 2006.




f)  Property
      and Equipment




Property
      and equipment are recorded at cost. Depreciation and amortization expense is
      provided on a straight-line basis using estimated useful lives of 3-7 years.
      Maintenance and repairs are charged to expense as incurred and expenditures
      for
      major improvements are capitalized.




g)  Fair
      Value of Financial Instruments




The
      carrying amounts of cash, accounts receivable, other current assets, notes
      payable, accounts payable, accrued expenses, convertible notes payable, other
      liabilities, and related party balances approximate fair value because of the
      short maturity of these items.




h)  Concentrations
      of Credit Risk




Financial
      instruments, which potentially expose the Company to concentrations of credit
      risk, consist primarily of trade accounts receivable. Aggregate potential credit
      losses have so far not exceeded management's expectations.




For
      the
      nine month period ended September 30, 2006, approximately 46% of sales revenue
      is from license revenue attributed to one customer, and 46% of sales revenue
      is
      from product sales to two customers. As at September 30, 2006, 99% of accounts
      receivable is owing from two customers.




i)  Advertising
      Expenses




Advertising
      costs are charged to operations as incurred and recorded as general and
      administrative expenses. During the nine months ended September 30, 2006 and
      2005, the Company incurred $44,801 and $68,445 for advertising costs,
      respectively.




j)  Long
      Lived Assets




In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ”,
      the
      Company tests long-lived assets or asset groups for recoverability when events
      or changes in circumstances indicate that their carrying amount may not be
      recoverable. Circumstances which could trigger a review include, but are not
      limited to: significant decreases in the market price of the asset; significant
      adverse changes in the business climate or legal factors; accumulation of costs
      significantly in excess of the amount originally expected for the acquisition
      or
      construction of the asset; current period cash flow or operating losses combined
      with a history of losses or a forecast of continuing losses associated with
      the
      use of the asset; and current expectation that the asset will more likely than
      not be sold or disposed significantly before the end of its estimated useful
      life.




Recoverability
      is assessed based on the carrying amount of the asset and its fair value which
      is generally determined based on the sum of the undiscounted cash flows expected
      to result from the use and the eventual disposal of the asset, as well as
      specific appraisal in certain instances. An impairment loss is recognized when
      the carrying amount is not recoverable and exceeds fair value. During the nine
      month period ended September 30, 2006, the Company recorded an impairment loss
      of $28,827, representing the unamortized book value of property and equipment
      removed from service.




k)  Patents




The
      Company has several international patents for its biometric technology, as
      well
      as several pending patent applications. The patents are being carried at a
      fair
      value of $200,000.




l)  Income
      Taxes




The
      Company recognizes deferred tax assets and liabilities for the expected future
      income tax consequences of events that have been recognized in the Company’s
      financial statements in accordance with SFAS No. 109 “ *Accounting
      for Income Taxes* ”.
      Under
      this method, deferred tax assets and liabilities are determined based on
      temporary differences between the financial carrying amounts and the tax bases
      of assets and liabilities using enacted tax rates in effect in the periods
      in
      which the temporary differences are expected to reverse. Valuation allowances
      are established when necessary to reduce deferred tax assets to the amount
      expected to be realized. Income tax expense represents the tax payable for
      the
      current period and the change during the period in deferred tax assets and
      liabilities.





F-5




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




m)  Foreign
      Currency Transactions/Balances




The
      Company translates the financial statements of foreign subsidiaries in
      accordance with SFAS No. 52, “ *Foreign
      Currency Translation* ”.
      Assets
      and liabilities of foreign subsidiaries denominated in foreign currencies are
      translated into US dollars at rates of exchange in effect at the balance sheet
      date. Average rates for the year are used to translate revenues and expenses.
      Resulting translation gains and losses are accumulated in a separate component
      of stockholders’ equity as accumulated other comprehensive income or
      loss.




Pakistan
      considers the Pakistan Rupee to be the functional currency of its operations.
      Cavio and Canada Inc. consider the Canadian Dollar to be the functional currency
      of their operations. The reporting currency of the Company is the U.S. dollar;
      accordingly, all amounts included in the financial statements have been
      translated into U.S. dollars.




Exchange
                Rates
              (indirect
                quotation)
            
            For
                the nine months ending
              September
                30, 2006
            
            For
                the nine months ending
              September
                30, 2005Rupee
                Average
            
            .01652
            
            .01673Rupee
                Period end
            
            .01662
            
            .01676Canadian
                Dollar Average
            
            .89790
            
            .84918Canadian
                Dollar Period end
            
            .89240
            
            .86125




n)  Impairment
      of Goodwill




Goodwill
      is recorded as the difference, if any, between the aggregate consideration
      paid
      for an acquisition and the fair value of the net tangible and intangible assets
      acquired. In accordance with SFAS No. 142, “ *Goodwill
      and Other Intangible Assets* ”,
      the
      Company tests goodwill for impairment at the reporting unit level (operating
      segment or one level below an operating segment) on an annual basis in the
      fourth quarter or more frequently if the Company believes indicators of
      impairment exist. The performance of the test involves a two-step process.
      The
      first step of the impairment test involves comparing the fair values of the
      applicable reporting units with their aggregate carrying values, including
      goodwill. The Company generally determines the fair value of its reporting
      units
      using the income approach methodology of valuation that includes the discounted
      cash flow method as well as other generally accepted valuation methodologies.
      If
      the carrying amount of a reporting unit exceeds the reporting unit’s fair value,
      the Company performs the second step of the goodwill impairment test to
      determine the amount of impairment loss. The second step of the goodwill
      impairment test involves comparing the implied fair value of the affected
      reporting unit’s goodwill with the carrying value of that goodwill. If the
      actual results, or the plans and estimates, used for future impairment analysis
      are lower from the original estimates used to assess the recoverability of
      those
      assets, the Company could incur additional impairment charges.




o)  Revenue
      Recognition




In
      accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
      Bulletin No. 104 (“SAB 104”), “ *Revenue
      Recognition* ”,
      the
      Company recognizes product revenue when the following fundamental criteria
      are
      met: (i) persuasive evidence of an arrangement exists, (ii) delivery has
      occurred or services have been rendered, (iii) the price to the customer is
      fixed or determinable and (iv) collection of the resulting receivable is
      reasonably assured. These criteria are usually met at the time of product
      shipment.




Revenue
      from software licenses and maintenance agreements is recognized in accordance
      with the provisions of SOP 97-2, “ *Software
      Revenue Recognition* ”,
      as
      amended by SOP 98-9, “ *Modification
      of SOP 97-2, Software Revenue Recognition, With Respect to Certain
      Transactions* ”.




The
      Company records reductions to revenue for estimated product returns and pricing
      adjustments, such as competitive pricing programs and rebates, in the same
      period that the related revenue is recorded. The amount of these reductions
      is
      based on historical sales returns, analysis of credit memo data, specific
      criteria included in rebate agreements, and other factors known at the time.




Veridicom
      Inc. and the Company recognize revenues at the point of shipment of products.




p)  Allowance
      for doubtful accounts




The
      Company continually monitors timely payments and assesses any collection issues.
      The allowance for its bad debts is based on the Company’s detailed assessment of
      the collectibility of specific customer accounts. Any significant customer
      accounts that are not expected to be collected are excluded from
      revenues.




F-6


NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




q)  Stock
      Based Compensation




Prior
      to
      January 1, 2006, the Company accounted for stock-based awards under SFAS No.
      123, “ *Accounting
      for Stock-Based Compensation* ”
which
      established a fair value based method of accounting for stock based awards.
      Effective January 1, 2006, the Company adopted the fair value recognition
      provisions of SFAS No. 123R “ *Share
      Based Payments* ”,
      using
      the modified retrospective transition method. There was no effect on the
      Company’s reported loss from operations, cash flows or loss per share as a
      result of adopting SFAS No 123R




Share
      based payments made by the Company have been valued at the market value of
      our
      common stock on the date the transaction was entered into or have been valued
      using the Black Scholes Option Pricing Model to estimate the fair market
      value.




r)  Comprehensive
      Loss




The
      Company utilizes SFAS No. 130 " *Reporting
      Comprehensive Income* ."
      This
      statement establishes standards for reporting comprehensive loss and its
      components in the consolidated financial statements. Accumulated other
      comprehensive loss presented in these consolidated financial statements resulted
      from translations of foreign currency financial statements.




s)  Software
      Development Costs




Costs
      related to the development of products and software are expensed as incurred
      until technological feasibility in the form of a working model has been
      established in accordance with SFAS No. 86, “ *Accounting
      for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed* ”.
      The
      time period between the establishment of technological feasibility and
      completion of product development is expected to be short; therefore, the
      Company has not capitalized any product development costs during the presented
      periods.




t)  Earnings
      Per Common Share




The
      Company computes net income (loss) per share in accordance with SFAS No. 128,
      " *Earnings
      per Share* "
      which
      requires presentation of both basic and diluted earnings per share (EPS) on
      the
      face of the income statement. Basic EPS is computed by dividing net income
      (loss) available to common shareholders (numerator) by the weighted average
      number of shares outstanding (denominator) during the period. Diluted EPS gives
      effect to all dilutive potential common shares outstanding during the period
      using the treasury stock method and convertible preferred stock using the
      if-converted method. In computing diluted EPS, the average stock price for
      the
      period is used in determining the number of shares assumed to be purchased
      from
      the exercise of stock options or warrants. Diluted EPS excludes all dilutive
      potential shares if their effect is anti-dilutive.




u)  Warranty




The
      Company’s products carry a limited warranty from manufacturing defects for a
      period of one year from the date of purchase. The Company’s liability is limited
      to the repair or replacement of the defective product. To date, there have
      been
      no significant costs incurred by the Company for warranty claims. In future
      years, the Company intends to establish reserves for estimated product warranty
      costs at the time revenue is recognized based upon its historical warranty
      experience, and additionally for any known product warranty issues.




v)  Shipping
      and Handling Costs




The
      Company’s shipping and handling costs are normally included in cost of
      sales.




w)  Reclassifications




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




x)  Recent
      Accounting Pronouncements




In
      September 2006, the FASB issued SFAS No. 158, “ *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans - an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)* ”.
      This
      statement requires employers to recognize the overfunded or underfunded status
      of a defined benefit postretirement plan (other than a multiemployer plan)
      as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income of a business entity or changes in unrestricted net assets
      of a not-for-profit organization. This statement also requires an employer
      to
      measure the funded status of a plan as of the date of its year-end statement
      of
      financial position, with limited exceptions. The provisions of SFAS No. 158
      are
      effective for employers with publicly traded equity securities as of the end
      of
      the fiscal year ending after December 15, 2006. The adoption of this statement
      is not expected to have a material effect on the Company's future reported
      financial position or results of operations.


F-7


NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




x)  Recent
      Accounting Pronouncements (continued)




In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ”.
      The
      objective of SFAS 157 is to increase consistency and comparability in fair
      value
      measurements and to expand disclosures about fair value measurements. SFAS
      157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS 157 applies under other accounting pronouncements
      that
      require or permit fair value measurements and does not require any new fair
      value measurements. The provisions of SFAS No. 157 are effective for fair value
      measurements made in fiscal years beginning after November 15, 2007. The
      adoption of this statement is not expected to have a material effect on the
      Company's future reported financial position or results of
      operations.




In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, *“Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statements No.
      109”* .
      FIN 48
      clarifies the accounting for uncertainty in income taxes by prescribing a
      two-step method of first evaluating whether a tax position has met a more likely
      than not recognition threshold and second, measuring that tax position to
      determine the amount of benefit to be recognized in the financial statements.
      FIN 48 provides guidance on the presentation of such positions within a
      classified statement of financial position as well as on derecognition, interest
      and penalties, accounting in interim periods, disclosure, and transition. FIN
      48
      is effective for fiscal years beginning after December 15, 2006. The adoption
      of
      this statement is not expected to have a material effect on the Company's future
      reported financial position or results of operations.




In
      March
      2006, the FASB issued SFAS No. 156, " *Accounting
      for Servicing of Financial Assets, an amendment of FASB Statement No. 140,
      Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities* ".
      This
      statement requires all separately recognized servicing assets and servicing
      liabilities be initially measured at fair value, if practicable, and permits
      for
      subsequent measurement using either fair value measurement with changes in
      fair
      value reflected in earnings or the amortization and impairment requirements
      of
      Statement No. 140. The subsequent measurement of separately recognized servicing
      assets and servicing liabilities at fair value eliminates the necessity for
      entities that manage the risks inherent in servicing assets and servicing
      liabilities with derivatives to qualify for hedge accounting treatment and
      eliminates the characterization of declines in fair value as impairments or
      direct write-downs. SFAS No. 156 is effective for an entity's first fiscal
      year
      beginning after September 15, 2006. The adoption of this statement is not
      expected to have a material effect on the Company's future reported financial
      position or results of operations.




In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments-an amendment of FASB Statements No. 133 and 140", to
      simplify and make more consistent the accounting for certain financial
      instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities", to permit fair value re-measurement for
      any
      hybrid financial instrument with an embedded derivative that otherwise would
      require bifurcation, provided that the whole instrument is accounted for on
      a
      fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the
      Impairment or Disposal of Long-Lived Assets", to allow a qualifying
      special-purpose entity to hold a derivative financial instrument that pertains
      to a beneficial interest other than another derivative financial instrument.
      SFAS No. 155 applies to all financial instruments acquired or issued after
      the
      beginning of an entity's first fiscal year that begins after September 15,
      2006,
      with earlier application allowed. The adoption of this statement is not expected
      to have a material effect on the Company's future reported financial position
      or
      results of operations.




y) Consolidated
          Interim Financial Statements




These
      interim unaudited consolidated financial statements for the period ended
      September 30, 2006, have been prepared on the same basis as the annual
      consolidated financial statements and in the opinion of management, reflect
      all
      adjustments, which include only normal recurring adjustments, necessary to
      present fairly the Company’s financial position, results of operations and cash
      flows for the periods shown. The results of operations for such periods are
      not
      necessarily indicative of the results expected for a full year or for any future
      period. The financial statements and related notes should be read in conjunction
      with the audited financial statements and notes thereto included in Form 10-KSB
      for the year ended December 31, 2005.




NOTE
      3 -
      ACCOUNTS RECEIVABLE, RELATED PARTIES




The
      Company inadvertently repaid a note of $82,501 that was previously converted
      to
      equity. This amount is fully collectible as of September 30, 2006. At September
      30, 2006, the Company is also owed $78,430 from officers and directors. These
      amounts are non-interest bearing and have no specified repayment
      terms.




F-8


NOTE
      4 -
      PROPERTY AND EQUIPMENT




Property
      and equipment at September 30, 2006 consists of the following:




Tooling
                equipment
            
            $
            202,005Furniture
                and fixtures
            
            
            27,238Office
                equipment
            
            
            19,546Computer
                hardware
            
            
            260,468Computer
                software
            
            
            173,533682,790Less
                accumulated depreciation and amortization
            
            
            644,325Net
                carrying value
            
            $
            38,465




NOTE
      5 -
      RELATED PARTY TRANSACTIONS




The
      Company has entered into agreements with Manhattan Capital Partners
      ("Manhattan") and its affiliates to provide consulting and stock placement
      services. The Company paid Manhattan a total of $nil during the nine month
      period ended September 30, 2006 (December 31, 2005 - $150,714).




Unsecured,
      non-interest bearing short term advances from the Company’s Chief Executive
      Officer and former officers and directors of the Company, amounted to $102,830
      as at September 30, 2006 (December 31, 2005: $83,719). These advances are
      without any specified repayment terms.




NOTE
      6 -
      NOTES PAYABLE




The
      Company has notes payable totaling $446,263 bearing interest at rates from
      10%-12% per annum, maturing between January and June 2007, and a short term
      notes payable of $33,125 which is non-interest bearing, unsecured and has no
      specific terms of repayment.




NOTE
      7 -
      NOTES PAYABLE, RELATED PARTIES




Notes
      payable to related parties includes $25,000 due to an affiliate of one of the
      subsidiaries of the Company, $36,812 due to a shareholder of the Company, and
      $28,000 due to ten former officers of the Company. The amounts are unsecured,
      non-interest bearing and due on demand.




NOTE
      8 -
      COMMON STOCK




a)
            Common
                Stock Issued During the Nine Months Ended September 30,
                2006




i.
            The
                Company issued 7,500,000 units at a price of $0.04 per unit for cash
                proceeds of $276,000, net of offering costs of $24,000. Each unit
                consisted of one share of common stock and one stock purchase warrant
                entitling the holder to acquire an additional common share at an
                exercise
                price of $0.20 per share on or before February 1, 2011. The Company
                also
                issued 12,500,000 stock purchase warrants to the agent as consideration,
                with the same exercise terms noted
                above.




ii.
            The
                Company issued 2,500,000 units upon the settlement of $100,000 of
                accounts
                payable. Each unit consisted of one share of common stock and one
                stock
                purchase warrant entitling the holder to acquire an additional common
                share at an exercise price of $0.20 per share on or before February
                1,
                2011.




iii.
            The
                Company issued 2,500,000 shares with a fair value of $243,750 in
                consideration of legal services
                rendered.




iv.
            The
                Company issued 8,400,000 shares upon the exercise of 8,400,000 stock
                purchase warrants at $0.04 per share for cash proceeds of
                $336,000.




v.
            The
                Company issued an aggregate of 6,449,509 shares upon the conversion
                of
                notes payable of $263,162.


F-9


NOTE
      8 -
      COMMON STOCK (continued)




b)
            Stock-Based
                Compensation




In
      April
      2004, the Company adopted the 2004 Stock Option, Deferred Stock, and Restricted
      Stock Plan (“the Plan”) effective June 25, 2004, which provides for the granting
      of options to officers, directors, consultants, employees, and advisors.
      2,000,000 shares of common stock are reserved under the Plan for the granting
      of
      options. The Plan is in effect until June 25, 2014. The options are exercisable
      to purchase stock for a period of up to ten years from the date of grant. The
      stock options vest monthly over a thirty-six-month period.




Activity
      under the Company’s stock option plan is as follows:




On
      February 7, 2005, the Board of Directors of the Company approved the granting
      of
      1,155,000 options to officers, directors and employees of the Company under
      the
      Plan. On March 1, 2004, the Board of Directors of the Company approved the
      granting of 150,000 the President of the Company under the Plan.




The
      fair
      value of the vested options of $199,298 for the nine month period ended
      September 30, 2006 was estimated using the Black-Scholes option pricing model
      with an expected life of five years, a risk-free interest rate of 2.43% and
      an
      expected volatility of 209%. The fair value of vested options during the period
      has been expensed as stock based compensation.




During
      the three month period ended September 30, 2006, the Company cancelled 105,000
      options accounting for a reduction in stock-based compensation of
      $12,096.




September
                30, 2006Number
            
            Weighted
                Average Exercise
              PriceBalance,
                December 31, 2005
            
            
            3,174,264
            
            $
            1.99Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Forfeited/Expired
            
            
            (2,544,264
            )
            
            1.79Balance,
                September 30, 2006
            
            
            630,000
            
            $
            2.54





Additional
      information regarding options outstanding as at September 30, 2006 is as
      follows:




Outstanding
            
            Vested
                and ExercisableRange
                of
              Exercise
                prices
              $
            
            Number
                of
              shares
            
            Weighted
              average
              remaining
              contractual
              life
                (years)
            
            Weighted
              average
              exercise
                price
              ($)
            
            Number
                of
              shares
            
            Weighted
              average
              exercise
                price
              ($)1.79
            
            
            480,000
            
            
            3.36
            
            
            1.79
            
            
            160,000
            
            
            1.793.50
            
            
            150,000
            
            
            2.42
            
            
            3.50
            
            
            150,000
            
            
            3.50630,000
            
            
            
            
            
            
            
            
            310,000




b)
            Stock
                Purchase Warrants




The
      following table summarized the continuity of the Company’s warrants to acquire
      additional shares:




September
                30, 2006Number
            
            Weighted
                Average Exercise
              PriceBalance,
                December 31, 2005
            
            
            11,783,145
            
            $
            3.75Issued
            
            
            32,500,000
            
            
            0.15Exercised
            
            
            (8,400,000
            )
            
            0.04Forfeited/Expired
            
            
            (214,134
            )
            
            1.23Balance,
                September 30, 2006
            
            
            35,669,011
            
            $
            0.43




As
      at
      September 30, 2006, the outstanding warrants have a weighted average life of
      4.43 years





F-10





NOTE
      9 -
      COMMITMENTS AND CONTINGENCIES




Employment
      Agreement




The
      Company entered into an employment agreement with its President and Chief
      Executive Officer effective February 20, 2004 for one year providing for an
      annual salary of $175,000, a ten-year stock option to purchase 150,000 shares
      of
      the Company's common stock at $3.50 per share, and an annual bonus of $20,000
      for every $1.5 million in gross consolidated revenue of the Company for said
      year. The agreement is automatically renewable, and no revisions have been
      made
      to the original agreement.




The
      stock
      options vest monthly over a twenty-four month period. The fair value of the
      vested options of $71,820 was estimated using the Black-Scholes option pricing
      model with an expected life of five years, a risk-free interest rate of 2.79%
      and an expected volatility of 293%. This amount was charged to operations as
      stock based compensation.




Litigation




In
      October 2002, the Company had licensed its OneView software to Global Alpha
      Corporation (“GAC”). In July 2003, the Company entered into a License Agreement
      (“the license”) with GAC for an exclusive license to commercialize a certain
      computer software system (“the System”) that is specified in the License
      Agreement (“the Agreement”). GAC alleges that the Agreement provides the Company
      (a) pay an annual license fee (b) agree to keep accurate account of its business
      and operations concerning the license and (c) the Company grant GAC the right
      (“the Put Right”) to sell the System to the Company and that the Company agrees
      to buy the System from GAC, on terms specified in the Agreement for the purchase
      price of $200,000. The Company has accrued the liability for the minimum annual
      license fees for the last two years to date amounting to $50,000 in its
      financial statements as at September 30, 2006.




GAC
      has
      asserted a claim for breach of contract and breach of fiduciary duty in the
      Superior Court of California, Los Angeles County, Western District (“the
      Court”), which arise out of the alleged breach of the July 2003 Agreement
      discussed above. GAC is seeking damages on its breach of contract claim, damages
      for the Company’s alleged breach of the license fee provision, damages for
      breach of fiduciary duty claim, as well as attorney’s fees and pre-judgment
      interest on all damages according to proof at trial. On December 23, 2005,
      the
      Company filed a response to the complaint denying the material allegations
      and
      asserting numerous affirmative defenses. This matter is in the early stages
      of
      proceeding. GAC has added an additional defendant to the claim, and the trial
      setting conference scheduled for April, 2006 in which the Court was expected
      to
      set a trial date has been postponed. The Company intends to vigorously defend
      the matter and investigate the possibility of an out of court
      settlement.




Five
      former employees of Veridicom Inc. have filed claims against the Company with
      the Labor Commissioner in the State of California. The former employees allege
      that the Company owes unpaid wages, salaries and vacation pay for various
      periods between July 2000 and November 2003 amounting to a total of $122,099.
      The Company has accrued for this liability in its financial statements as at
      September 30, 2006. On March 21, 2005 one of the claimants signed a letter
      of
      agreement to convert his claim of $61,054 into stock based on the closing price
      of the Company’s common stock on that day of $2.40 per share, or a total of
      25,439 shares for his entire claim. However, this settlement is subject to
      obtaining certain waivers and documents from the holders of the Company’s
      Callable Secured Convertible Notes.




On
      March
      28, 2003, the Company and one of the company's stockholders filed a lawsuit
      in
      Superior Court in the State of California against a former CEO of the Company.
      The lawsuit alleges a breach of fiduciary duty, negligence, fraud and breach
      of
      contract claiming the CEO did not devote his efforts to the Company's product
      development and market strategies or maximize the profit of the business. The
      lawsuit was settled with the former CEO agreeing to pay over $200,000 to the
      Company. This amount has not been recorded in the financial statements as the
      Company has not succeeded in collection of the same.




In
      addition, the Company is a party to a number of other lawsuits arising in the
      normal course of business. In the opinion of management, the resolution of
      these
      matters will not have a material adverse effect on the Company's operations,
      cash flows or financial position.


F-11


NOTE
      9 -
      COMMITMENTS AND CONTINGENCIES (continued)




Agreements




On
      November 3, 2003, Veridicom Inc., a subsidiary of the Company, entered into
      a
      five year Marketing and Distribution Agreement with Biocom Co. Ltd., (“Biocom”)
      a Korean corporation and Gyung Min Kim, a director of the Company. Under the
      terms of this Agreement, Biocom was appointed as the Company’s exclusive
      distributor for all the sale and servicing of the Company’s products in Korea




In
      January 2005, the Company entered into a Consulting Agreement for a term of
      24
      months at $10,000 per month with Taktical Advisory Group of United Arab Emirates
      (UAE), a company affiliated with a former related party, for consulting services
      to develop strategic alliances, business development, securing distribution
      channels, and to provide representation in the UAE.




Leases




In
      February 2004, the Company entered into a three year operating lease for its
      corporate office space in Vancouver, Canada. The Company is required to pay
      basic rent and estimated operating expenses monthly of $13,731 (Cdn$15,375).
      The
      lease expires at the end of February, 2007. The Company also maintains
      short-term month to month tenancies for office spaces located in Seattle
      (Washington), London (UK) and Lahore (Pakistan).




NOTE
      10 -
      LONG-TERM DEBT




i)
            On
                February 25, 2005, the Company entered into a Securities Purchase
                Agreement (the “Agreement”) with certain accredited investors (the
                “holders”) pursuant to which the holders purchased 10% callable secured
                convertible notes (the “Notes) in the aggregate principal amount of
                $5,100,000, and 5,100,000 Series A stock purchase warrants and 5,100,000
                Series B stock purchase warrants to acquire an aggregate of 10,200,000
                shares of common stock. The Series A warrants are exercisable at
                $3.00 per
                share for a period of five years from the date of issuance, and the
                Series
                B warrants are exercisable at $5.00 per share for a period of five
                years
                from the date of issuance. The convertible notes are exercisable
                at $1.27
                per share, mature on the third anniversary of the date of issue (the
                “Maturity Date”) and bear interest at 10% per annum. The gross proceeds of
                this financing were received in three tranches as follows:(i) $1,700,000
                was received on closing on February 25 2005; (ii) $1,700,000 was
                received
                on April 29, 2005; and (iii) $1,620,000 was received on August 16,
                2005.
                During the fiscal year ended December 31, 2005, $80,000 was deemed
                uncollectible and was written off. During the nine month period ended
                September 30, 2006, the Company collected $40,000 for total aggregate
                proceeds to date of $1,660,000. The Notes are required to be repaid
                with
                33 equal payments of $51,515 per month for each tranche, with the
                first
                payment due three months after each respective closing date.




The
      Notes
      are convertible into the Company’s common stock at a conversion price equal to
      $1.27 (the “Conversion Price”), which is seventy percent (70%) of the Initial
      Market Price of $1.81, as defined in the Agreement; provided, however, that
      if
      an event of default shall have occurred and be continuing, the Conversion Price
      shall be equal to the lesser of (i) fifty percent (50%) of the Initial Market
      Price or (ii) the Variable Conversion Price, defined as fifty percent (50%)
      multiplied by the average of the volume weighted average daily prices for the
      common stock for the five (5) days prior to the date the conversion notice
      is
      sent by the holder of the notes to the Company. The Notes have a term of 36
      months and bear interest at 10% per annum or 15% per annum if the Company is
      in
      default. Interest is payable monthly; provided, however, that the interest
      rate
      shall reset at 0% for any monthly period in which the Company's stock price
      is
      greater than 125% of the "Initial Market Price," which is defined as 100% of
      the
      volume weighted average of the Company's common stock for the five days
      immediately prior to closing, as reported on the Over-the-Counter Bulletin
      Board. Since October 1, 2005 the Company is in default in making repayments
      of
      principal and interest due on these Notes.




The
      Initial Market Price and the warrant exercise price are subject to adjustments
      under certain conditions and events occurring, including the issue of common
      stock and common stock equivalents at a price per share less than the Initial
      Market Price or exercise price. Accordingly, upon completion of the financing
      on
      February 1, 2006 as disclosed in Note 8(a)(i), the Initial Market Price was
      reduced from $1.27 to $0.04, and the exercise price remained unchanged.




The
      Company incurred a total of $493,707 in legal expenses and commissions to
      complete all three rounds of the private placement. These costs are capitalized
      and are being amortized over the three-year term of the Notes. The Company
      also
      recorded, as deferred finance costs, the fair value of 321,261 warrants issued
      as consideration for the three completed rounds of the private placement. The
      fair value of these warrants was estimated at $539,579 using the Black-Scholes
      option pricing model with an expected life of five years, a risk-free interest
      rate of 2.43% and an expected volatility of 187%, 185% and 187% for the first,
      second and third rounds of the private placement, respectively. The fair value
      of the deferred finance costs have been capitalized and are being amortized
      over
      the three-year term of the Notes.


F-12


NOTE
      10 -
      LONG-TERM DEBT (continued)




On
      March
      28, 2006, the Company extended a special warrant offer (the “Special Warrant
      Offer”) to all holders of the Company’s Series A and Series B Warrants (the
“Original Warrants”). As part of the Special Warrant Offer, the exercise price
      of the Original Warrants was reduced to $0.04 per share (the “Reduced Exercise
      Price”). The Special Warrant Offer commenced on March 30, 2006 and expired on
      April 10, 2006. Thereafter, all the Original Warrants that were not exercised
      pursuant to the Special Warrant Offer continue to retain all of their previous
      rights and remain in full force and effect. A total of 8,400,000 Series A and
      Series B Warrants for gross proceeds of $336,000 were exercised by certain
      holders for cash, which also resulted in the reinstatement of 6,046,096 shares
      of the Company’s common stock previously issued to such holders and the
      reinstatement of the principal amounts of $184,133 of the Notes. The
      reinstatement of the previously converted Notes was a result of the Company
      issuing common shares in excess of the amount registered to be issuable upon
      the
      conversion of the Notes. The reduction of the exercise price of the warrants
      held by holders who participated in the Special Warrant Offer has been accounted
      for as an inducement. However, no additional amount was credited to additional
      paid in capital, as the aggregate fair value of the shares issued did not exceed
      the carrying value of the warrants.




As
      at
      September 30, 2006, an aggregate of $580,333 (December 31, 2005 - $317,170)
      of
      the Notes have been converted, after the reinstatement of 6,046,096 shares
      of
      the Company’s common stock previously issued to such holders and the
      reinstatement of the principal amounts of $184,133 of the Notes, pursuant to
      the
      Special Warrant Offer as noted above.




Pursuant
      to the Agreement, the Company incurs a penalty of 3% per month of the
      outstanding principal balance of the Notes if: (a) the number of the Company’s
      authorized and reserved common shares is less than two times the number of
      shares issuable upon conversion of the Notes and upon exercise of the Warrants;
      and (b) the holders are not provided with monthly share information detailing
      the number of shares authorized and reserved within 5 business days of the
      end
      of the month. During the period ended September 30, 2006, the Company incurred
      both penalties on the entire principal balance of convertible notes.
      Accordingly, the Company recognized liquidated damages of $753,135 and
      $2,251,671 for the three and nine month periods ended September 30, 2006. As
      at
      September 30, 2006, the Company has recognized an accrued liability of
      $3,983,275 relating to these penalties.




During
      the year ended December 31, 2005, as consideration for the placement agent
      services in connection with the private placement, the Company issued warrants
      to purchase up to 107,087 shares of its common stock at an exercise price of
      $1.27 per share and cash commission in the amount of $136,000 for each round
      of
      the private placement. In addition, the Company issued warrants to purchase
      up
      to 100,000 shares of its common stock at an exercise price of $3.50 per
      share.




In
      connection with the Agreement, the Company also entered into a registration rights
      agreement (the
“Registration Rights Agreement”) providing for the filing of an SB-2 Registration Statement (the
“Registration Statement”) with the U.S. Securities and Exchange Commission
      (“SEC”) registering the common stock issuable upon conversion of the convertible
      Notes and exercise of the stock purchase warrants. The Company filed an SB-2
      Registration Statement on April 27, 2005, and it was declared effective on
      July
      19, 2005.




The
      investor has agreed to restrict its ability to convert the convertible Notes
      and
      receive shares of the Company’s common stock such that the number of shares of
      common stock held by the investor in the aggregate and its affiliates after
      such
      conversion or exercise does not exceed 4.9% of the then issued and outstanding
      shares of the Company’s common stock.




In
      accordance with EITF 98-5 *“Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios”* ,
      the
      Company recognized the value of the embedded beneficial conversion feature
      of
      $5,060,000 as additional paid-in capital and an equivalent discount which will
      be expensed over the term of convertible Notes. The carrying value of the
      convertible Notes will be accreted to the face value of $5,060,000 to maturity.
      At September 30, 2006, interest expense of $1,847,028 has been accreted
      increasing the carrying value of the convertible Notes to $1,847,028. During
      the
      nine month period ended September 30, 2006, accrued interest of $760,003 has
      been included in accrued liabilities.




F-13


NOTE
      10 -
      LONG-TERM DEBT (continued)




ii)
            On
                September 28, 2006, the Company entered into a Securities Purchase
                Agreement (the “Agreement”) with certain accredited investors (the
                “holders”) pursuant to which the holders purchased 6% callable secured
                convertible notes (the “Notes) in the aggregate principal amount of
                $525,000, and 10,000,000 stock purchase warrants to acquire an aggregate
                of 10,000,000 shares of common stock. The warrants are exercisable
                at
                $0.04 per share for a period of five years from the date of issuance.
                The
                convertible notes are exercisable at $0.04 per share, mature on the
                third
                anniversary of the date of issue (the “Maturity Date”) and bear interest
                at 6% per annum, or 15% per annum if the Company is in default. Interest
                is payable quarterly provided that no interest is due and payable
                for any
                month in which the trading price is greater than $0.06 for each trading
                day of the month. The Notes are convertible into the Company’s common
                stock at a conversion price equal to $0.04 or 50% of the average
                of the
                three lowest intraday trading prices for the Company’s common stock during
                the 20 trading days preceding conversion.




Pursuant
      to the Agreement, the Company is deemed to default on the Notes upon the
      occurrence of certain specified events, including if the number of the Company’s
      authorized and reserved common shares is less than two times the number of
      shares issuable upon conversion of the Notes and upon exercise of the Warrants.
      On September 28, 2006, the Company failed to reserve the required number of
      shares and defaulted on the Notes. Upon default of the Notes, the Company is
      required to pay the greater of: i) 140% of the principle and interest
      outstanding on the notes plus 15% per annum on the principle and interest
      outstanding or ii) the number of shares the debt is convertible into at the
      time
      of default times the highest closing stock price between the default and
      mandatory prepayment date. At September 30, 2006, the Company has recognized
      an
      accrued liability of $580,263 relating to these default penalties.




The
      investor has agreed to restrict its ability to convert the convertible Notes
      and
      receive shares of the Company’s common stock such that the number of shares of
      common stock held by the investor in the aggregate and its affiliates after
      such
      conversion or exercise does not exceed 4.99% of the then issued and outstanding
      shares of the Company’s common stock.




In
      accordance with EITF 98-5 *“Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios”* ,
      the
      Company recognized the value of the embedded beneficial conversion feature
      of
      $383,298, using the Black Scholes option pricing model with risk-free rate
      of
      4.42% over an expected life of five years and a volatility of 203%, as
      additional paid-in capital and an equivalent discount which will be expensed
      over the term of convertible Notes. The carrying value of the convertible Notes
      will be accreted to the face value of $525,000 to maturity. At September 30,
      2006, interest expense of $959 has been accreted increasing the carrying value
      of the Notes to $959.




The
      Company incurred a total of $70,000 in legal expenses and commissions to
      complete financing. These costs are capitalized and are being amortized over
      the
      three-year term of the Notes.





NOTE
      11 -
      SEGMENT DISCLOSURES




The
      Company operates as one operating segment which is the development, manufacture
      and sale of capacitive fingerprint sensors, computer peripherals and software
      related to the use of its fingerprint authentication technology. The Chief
      Executive Officer is the Company’s Chief Operating Decision Maker (CODM) as
      defined by SFAS 131, “Disclosure about Segments of an Enterprise and Related
      Information”. The CODM allocates resources and assesses the performance of the
      Company based on the results of operations.




NOTE
      12 -
      SUBSEQUENT EVENT




On
      October 31, 2006, the Company entered into a Securities Purchase Agreement
      (the
“Agreement”) with certain accredited investors (the “holders”) pursuant to which
      the holders purchased 6% callable secured convertible notes (the “Notes”) in the
      aggregate principal amount of $505,000, and 10,000,000 stock purchase warrants
      to acquire an aggregate of 10,000,000 shares of common stock. The warrants
      are
      exercisable at $0.04 per share for a period of five years from the date of
      issuance. The convertible notes are exercisable at $0.04 per share, mature
      on
      the third anniversary of the date of issue (the “Maturity Date”) and bear
      interest at 6% per annum, or 15% per annum if the Company is in default.
      Interest is payable quarterly provided that no interest is due and payable
      for
      any month in which the trading price is greater than $0.06 for each trading
      day
      of the month. The Notes are convertible into the Company’s common stock at a
      conversion price equal to $0.04 or 50% of the average of the three lowest
      intraday trading prices for the Company’s common stock during the 20 trading
      days.


F-14


NOTE
      12 -
      SUBSEQUENT EVENT (continued)




Pursuant
      to the Agreement, the Company is deemed to default on the Notes upon the
      occurrence of certain specified events, including if the number of the Company’s
      authorized and reserved common shares is less than two times the number of
      shares issuable upon conversion of the Notes and upon exercise of the Warrants.
      On October 31, 2006, the Company failed to reserve the required number of shares
      and defaulted on the Notes. Upon default of the Notes, the Company is required
      to pay the greater of: i) 140% of the principle and interest outstanding on
      the
      notes plus 15% per annum on the principle and interest outstanding or ii) the
      number of shares the debt is convertible into at the time of default times
      the
      highest closing stock price between the default and mandatory prepayment date.




The
      investor has agreed to restrict its ability to convert the convertible Notes
      and
      receive shares of the Company’s common stock such that the number of shares of
      common stock held by the investor in the aggregate and its affiliates after
      such
      conversion or exercise does not exceed 4.99% of the then issued and outstanding
      shares of the Company’s common stock.





F-15




ITEM
                2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS
                OF OPERATIONS




SPECIAL
      NOTE REGARDING FORWARD LOOKING STATEMENTS





The
      following discussion should be read in conjunction with our Financial
      Statements, including the related notes thereto, and other financial information
      included herein. The information in this Report includes forward-looking
      statements. In addition, past operating results are not necessarily indicative
      of the results to be expected for future periods.




OVERVIEW





We
      were
      incorporated in Delaware on September 9, 1987 under the name Perceptronics,
      Inc.
      From our inception through fiscal 2000, we were engaged in the design,
      development and manufacture of computer-based simulation systems for training
      and decision support. These systems included both hardware and software and
      are
      used to train personnel in the use of various military and commercial equipment.
      Much of our simulator business was in the foreign defense industry. The
      tightening of defense budgets worldwide, combined with the continuing
      consolidation and competition in the defense industry, negatively impacted
      the
      growth and profit opportunities for small companies such as ours. As a result,
      in July 2000, we refocused our business. In connection with the refocus, we
      sold
      the assets related to our computer based simulation system line of business
      to a
      developer and manufacturer of specialized defense simulation products. We then
      commenced development of commercial products in the area of Internet
      collaboration.





However,
      we lacked the funds necessary to exploit our developed products. As a result,
      in
      October 2002, we entered into a license agreement with our then principal
      stockholder, Global Alpha Corporation ("GAC") pursuant to which GAC was granted
      an exclusive license to our software and systems commonly referred to as the
      "IC3D Framework" (the "System"). The System encompassed substantially all of
      our
      software including software developed to support multi-user online collaborative
      interactivity in a broad variety of applications employing a variety of virtual
      media over a number of networks including the Internet and intra-nets. Under
      the
      license agreement, GAC agreed to pay the Company a license fee of 10% of the
      revenue generated from the sale or use of the System up to $1.0 million, 9%
      up
      to $2.0 million, 8% up to $3.0 million and, thereafter, 7% of the revenue
      generated.





In
      connection with the license agreement, in October 2002 we terminated
      substantially all of our employees, and except for our license agreement, ceased
      all of our prior operating activities. Our principal activities became directed
      to reducing our liabilities and seeking possible acquisitions. Management's
      objective was to acquire an operating company that has experienced management
      and the potential for profitable growth in exchange for our
      securities.





On
      April
      28, 2003, we entered into an Agreement and Plan of Merger with EssTec, Inc.,
      a
      privately-held Nevada corporation ("EssTec"). In accordance with the merger,
      on
      May 8, 2003, we, through our wholly-owned subsidiary, Alpha Acquisition
      Corporation, a Nevada corporation, acquired EssTec in exchange for 4,276,162
      shares of our Common Stock. The transaction contemplated by the agreement was
      intended to be a "tax-free" reorganization pursuant to the provisions of Section
      351 and 368(a)(1)(A) of the Internal Revenue Code of 1986, as
      amended.





On
      May 8,
      2003, in connection with the EssTec merger, we changed our fiscal year end
      from
      March 31 to December 31.





-16-




On
      November 25, 2003, we entered into an Agreement and Plan of Merger with
      Veridicom, Inc., a privately-held California corporation ("Veridicom"). In
      accordance with the merger, on November 25, 2003, we, through our wholly-owned
      subsidiary, A/V Acquisition Corporation, a Nevada corporation, acquired
      Veridicom in exchange for 3,500,000 shares of our Common Stock; 3,250,000 shares
      were issued to the holders of Veridicom stock and 250,000 shares were issued
      into escrow to cover indemnification obligations, if any, of Veridicom. The
      transaction contemplated by the agreement was intended to be a "tax-free"
      reorganization pursuant to the provisions of Section 351 and 368(a)(1)(A) of
      the
      Internal Revenue Code of 1986, as amended.





On
      January 16, 2004, we entered into an Agreement and Plan of Merger with Cavio
      Corporation, a privately-held Washington corporation ("Cavio"). In accordance
      with the merger, on February 20, 2004, we, through our wholly-owned subsidiary,
      A/VII Corporation, a Nevada corporation, acquired Cavio in exchange for
      5,119,140 shares of our Common Stock. The transaction contemplated by the
      agreement was intended to be a "tax-free" reorganization pursuant to the
      provisions of Section 351 and 368(a)(1)(A) of the Internal Revenue Code of
      1986,
      as amended.




Description
      of the Company Post-Merger





Following
      the merger with Cavio, we realigned our business strategy to leverage the core
      operations of each of our subsidiaries. We have five subsidiaries: Cavio,
      Veridicom Inc., Veridicom Canada, Veridicom Pakistan and EssTec.





Our
      core
      strategy is to build a comprehensive authentication suite of products and
      services, with market-specific applications that leverage the core identity
      management infrastructure. We believe there is a significant need for an
      auditable, scalable product solution capable of linking an individual to a
      specific electronic event or transaction -- a strong authentication solution
      that safeguards legitimate interests and adheres to emerging electronic commerce
      legislation. Our identity management solutions employ public key infrastructure
      and a "virtual token" based technology to control, audit and monitor the
      identification processes for electronic events and transactions.





We
      will
      focus on transforming the market for biometrics and growing the market beyond
      traditional security applications. In particular, the strategy will be to expand
      the traditional security offerings to include security and convenience value
      propositions for commercial or point-of-sale transactions. By developing
      customizable applications as well as authentication technology, we are
      endeavoring that our brand become synonymous with secure, authenticated
      transactions.





We
      offer
      a solution that we believe not only addresses an organization's current
      requirements for stronger and more scalable authentication and authorization,
      but also addresses a future vision for security, via a combination of
      centralized and distributed identity repositories and administration tools.
      Utilizing biometric technology, we provide organizations with an authentication
      solution that also provides users with increased convenience by reducing the
      reliance on passwords.





We
      have a
      management team with combined experience in sales and marketing, vertical market
      knowledge, technology development, and hardware integrated circuit design.
      In
      addition, we will have access to a network of advisors and consultants with
      significant expertise in technology, government, security, and financial
      services. These advisors will be invited to form a more formal advisory board
      to
      provide strategic direction for products and services, and, they may be
      leveraged to provide targeted business development contacts in key target
      markets.





There
      are
      several factors that management believes will provide new opportunities or
      present new challenges for us. We believe that regulatory, technological, and
      cultural changes will create new opportunities. International distribution
      arrangements are currently in place, while new channels are being
      developed.





-17-




Since
      March 1, 2004, we have undertaken a comprehensive review of all pre-merger
      operations. This on-going review has included all facets of operations,
      including the supply chain, product development, previous sales and marketing
      agreements, internal controls and reporting systems. Based on this review,
      we
      have decided that a thorough reorganization of all of the companies is
      warranted, including a re-evaluation of the supply chain, method of manufacture,
      product strategy and other organizational procedures. Although distracting
      in
      the short-term, we believe that this review is in the long-term best interests
      of the Company and our stockholders. As part of the reorganization, we closed
      our Sunnyvale, California offices on April 15, 2004 in favor of a more cost
      effective and efficient development environment in the Pacific
      Northwest.





Since
      2004, Veridicom International has prioritized the process of streamlining its
      manufacturing operations. In addition, we have re-aligned our product line
      in
      anticipation of customer requirements for stronger security solutions and secure
      devices. As such, we have worked with our suppliers to identify opportunities
      for efficiencies, reduced costs, improved quality and improved
      capacity.




We
      expect
      to begin manufacturing a new revision of our FPS200 fingerprint sensor which
      includes a number of enhancements to the previous version.





We
      have
      several patents and pending patent applications for its technology, an important
      factor in today’s competitive landscape. We expect to receive a decision to
      grant for our previously announced European Patent for the use of biometric
      technology in conjunction with encryption and the use of public and private
      keys. We believe that this is a significant patent for the company, as it covers
      a range of devices utilizing encryption technology and biometrics. The VKI-V
      is
      an example of this patent and technology used in a device.





We
      do not
      announce all sales orders received either due to confidentiality provisions
      or
      because sales are conducted indirectly through a growing base of channel
      partners.





We
      intend
      to continue the transition of our Company from research & development to the
      manufacturing and sales of our products. Because of heightened demand from
      other
      manufacturers of products in the electronic and biometric industry, and because
      some present and potential competitors have financial, marketing and
      manufacturing resources greater than we have, the lead times and delivery times
      from suppliers for some of the components required for the manufacture of our
      products are longer than anticipated. During this last Quarter the company
      secured and delivered orders for our PKI server software as well as USB (VKI)
      hardware. We have started to see a marked increase in demand for some of our
      orders product lines such as desk top sensors. As a result we have generated
      a
      gross profit from Sales during the last quarter underlining the positive forward
      momentum in sale started at the start of this year.




Recent
      Events





On
      January 4, 2006 we announced the receipt and fulfillment of sales order valued
      at approximately $260,000.00 US from Corum Marketing Inc.





On
      February 16, 2006 we announced a strategic reseller agreement with PC Mall
      Corporation.





On
      April
      3, 2006, we announced the delivery of our Cavio server solution and VKI-V
      personal identity devices to a Ministry of Defense department in
      Egypt.




Basis
      of Presentation




-18-





These
      consolidated financial statements reflect all adjustments that, in the opinion
      of management, are considered necessary for a fair presentation of the financial
      position, results of operations, and cash flows for the periods presented.
      The
      results of operations for such periods are not necessarily indicative of the
      results expected for the full fiscal year or for any future period.





The
      historical results for fiscal 2006 and 2005 include the Company and all its
      subsidiaries.




Critical
      Accounting Policies





The
      Company's critical accounting policies are particularly important to the
      portrayal of financial position and results of operations and require the
      application of significant judgments by management. As a result, the
      consolidated financial statements are subject to an inherent degree of
      uncertainty. In applying those policies, management uses its judgment to
      determine the appropriate assumptions to be used in the determination of certain
      estimates. These estimates are based on the Company's historical experience,
      terms of existing contracts, observance of trends in the industry and
      information available from outside sources, as appropriate. The Company's
      critical accounting policies are described below:




Use
      of
      Estimates in the Preparation of Financial Statements




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




Long
      Lived assets




In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”, the Company tests long-lived assets or asset groups for
      recoverability when events or changes in circumstances indicate that their
      carrying amount may not be recoverable. Circumstances which could trigger a
      review include, but are not limited to: significant decreases in the market
      price of the asset; significant adverse changes in the business climate or
      legal
      factors; accumulation of costs significantly in excess of the amount originally
      expected for the acquisition or construction of the asset; current period cash
      flow or operating losses combined with a history of losses or a forecast of
      continuing losses associated with the use of the asset; and current expectation
      that the asset will more likely than not be sold or disposed significantly
      before the end of its estimated useful life.





Recoverability
      is assessed based on the carrying amount of the asset and its fair value which
      is generally determined based on the sum of the undiscounted cash flows expected
      to result from the use and the eventual disposal of the asset, as well as
      specific appraisal in certain instances. An impairment loss is recognized when
      the carrying amount is not recoverable and exceeds fair value.




Impairment
      of Goodwill





Goodwill
      is recorded as the difference, if any, between the aggregate consideration
      paid
      for an acquisition and the fair value of the net tangible and intangible assets
      acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets
      (“SFAS 142”), the Company tests goodwill for impairment at the reporting unit
      level (operating segment or one level below an operating segment) on an annual
      basis in the fourth quarter or more frequently if the Company believes
      indicators of impairment exist. The performance of the test involves a two-step
      process. The first step of the impairment test involves comparing the fair
      values of the applicable reporting units with their aggregate carrying values,
      including goodwill. The Company generally determines the fair value of its
      reporting units using the income approach methodology of valuation that includes
      the discounted cash flow method as well as other generally accepted valuation
      methodologies. If the carrying amount of a reporting unit exceeds the reporting
      unit’s fair value, the Company performs the second step of the goodwill
      impairment test to determine the amount of impairment loss. The second step
      of
      the goodwill impairment test involves comparing the implied fair value of the
      affected reporting unit’s goodwill with the carrying value of that goodwill. If
      the actual results, or the plans and estimates, used for future impairment
      analysis are lower from the original estimates used to assess the recoverability
      of those assets, the Company could incur additional impairment
      charges





-19-




Revenue
      Recognition





In
      accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
      Bulletin No. 104, Revenue Recognition (“SAB 104”), the Company recognizes
      product revenue when the following fundamental criteria are met: (i) persuasive
      evidence of an arrangement exists, (ii) delivery has occurred or services have
      been rendered, (iii) the price to the customer is fixed or determinable and
      (iv)
      collection of the resulting receivable is reasonably assured. These criteria
      are
      usually met at the time of product shipment.





Revenue
      from software licenses and maintenance agreements is recognized in accordance
      with the provisions of SOP 97-2, Software Revenue Recognition, as amended by
      SOP
      98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect
      to
      Certain Transactions.





The
      Company records reductions to revenue for estimated product returns and pricing
      adjustments, such as competitive pricing programs and rebates, in the same
      period that the related revenue is recorded. The amount of these reductions
      is
      based on historical sales returns, analysis of credit memo data, specific
      criteria included in rebate agreements, and other factors known at the time.





Pakistan
      recognizes revenue at the point/time the software is delivered/exported.





Veridicom
      Inc. and the Company recognize revenues at the point of shipment of products.




Software
      Development Costs





Costs
      related to the development of products and software are expensed as incurred
      until technological feasibility in the form of a working model has been
      established in accordance with SFAS No. 86, “Accounting for the Costs of
      Computer Software to be Sold, Leased or Otherwise Marketed”. The time period
      between the establishment of technological feasibility and completion of product
      development is expected to be short, therefore the Company has not capitalized
      any product development costs during the presented periods.




Recent
      Accounting Pronouncements





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106, and 132(R)”. This statement requires employers to recognize the
      overfunded or underfunded status of a defined benefit postretirement plan (other
      than a multiemployer plan) as an asset or liability in its statement of
      financial position and to recognize changes in that funded status in the year
      in
      which the changes occur through comprehensive income of a business entity or
      changes in unrestricted net assets of a not-for-profit organization. This
      statement also requires an employer to measure the funded status of a plan
      as of
      the date of its year-end statement of financial position, with limited
      exceptions. The provisions of SFAS No. 158 are effective for employers with
      publicly traded equity securities as of the end of the fiscal year ending after
      December 15, 2006. The adoption of this statement is not expected to have a
      material effect on the Company's future reported financial position or results
      of operations.





-20-




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The
      objective of SFAS 157 is to increase consistency and comparability in fair
      value
      measurements and to expand disclosures about fair value measurements. SFAS
      157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS 157 applies under other accounting pronouncements
      that
      require or permit fair value measurements and does not require any new fair
      value measurements. The provisions of SFAS No. 157 are effective for fair value
      measurements made in fiscal years beginning after November 15, 2007. The
      adoption of this statement is not expected to have a material effect on the
      Company's future reported financial position or results of
      operations.





In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
      Statements No. 109”. FIN 48 clarifies the accounting for uncertainty in income
      taxes by prescribing a two-step method of first evaluating whether a tax
      position has met a more likely than not recognition threshold and second,
      measuring that tax position to determine the amount of benefit to be recognized
      in the financial statements. FIN 48 provides guidance on the presentation of
      such positions within a classified statement of financial position as well
      as on
      derecognition, interest and penalties, accounting in interim periods,
      disclosure, and transition. FIN 48 is effective for fiscal years beginning
      after
      December 15, 2006. The adoption of this statement is not expected to have a
      material effect on the Company's future reported financial position or results
      of operations.





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities". This
      statement requires all separately recognized servicing assets and servicing
      liabilities be initially measured at fair value, if practicable, and permits
      for
      subsequent measurement using either fair value measurement with changes in
      fair
      value reflected in earnings or the amortization and impairment requirements
      of
      Statement No. 140. The subsequent measurement of separately recognized servicing
      assets and servicing liabilities at fair value eliminates the necessity for
      entities that manage the risks inherent in servicing assets and servicing
      liabilities with derivatives to qualify for hedge accounting treatment and
      eliminates the characterization of declines in fair value as impairments or
      direct write-downs. SFAS No. 156 is effective for an entity's first fiscal
      year
      beginning after September 15, 2006. The adoption of this statement is not
      expected to have a material effect on the Company's future reported financial
      position or results of operations.





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments-an amendment of FASB Statements No. 133 and 140", to
      simplify and make more consistent the accounting for certain financial
      instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities", to permit fair value re-measurement for
      any
      hybrid financial instrument with an embedded derivative that otherwise would
      require bifurcation, provided that the whole instrument is accounted for on
      a
      fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the
      Impairment or Disposal of Long-Lived Assets", to allow a qualifying
      special-purpose entity to hold a derivative financial instrument that pertains
      to a beneficial interest other than another derivative financial instrument.
      SFAS No. 155 applies to all financial instruments acquired or issued after
      the
      beginning of an entity's first fiscal year that begins after September 15,
      2006,
      with earlier application allowed. The adoption of this statement is not expected
      to have a material effect on the Company's future reported financial position
      or
      results of operations .





-21-




Reclassifications





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




Results
      of Operations - Nine
      Months Ended September 30, 2006 and 2005




Net
      Revenue





Net
      revenue for the nine months ended September 30, 2006 of $1,303,135 increased
      by
      $963,449 compared to net revenue of $339,686 for the same period in 2005.
      Revenues in the third quarter of 2006 are mainly in respect of VKI, a USB flash
      drive with finger print sensor and a $600,000 sale of a license to technology.
      All other revenues for the comparative periods are in respect of sales of
      capacitive fingerprint sensors, computer peripherals and software related to
      the
      use of our fingerprint authentication technology.




Cost
      of Goods Sold





Cost
      of
      goods sold is mainly for product components purchased from suppliers and the
      cost of finished products from existing inventory. These amounted to $280,962
      for the nine months ended September 30, 2006 compared to $172,728 for the same
      period in 2005.




Gross
      Profit





The
      gross
      profit for the nine months ended September 30, 2006 of $1,022,173 was 78% of
      net
      sales compared to gross profit of $166,958 which was 49% of net sales for the
      same period in 2005. This increase in gross profit was due to a $600,000 sale
      of
      a license to technology in fiscal 2006 that had no associated costs of
      sales.




General
      and Administrative Expenses





General
      and administrative expenses, which include non-cash compensation expenses of
      $199,298, amounted to $1,390,164 for the nine months ending September 30, 2006
      compared to $2,597,551, which included non-cash compensation of $527,630, for
      the same period in 2005. The net decrease of $1,207,387 is mainly in respect
      of:





·
            A
                decrease in consulting expenses from $441,000 for the nine months
                ended
                September 30, 2005 to $157,000 for the nine months ended September
                30,
                2006. After the merger of Sunnyvale, the Company hired full time
                employees
                for services which were previously provided by consultants. This
                reduced
                consulting expenses.





·
            Commissions
                and fees which decreased to $35,000 in the nine months ended September
                30,
                2006 compared to $50,000 for the same period in 2005. This decrease
                is
                because the Company paid commissions for equity investments in
                2006.





·
            A
                decrease in travel expenses from $131,000 for the nine months ended
                September 30, 2005 to $70,000 for the nine months ended September
                30,
                2006.





·
            Stock
                based compensation, which decreased to $199,000 in the nine months
                ended
                September 30, 2006 compared to $573,000 for the same period in 2005
                as a
                result of new stock based compensation vested for employees and directors
                of the Company in accordance with the options granted in February
                2005,
                under the 2004 Stock Option Plan.




-22-




·
            Marketing
                and advertising expenses decreased from $68,000 for the nine months
                ended
                September 30, 2005 to $45,000 for the nine months ended September
                30,
                2006. This is due to costs incurred for attendance of trade shows
                in
                2005.





·
            A
                decrease in salaries expense from $1,128,000 for the ninemonths ended September 30,
                2005 to$476,000for thesix
                months ended September 30,
                2006 as a result of the recent layoff most of the Vancouver
                staff.




Research
      and Development





Research
      and development expenditure for the nine months ending September 30, 2006 was
      $357,965, compared to $944,243 for the same period in 2005. Such expenditures
      are related to salaries paid to research and development staff and on-going
      product, hardware and software enhancements. These expenditures decreased during
      the nine months ending September 30, 2006 due to funding
      constraints.




Interest
      Expense





Interest
      expense for the nine months ending September 30, 2005 amounting to $2,607,605
      was for amortization of notes discount and accrued interest on notes payable,
      compared to interest expense of $2,067,461 for the same period in 2005.




Liquidity
      and Capital Resources





On
      February 25, 2005, we completed the first of three rounds of a private placement
      whereby we have issued up to an aggregate of $5,100,000 worth of 10% callable
      secured notes convertible into shares of common stock, and warrants to purchase
      up to an aggregate of 10,200,000 shares of our common stock to certain
      accredited investors. The first of three equal installments of $1,700,000 was
      received in March, 2005.





Subsequently,
      in April 2005, the Company completed the second round of the private placement
      resulting in aggregate proceeds amounting to $1,700,000.





On
      August
      16, 2005, the third closing of the private placement was completed. As at June
      30, 2006, $5,060,000 of the aggregate proceeds were received and $40,000 was
      deemed uncollectible.





Since
      October 1, 2005 we are in default in making repayments of principal and interest
      at the default rate of 15% per annum on the callable secured notes.





On
      September 28, 2006, we issued $525,000 worth of 6% callable secured notes
      convertible into shares of common stock, and warrants to purchase up to an
      aggregate of 10,000,000 shares of our common stock to certain accredited
      investors.





On
      September 28, 2006, the Company failed to reserve the required number of shares
      and defaulted on the Notes. Upon default of the Notes, the Company is required
      to pay the greater of: i) 140% of the principle and interest outstanding on
      the
      notes plus 15% per annum on the principle and interest outstanding or ii) the
      number of shares the debt is convertible into at the time of default times
      the
      highest closing stock price between the default and mandatory prepayment
      date.





On
      October 31, 2006, we issued $505,000 worth of 6% callable secured notes
      convertible into shares of common stock, and warrants to purchase up to an
      aggregate of 10,000,000 shares of our common stock to certain accredited
      investors.





-23-




On
      October 31, 2006, the Company failed to reserve the required number of shares
      and defaulted on the Notes. Upon default of the Notes, the Company is required
      to pay the greater of: i) 140% of the principle and interest outstanding on
      the
      notes plus 15% per annum on the principle and interest outstanding or ii) the
      number of shares the debt is convertible into at the time of default times
      the
      highest closing stock price between the default and mandatory prepayment
      date.





We
      need
      to seek and secure additional financing to fund our current and future
      operations. If we are successful in obtaining this additional financing, we
      may
      not be able to do so on terms that are not excessively dilutive to our existing
      stockholders or less costly than existing sources of financing. Failure to
      secure additional financing in a timely manner and on favorable terms when
      needed in the future could have a material adverse effect on our financial
      performance, balance sheet and stock price and require us to implement cost
      reduction initiatives and curtail or cease operations .





If
      we are
      able to raise the required additional financing and if we are able to generate
      funds from operations by fulfillment of orders and product deliveries in the
      fourth quarter of this year, we expect to have sufficient funds to meet our
      operating requirements for the remainder of this year.





In
      addition, if the holders of the private placement financing notes exercise
      their
      option to convert these into common stock of our company, we would not then
      be
      required to repay the principal and interest on these notes and would therefore
      enhance our cash flow by approximately $550,000 per quarter. However, the
      noteholders are not under any obligation to convert the notes into our common
      stock.




Off-Balance
      Sheet Arrangements





None




Dividends
      and Distributions





We
      have
      not paid any cash dividends to date. We intend to retain our future earnings,
      if
      any, and we do not anticipate paying cash dividends on either class of our
      stock
      in the foreseeable future.




RISK
      FACTORS





THE
      COMPANY MAY HAVE VIOLATED FEDERAL SECURITIES LAWS




Section
      5
      of the Securities Act prohibits the public sale of securities absent an
      effective registration statement being filed with the SEC, unless an exemption
      from registration applies. On March 3, 2006, the Company filed a Form 8-K with
      the Securities and Exchange Commission (“SEC”) that, through inadvertence and
      oversight, the Company had authorized and the Company’s transfer agent had
      issued, an aggregate of 11,610,178 unlegended shares of the Company’s common
      stock in excess of the shares of its common stock allocated in the Registration
      Statement filed by the Company on Form SB-2, which was declared effective by
      the
      SEC on July 18, 2005. The amount issued does not exceed the aggregate number
      of
      shares included in such Registration Statement. The Company has reviewed and
      revised its controls and procedures, with regard to the issuance of securities,
      to ensure full compliance with Federal Securities Laws in the future, and has
      formally requested that its transfer agent do so as well. As at December 31,
      2005, there were 2,135,543 excess shares of common stock issued.




Until
      such time as the above issuance of excess shares of common stock is cured and
      rectified in a manner satisfactory to the regulators, this could impact the
      Company’s ability to raise additional capital in the market and hence its
      on-going and future operations.




-24-




The
      Company may face litigation from the Regulators and other interested parties
      and
      could incur significant legal and other costs, including any financial penalties
      that may be imposed. Any such action will negatively impact the Company’s
      liquidity and operations.




IF
      WE
      ARE SUBJECTED TO ADDITIONAL LITIGATION AND CLAIMS IN THE
      FUTURE.




If
      we are
      subjected to additional lawsuits or claims in the future, the costs and other
      effects of litigation and disputes, including the diversion of time and
      resources, and including claims, settlements, judgments, and changes in those
      matters, could have a material adverse effect on our business and financial
      condition.




OUR
      STOCK PRICE IS VOLATILE AND COULD DECLINE IN THE FUTURE.





The
      price
      of our common stock has been volatile in the past and will likely continue
      to
      fluctuate in the future. The stock market in general and the market for shares
      of technology stocks in particular has experienced extreme stock price
      fluctuations. In some cases, these fluctuations have been unrelated to the
      operating performance of the affected companies. Many companies in the
      technology and related industries, including us, have experienced dramatic
      volatility in the market prices of their common stock.





WE
      HAVE AN ACCUMULATED DEFICIT, ARE NOT CURRENTLY PROFITABLE AND EXPECT TO INCUR
      SIGNIFICANT EXPENSES IN THE FUTURE AS WE IMPLEMENT OUR NEW BUSINESS MODEL,
      WHICH
      MAY REDUCE OUR PROFITABILITY.





We
      have
      incurred a cumulative net loss since inception and are currently experiencing
      negative cash flow. We expect to continue to experience negative cash flow
      and
      operating losses for the foreseeable future as we continue to make significant
      expenditures for acquisitions, sales and marketing, international expansion,
      infrastructure development and general and administrative functions, in light
      of
      our new business model. As a result, we will need to generate significant
      revenues to achieve profitability. If our revenues grow more slowly than we
      anticipate, or if our operating expenses exceed expectations, we may experience
      reduced profitability.





OUR
      AUDITORS HAVE INDICATED SUBSTANTIAL DOUBT CONCERNING OUR ABILITY TO CONTINUE
      OPERATIONS AS A GOING CONCERN.





Our
      auditors have substantial doubt concerning our ability to continue as a going
      concern as of the year ended December 31, 2005. We cannot assure you that our
      ability to obtain additional customers or financing sources will be impaired
      as
      a result of this qualification. Additionally, we cannot assure you that our
      proposed projects and services, if fully developed, can be successfully marketed
      or that we will ever achieve significant revenues or profitable margins and
      therefore remain a going concern.





WE
      WILL BE REQUIRED TO RAISE ADDITIONAL CAPITAL TO FUND OUR
      OPERATIONS.





We
      just
      completed the last of three rounds of a private placement to raise an aggregate
      of $5,060,000. The first of three equal installments of $1,700,000 was received
      in February, 2005, the second was received in May, 2005 and the third closing
      of
      $1,660,000 was completed on August 16, 2005. If we cannot raise additional
      needed funds on acceptable terms, we will not be able to develop or enhance
      our
      products, take advantage of future opportunities or respond to competitive
      pressures or unanticipated requirements. To the extent we raise additional
      capital by issuing equity securities, our stockholders may experience
      substantial dilution. Also, any new equity securities may have greater rights,
      preferences or privileges than our existing common stock. A material shortage
      of
      capital will require us to take drastic steps such as reducing our level of
      operations, disposing of selected assets or seeking an acquisition partner.
      If
      cash is insufficient, we will not be able to continue operations.





-25-




IF
      WE
      FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE
      PRICE
      OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.





Our
      internal controls over financial reporting may have weaknesses and conditions
      that need to be addressed, the disclosure of which may have an adverse impact
      on
      the price of our common stock. We are required to establish and maintain
      appropriate internal controls over financial reporting. Failure to establish
      those controls, or any failure of those controls once established, could
      adversely impact our public disclosures regarding our business, financial
      condition or operating results. In addition, management's assessment of our
      internal controls over financial reporting may identify weaknesses and
      conditions that need to be addressed in our internal controls over financial
      reporting or other matters that may raise concerns for investors. Any actual
      or
      perceived weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting, disclosure of management's assessment of
      our
      internal controls over financial reporting or disclosure of our public
      accounting firm's attestation to or report on management's assessment of our
      internal controls over financial reporting may have an adverse impact on the
      price of our common stock.




RISKS
      RELATED TO OUR BUSINESS





WE
      FACE INTENSE COMPETITION FROM OTHER BIOMETRIC SECURITY SOLUTION PROVIDERS AS
      WELL AS IDENTIFICATION AND SECURITY SYSTEMS PROVIDERS.





A
      significant number of established and startup companies have developed or are
      developing hardware for fingerprint biometric security applications that
      currently compete or will compete directly with those products designed,
      developed and sold by us. Other companies have developed or are developing
      and
      marketing biometric security applications for the recognition of fingerprints
      that currently compete or will compete with those products designed, developed
      and sold by us. Some of these companies have developed or are developing and
      marketing semiconductor or optically based direct contact fingerprint image
      capture devices. Other companies have developed or are developing and marketing
      other methods of biometric identification such as retinal blood vessel or iris
      pattern, facial structure, or voice recognition.





If
      one or
      more of these technologies or approaches were widely adopted, it would
      significantly reduce the potential market for our products. Our products also
      compete with non-biometric technologies such as certificate authorities and
      traditional keys, cards, surveillance systems and passwords. Many competitors
      offering products that are competitive with our products and services have
      significantly more cash and resources than us. The biometric security market
      is
      a rapidly evolving and intensely competitive market, and we believe that
      additional competitors may enter the market and become significant long-term
      competitors.





We
      expect
      competition to increase and intensify in the near term in the biometrics
      markets. Companies competing with us may introduce products that are
      competitively priced, have increased performance or functionality or incorporate
      technological advances not yet developed or implemented by us.





Some
      present and potential competitors have financial, marketing, research, and
      manufacturing resources substantially greater than we have.





In
      order
      to compete effectively in this environment, we must continually develop and
      market new and enhanced products at competitive prices and must have the
      resources available to invest in significant research and development
      activities. The failure to do so could have a material adverse effect on its
      business operations, financial results and stock price.




-26-




WE
      WILL NEED TO RAISE ADDITIONAL EQUITY OR DEBT FINANCING IN THE
      FUTURE.





We
      will
      need to raise financing in the future to fund our operations. If successful
      in
      raising additional financing, we may not be able to do so on terms that are
      not
      excessively dilutive to our existing stockholders or less costly than existing
      sources of financing. Failure to secure additional financing in a timely manner
      and on favorable terms if and when needed in the future could have a material
      adverse effect on our financial performance, balance sheet and stock price
      and
      require us to implement cost reduction initiatives and curtail
      operations.





OUR
      BUSINESS WILL NOT GROW UNLESS THE MARKET FOR OUR SECURITY SOLUTIONS EXPANDS
      BOTH
      DOMESTICALLY AND INTERNATIONALLY.





A
      large
      portion of our revenues is derived from the sale of security products and
      services. We cannot accurately predict the future growth rate, if any, or the
      ultimate size of the biometric technology market. The expansion of the market
      for our products and services depends on a number of factors,
      including:





·
            the
                cost, performance and reliability of its products and services and
                the
                products and services of our
                competitors;


·
            customers'
                perception of the benefit of biometric security
                solutions;


·
            public
                perceptions of the intrusiveness of these solutions and the manner
                in
                which firms are using the biometric information
                collected;


·
            public
                perceptions regarding the confidentiality of private
                information;


·
            customers'
                satisfaction with our products and services;
                and


·
            marketing
                efforts and publicity regarding these products and
                services.





Certain
      groups have publicly objected to the use of biometric products for some
      applications on civil liberties grounds and legislation has been proposed to
      regulate the use of biometric security products. From time to time, fingerprint
      recognition and other biometrics technologies have been the focus of
      organizations and individuals seeking to curtail or eliminate the use of these
      technologies on the grounds that these technologies may be used to diminish
      personal privacy rights. In the event that such initiatives result in
      restrictive legislation, the market for fingerprint recognition products may
      be
      adversely affected. Even if biometric markets develop as we hope, our products
      and services may not gain wide market acceptance. Even if biometric security
      solutions gain wide market acceptance, our products and services may not
      adequately address the market requirements.





THE
      BIOMETRICS INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND EVOLVING
      INDUSTRY STANDARDS, WHICH COULD RENDER OUR EXISTING PRODUCTS
      OBSOLETE.





Our
      future success will depend upon our ability to develop and introduce a variety
      of new products and services and enhancements to these new products and services
      in order to address the changing and sophisticated needs of the marketplace.
      Frequently, technical development programs in the biometrics industry require
      assessments to be made of the future directions of technology and technology
      market generally, which are inherently difficult to predict.





DELAYS
      IN INTRODUCING NEW PRODUCTS, SERVICES AND ENHANCEMENTS, THE FAILURE TO CHOOSE
      CORRECTLY AMONG TECHNICAL ALTERNATIVES OR THE FAILURE TO OFFER INNOVATIVE
      PRODUCTS AND SERVICES AT COMPETITIVE PRICES MAY CAUSE CUSTOMERS TO FOREGO
      PURCHASES OF OUR PRODUCTS AND SERVICES AND PURCHASE THOSE OF OUR
      COMPETITORS.





The
      development of new or enhanced products and services is a complex and uncertain
      process that requires the accurate anticipation of technological and market
      trends. We may experience development, marketing and other technological
      difficulties that may delay or limit our ability to respond to technological
      changes, evolving industry standards, competitive developments or customer
      requirements. You should also be aware that:




-27-




·
            Our
                technology may become obsolete upon the introduction of alternative
                technologies;


·
            We
                may incur substantial costs if we need to modify our products and
                services
                to respond to these alternative
                technologies;


·
            We
                may not have sufficient resources to develop or acquire new technologies
                or to introduce new products or services capable of competing with
                future
                technologies;


·
            We
                may be unable to acquire the rights to use the intellectual property
                necessary to implement new technology;
                and


·
            When
                introducing new or enhanced products or services, we may be unable
                to
                effectively manage the transition from older products and
                services.





Continued
      participation by us in the market for biometric products that are linked to
      forensic quality databases under the jurisdiction of governmental agencies
      may
      require the investment of resources in upgrading our products and technology
      in
      order for us to compete and to meet regulatory and statutory standards. We
      may
      not have adequate resources available to us or may not adequately keep pace
      with
      appropriate requirements in order to effectively compete in the
      marketplace.





DEFECTS
      IN OUR PRODUCTS AND SERVICES COULD DIMINISH DEMAND FOR OUR PRODUCTS AND
      SERVICES, WHICH MAY HARM OUR BUSINESS.





Because
      our products and services are complex, they may contain errors or defects that
      are not found until after they are used by our customers. Errors or defects
      that
      subsequently arise could seriously harm our reputation and its ability to
      generate sales to new or existing customers.





Our
      products and services are used in systems with other vendors' products. These
      products and services can be adequately tested only when they are successfully
      integrated with these systems. Errors may be found in new products or releases
      after shipment and our products and services may not operate as expected. Errors
      or defects in our products and services could result in:





·
            loss
                of revenues and increased service and warranty
                costs;


·
            delay
                in market acceptance;


·
            loss
                of salaries; and


·
            injury
                to our reputation.





WE
      MAY
      BE SUBJECT TO LOSS IN MARKET SHARE AND MARKET ACCEPTANCE AS A RESULT OF
      MANUFACTURING ERRORS, DELAYS OR SHORTAGES.





Performance
      failure in our products or certain of our services may cause loss of market
      share, delay in or loss of market acceptance, additional warranty expense or
      product recall, or other contractual liabilities. The complexity of certain
      of
      the fingerprint recognition systems makes the manufacturing and assembly process
      of such products, especially in volume, complex. This may in turn lead to delays
      or shortages in the availability of certain products, or, in some cases, the
      unavailability of certain products. The negative effects of any delay or failure
      could be exacerbated if the delay or failure occurs in products or services
      that
      provide personal security, secure sensitive computer data, authorize significant
      financial transactions or perform other functions where a security breach could
      have significant consequences.





If
      a
      product or service launch is delayed or is the subject of an availability
      shortage because of problems with our ability to manufacture or assemble the
      product or service successfully on a timely basis, or if a product or service
      otherwise fails to meet performance criteria, we may lose revenue opportunities
      entirely and/or experience delays in revenue recognition associated with a
      product or service in addition to incurring higher operating expenses during
      the
      period required to correct the defects. We may be subject to repair,
      replacement, reimbursement and liability claims for products that fail to work
      or to meet applicable performance criteria.





-28-




There
      is
      a risk that for unforeseen reasons we may be required to repair or replace
      a
      substantial number of products in use or to reimburse customers for products
      that fail to work or meet strict performance criteria. We attempt to limit
      remedies for product or service failure to the repair or replacement of
      malfunctioning or noncompliant products or services, and also attempts to
      exclude or minimize exposure to product and related liabilities by including
      in
      our standard agreements warranty disclaimers and disclaimers for consequential
      and related damages as well as limitations on our aggregate liability. From
      time
      to time, in certain complex sale or licensing transactions, each entity may
      negotiate liability provisions that vary from such standard forms.





OUR
      EXISTING AND PROPOSED INTERNATIONAL BUSINESS EXPOSES US TO ADDITIONAL RISKS
      THAT
      MAY RESULT IN FUTURE ADDITIONAL COSTS OR LIMIT THE MARKET FOR PRODUCT
      SALES.





Products
      and services provided to our international customers account for a significant
      part of our revenues. In addition, key component of our business plan is to
      expand our reach in our foreign markets. Conducting business outside of the
      United States subjects us to additional risks, including:





·
            changes
                in regulatory requirements;


·
            reduced
                protection of intellectual property
                rights;


·
            evolving
                privacy laws;


·
            tariffs
                and other trade barriers;


·
            difficulties
                in staffing and managing foreign
                operations;


·
            problems
                in collecting accounts receivable;
                and


·
            difficulties
                in authenticating customer
                information.





We
      will
      face risks inherent to new ventures in each new market that we enter, including
      a lack of acceptance of our business model. We may also incur substantial costs
      related to entering into new markets, which may not be recoverable if we are
      unsuccessful in these markets. Failure to recover these costs and expenses
      may
      materially adversely impact our cash flow and ability to meet our regular
      operating expenses, which may, in turn harm our ability to serve our customers
      and our competitive position to obtain new customers.





In
      addition, a portion of our technology base is in Pakistan. We could be adversely
      affected by any major hostilities involving Pakistan, which result in the
      interruption or curtailment of trade between Pakistan and its trading partners.
      For example, if the United States or any of its trading partners reinstitutes
      the recently lifted trade sanctions, it may adversely impact our ability to
      continue our Pakistani operations.





IF
      WE
      FAIL TO ATTRACT AND RETAIN EMPLOYEES, OUR GROWTH COULD BE LIMITED AND OUR COSTS
      COULD INCREASE, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND
      FINANCIAL POSITION.





Our
      future success depends in large part upon our ability to attract, train and
      retain highly skilled executive-level management and creative and technical
      personnel. The competition in the technology industry for such personnel is
      intense, and we cannot be sure that we will be successful in attracting,
      training and retaining such personnel. Some of our employees and executive
      officers have joined our company recently, and all employees are subject to
      "at
      will" employment. High turnover resulting in additional training expense would
      decrease its profitability. We cannot guarantee that we will be able to replace
      any of our management personnel in the event their services become
      unavailable.





-29-




OUR
      FAILURE TO MAINTAIN THE PROPRIETARY NATURE OF OUR TECHNOLOGY, INTELLECTUAL
      PROPERTY AND MANUFACTURING PROCESSES COULD HAVE A MATERIAL ADVERSE EFFECT ON
      OUR
      BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AND ON OUR ABILITY TO
      COMPETE EFFECTIVELY.





We
      principally rely upon patent, trademark, copyright, trade secret and contract
      law to establish and protect our proprietary rights. There is a risk that claims
      allowed on any patents or trademarks that we hold may not be broad enough to
      protect our technology. In addition, our patents or trademarks may be
      challenged, invalidated or circumvented and management cannot be certain that
      the rights granted thereunder will provide us with competitive advantages.
      Moreover, any current or future issued or licensed patents, or trademarks,
      or
      currently existing or future developed trade secrets or know-how may not afford
      sufficient protection against competitors with similar technologies or
      processes, and the possibility exists that certain of our already issued patents
      or trademarks may infringe upon third party patents or trademarks or be designed
      around by others.





In
      addition, there is a risk that others may independently develop proprietary
      technologies and processes, which are the same as, substantially equivalent
      or
      superior to those possessed by us or become available in the market at a lower
      price.





There
      is
      a risk that we have infringed or in the future will infringe patents or
      trademarks owned by owners, that we will need to acquire licenses under patents
      or trademarks belonging to others for technology potentially useful or necessary
      to us and that licenses will not be available on acceptable terms, if at
      all.





We
      may
      have to litigate to enforce our patents or trademarks or to determine the scope
      and validity of other parties' proprietary rights. Litigation could be very
      costly and divert management's attention. An adverse outcome in any litigation
      may have a severe negative effect on our financial results and stock price.
      To
      determine the priority of inventions, we may have to participate in interference
      proceedings declared by the United States Patent and Trademark Office or
      oppositions in foreign patent and trademark offices, which could result in
      substantial cost to us and limitations on the scope or validity our patents
      or
      trademarks.





We
      also
      rely on trade secrets and proprietary know-how, which we seek to protect by
      confidentiality agreements with our employees, consultants, service providers
      and third parties. There is a risk that these agreements may be breached, and
      that the remedies available to us may not be adequate. In addition, our trade
      secrets and proprietary know-how may otherwise become known to or be
      independently discovered by others.





FAILURE
      TO INCREASE OUR BRAND AWARENESS COULD LIMIT OUR ABILITY TO COMPETE
      EFFECTIVELY.





If
      the
      marketplace does not associate us with high-quality products and services,
      we
      may be unable to keep our existing customers, attract new customers or
      successfully introduce new products and services. Competitive and other
      pressures may require us to increase our marketing expenses to promote our
      brand
      name, and the benefits associated with brand creation may not outweigh the
      risks
      and costs associated with establishing our brand name. Our failure to develop
      a
      strong brand name or the incurrence of excessive costs associated with
      establishing our brand name may harm our business.





WE
      HAVE A LENGTHY SALES AND IMPLEMENTATION CYCLE, WHICH INCREASES THE COST OF
      COMPLETING SALES AND RENDERS COMPLETION OF SALES LESS
      PREDICTABLE.





-30-




If
      we are
      unable to license our products and services to new customers on a timely basis
      or if our existing and proposed customers and their end-users suffer delays
      in
      the implementation and adoption of its services, our revenue may be limited
      and
      business and prospects may be harmed. Our customers must evaluate our technology
      and integrate our products and services into the products and services they
      provide. In addition, our customers may need to adopt a comprehensive sales,
      marketing and training program in order to effectively implement some of its
      products. For these and other reasons, the cycle associated with establishing
      licenses and implementing our products can be lengthy.





Our
      success depends on our ability to grow and develop our direct and indirect
      distribution channels and the inability to do so could adversely affect future
      operating results.





Our
      failure to grow and develop our direct sales channel or to increase the number
      of our indirect distribution channels could have a material adverse effect
      on
      its business, operating results and financial condition. We must continue to
      develop relationships with existing channel partners or they may choose to
      devote greater resources to supporting the products of competitors.





WE
      MAY
      BE ADVERSELY IMPACTED BY THE EVENTS OF AND ACTIONS IN RESPONSE TO SEPTEMBER
      11,
      2001. A RECURRENCE OF TERRORIST ATTACKS MAY HAVE A MATERIAL ADVERSE IMPACT
      ON
      OUR BUSINESS PLAN, OPERATIONS AND FINANCIAL CONDITION.





We
      may be
      adversely affected by the events of September 11, 2001, and the war in Iraq.
      At
      this time, the long term effects of these events, or other similar or related
      events that may occur in the future, on the biometrics industry or on worldwide
      economic conditions. We cannot assure you that our business plan, will not
      be
      adversely impacted by future terrorist attacks or actions taken in response
      to
      those attacks.




RISKS
      RELATING TO OUR CURRENT FINANCING ARRANGEMENT





THERE
      ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CALLABLE SECURED CONVERTIBLE NOTES,
      AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES
      MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.





As
      of
      November 17, 2006 we had 55,362,364 shares of common stock issued and
      outstanding and callable secured convertible notes outstanding or an obligation
      to issue callable secured convertible notes that may be converted into an
      estimated 456,000,000 shares of common stock at current market prices, and
      outstanding warrants or an obligation to issue warrants to purchase 10,200,000
      shares of common stock. In addition, the number of shares of common stock
      issuable upon conversion of the outstanding callable secured convertible have
      increased due to exercise price adjustments due to default. All of the shares,
      including all of the shares issuable upon conversion of the notes and upon
      exercise of our warrants, may be sold without restriction. The sale of these
      shares may adversely affect the market price of our common stock.





AS
      THERE IS AN EVENT OF DEFAULT, THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE
      FEATURE OF OUR CALLABLE SECURED CONVERTIBLE NOTES BECOME APPLICABLE, WHICH
      COULD
      HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.





Upon
      an
      event of default the callable secured convertible notes are convertible into
      shares of our common stock at a 50% discount to the trading price of the common
      stock prior to the conversion. The significant downward pressure on the price
      of
      the common stock as the selling stockholder converts and sells material amounts
      of common stock could have an adverse effect on our stock price. In addition,
      not only the sale of shares issued upon conversion or exercise of notes,
      warrants and options, but also the mere perception that these sales could occur,
      may adversely affect the market price of the common stock.





-31-




THE
      ISSUANCE OF SHARES UPON CONVERSION OF THE CALLABLE SECURED CONVERTIBLE NOTES
      AND
      EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION
      TO
      OUR EXISTING STOCKHOLDERS.





The
      issuance of shares upon conversion of the callable secured convertible notes
      and
      exercise of warrants may result in substantial dilution to the interests of
      other stockholders since the selling stockholders may ultimately convert and
      sell the full amount issuable on conversion. Although the selling stockholders
      may not convert their callable secured convertible notes and/or exercise their
      warrants if such conversion or exercise would cause them to own more than 4.99%
      of our outstanding common stock, this restriction does not prevent the selling
      stockholders from converting and/or exercising some of their holdings and then
      converting the rest of their holdings. In this way, the selling stockholders
      could sell more than this limit while never holding more than this limit. There
      is no upper limit on the number of shares that may be issued which will have
      the
      effect of further diluting the proportionate equity interest and voting power
      of
      holders of our common stock, including investors in this offering.





IF
      WE
      ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CALLABLE SECURED
      CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF
      AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CALLABLE SECURED
      CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH
      COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.





On
      February 25, 2005, we entered into a Security Purchase Agreement involving
      the
      sale of an aggregate of $5,100,000 principal amount of callable secured
      convertible notes and stock purchase warrants to buy 10,200,000 shares of our
      common stock. The callable secured convertible notes are due and payable, with
      10% interest, three years from the date of issuance, unless sooner converted
      into shares of our common stock. We currently have approximately $5,025,000
      callable secured convertible notes outstanding. The investor is obligated to
      purchase additional callable secured convertible notes in the aggregate amount
      of $40,000. In addition, any event of default as our failure to repay the
      principal or interest when due, our failure to issue shares of common stock
      upon
      conversion by the holder, our failure to timely file a registration statement
      or
      have such registration statement declared effective, breach of any covenant,
      representation or warranty in the Securities Purchase Agreement or related
      convertible note, the assignment or appointment of a receiver to control a
      substantial part of our property or business, the filing of a money judgment,
      writ or similar process against us in excess of $100,000, the commencement
      of a
      bankruptcy, insolvency, reorganization or liquidation proceeding against us
      and
      the delisting of our common stock could require the early repayment of the
      callable secured convertible notes, including a default interest rate of 15%
      on
      the outstanding principal balance of the notes if the default is not cured
      within the specified grace period. We anticipate that the full amount of the
      callable secured convertible notes will be converted into shares of our common
      stock, in accordance with the terms of the callable secured convertible notes.
      If we are required to repay the callable secured convertible notes, we would
      be
      required to use our limited working capital and raise additional funds. If
      we
      were unable to repay the notes when required, the note holders could commence
      legal action against us and foreclose on all of our assets to recover the
      amounts due. Any such action would require us to curtail or cease
      operations.




RISKS
      RELATED TO OUR COMMON
      STOCK





THERE
      IS NO ASSURANCE OF AN ESTABLISHED PUBLIC TRADING MARKET, WHICH WOULD ADVERSELY
      AFFECT THE ABILITY OF INVESTORS IN OUR COMPANY TO SELL THEIR SECURITIES IN
      THE
      PUBLIC MARKETS.





-32-




Although
      our common stock trades on the Over-the-Counter Bulleting Board (the "OTCBB"),
      a
      regular trading market for the securities may not be sustained in the future.
      The NASD has enacted recent changes that limit quotations on the OTCBB to
      securities of issuers that are current in their reports filed with the
      Securities and Exchange Commission. The effect on the OTCBB of these rule
      changes and other proposed changes cannot be determined at this time. The OTCBB
      is an inter-dealer, Over-The-Counter market that provides significantly less
      liquidity than the NASD's automated quotation system (the "NASDAQ Stock
      Market"). Quotes for stocks included on the OTCBB are not listed in the
      financial sections of newspapers as are those for The Nasdaq Stock Market.
      Therefore, prices for securities traded solely on the OTCBB may be difficult
      to
      obtain and holders of common stock may be unable to resell their securities
      at
      or near their original offering price or at any price. Market prices for our
      common stock will be influenced by a number of factors, including:





·
            the
                issuance of new equity securities;


·
            changes
                in interest rates;


·
            competitive
                developments, including announcements by competitors of new products
                or
                services or significant contracts, acquisitions, strategic partnerships,
                joint ventures or capital
                commitments;


·
            variations
                in quarterly operating results;


·
            change
                in financial estimates by securities
                analysts;


·
            the
                depth and liquidity of the market for our common
                stock;


·
            investor
                perceptions of our company and the technologies industries generally;
                and


·
            general
                economic and other national
                conditions.




OUR
      COMMON STOCK MAY BE DELISTED FROM THE OTCBB, WHICH MAY HAVE A MATERIAL ADVERSE
      IMPACT ON THE PRICING AND TRADING OF OUR COMMON STOCK.




Under
      recently adopted rules of the NASDAQ Stock Market a listed company that has
      failed to file a required annual or quarterly report by the due date for such
      report three times in a two year period will be removed from quotation on the
      OTCBB. Our common stock was recently been delisted and then relisted, since
      during the past year we have failed to timely file our Form 10-KSB for the
      fiscal year ended December 31, 2005, our Form 10-QSB for the periods ended
      March
      31, 2006 and June 30, 2006. In order to maintain our quotation on the OTCBB
      we
      must ensure that we do not file a late report in the time frame measured by
      the
      rule. Our failure to file a report on time will result in the Staff of the
      NASDAQ Stock Market initiating delisting proceedings pursuant to Section 6530
      of
      the NASD Manual. Further, if our common stock is removed from quotation on
      the
      OTCBB, it may become more difficult for us to raise funds through the sales
      of
      our common stock or securities.





THE
      LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE VOLATILITY IN THE
      MARKET PRICE OF OUR COMMON STOCK.





Our
      common stock is currently traded on a limited basis on the OTCBB under the
      symbol "VRDI." The quotation of our common stock on the OTCBB does not assure
      that a meaningful, consistent and liquid trading market currently exists, and
      in
      recent years such market has experienced extreme price and volume fluctuations
      that have particularly affected the market prices of many smaller companies
      like
      us. Our common stock is thus subject to volatility. In the absence of an active
      trading market:





·
            investors
                may have difficulty buying and selling or obtaining market
                quotations;


·
            market
                visibility for our common stock may be limited;
                and


·
            a
                lack of visibility for our common stock may have a depressive effect
                on
                the market for our common stock.





OUR
      COMMON STOCK COULD BE CONSIDERED A "PENNY STOCK."





-33-




Our
      common stock could be considered to be a "penny stock" if it meets one or more
      of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g)
      of the Securities Exchange Act of 1934, as amended. These include but are not
      limited to the following: (i) the stock trades at a price less than $5.00 per
      share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it
      is
      NOT quoted on The Nasdaq Stock Market, or even if so, has a price less than
      $5.00 per share; or (iv) is issued by a company with net tangible assets less
      than $2.0 million, if in business more than a continuous three years, or with
      average revenues of less than $6.0 million for the past three years. The
      principal result or effect of being designated a "penny stock" is that
      securities broker-dealers cannot recommend the stock but must trade in it on
      an
      unsolicited basis.





BROKER-DEALER
      REQUIREMENTS MAY AFFECT TRADING AND LIQUIDITY.





Section
      15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
      promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
      to provide potential investors with a document disclosing the risks of penny
      stocks and to obtain a manually signed and dated written receipt of the document
      before effecting any transaction in a penny stock for the investor's
      account.





Potential
      investors in our common stock are urged to obtain and read such disclosure
      carefully before purchasing any shares that are deemed to be "penny stock."
      Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
      account of any investor for transactions in such stocks before selling any
      penny
      stock to that investor. This procedure requires the broker-dealer to (i) obtain
      from the investor information concerning his or her financial situation,
      investment experience and investment objectives; (ii) reasonably determine,
      based on that information, that transactions in penny stocks are suitable for
      the investor and that the investor has sufficient knowledge and experience
      as to
      be reasonably capable of evaluating the risks of penny stock transactions;
      (iii)
      provide the investor with a written statement setting forth the basis on which
      the broker-dealer made the determination in (ii) above; and (iv) receive a
      signed and dated copy of such statement from the investor, confirming that
      it
      accurately reflects the investor's financial situation, investment experience
      and investment objectives. Compliance with these requirements may make it more
      difficult for holders of our common stock to resell their shares to third
      parties or to otherwise dispose of them in the market or otherwise.





SHARES
      ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
      STOCK, AS THE FUTURE SALE OF A SUBSTANTIAL AMOUNT OF OUR RESTRICTED STOCK IN
      THE
      PUBLIC MARKETPLACE COULD REDUCE THE PRICE OF OUR COMMON STOCK.





From
      time
      to time, certain of our stockholders may be eligible to sell all or some of
      their shares of common stock by means of ordinary brokerage transactions in
      the
      open market pursuant to Rule 144, promulgated under the Securities Act ("Rule
      144"), subject to certain limitations. In general, pursuant to Rule 144, a
      stockholder (or stockholders whose shares are aggregated) who has satisfied
      a
      one-year holding period may, under certain circumstances, sell within any
      three-month period a number of securities which does not exceed the greater
      of
      1% of the then outstanding shares of common stock or the average weekly trading
      volume of the class during the four calendar weeks prior to such sale. Rule
      144
      also permits, under certain circumstances, the sale of securities, without
      any
      limitations, by a non-affiliate of our company that has satisfied a two-year
      holding period. In addition, we completed the first of three rounds of a private
      placement in February 2005, whereby we granted the investors in the private
      placement certain registration rights with respect to the shares of common
      stock
      underlying their securities. Any substantial sale of common stock pursuant
      to
      Rule 144 or pursuant to any resale prospectus may have an adverse effect on
      the
      market price of our securities.





CERTAIN
      PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY MAKE IT
      MORE
      DIFFICULT FOR A THIRD PARTY TO EFFECT A CHANGE-IN-CONTROL.





-34-




Our
      Certificate of Incorporation authorizes the Board of Directors to issue up
      to
      2,000,000 shares of preferred stock. The preferred stock may be issued in one
      or
      more series, the terms of which may be determined at the time of issuance by
      the
      Board of Directors without further action by the stockholders. These terms
      may
      include voting rights including the right to vote as a series on particular
      matters, preferences as to dividends and liquidation, conversion rights,
      redemption rights and sinking fund provisions. The issuance of any preferred
      stock could diminish the rights of holders of our common stock, and therefore
      could reduce the value of such common stock. In addition, specific rights
      granted to future holders of preferred stock could be used to restrict our
      ability to merge with, or sell assets to, a third party. The ability of the
      Board of Directors to issue preferred stock could make it more difficult, delay,
      discourage, prevent or make it more costly to acquire or effect a
      change-in-control.





In
      addition, we are also subject to Section 203 of the Delaware General Corporation
      Law that, subject to certain exceptions, prohibits a Delaware corporation from
      engaging in any business combination with any interested stockholder for a
      period of three years following the date that the stockholder became an
      interested stockholder. The preceding provisions of our Certificate of
      Incorporation, as well as Section 203 of the Delaware General Corporation Law,
      could discourage potential acquisition proposals, delay or prevent a
      change-in-control and prevent changes in our management, even if such things
      would be in the best interests of our stockholders.





ITEM
      3. CONTROLS AND PROCEDURES




Evaluation
      of Disclosure Controls and Procedures





As
      of the
      end of the fiscal year ended December 31, 2005 and the nine months ended
      September 30, 2006, the Company carried out an evaluation, under the supervision
      the Chief Executive Officer who is also acting as interim Chief Financial
      Officer, of the effectiveness of the design and operation of our Company's
      disclosure controls and procedures pursuant to Rule 13a-15(b) of the U.S.
      Securities Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation,
      our Chief Executive Officer, also acting as Interim Chief Financial Officer
      concluded that, as of September 30, 2006, our disclosure controls and
      procedures, related to internal control over financial reporting and the
      recording of certain equity transactions, were not effective in light of the
      material weaknesses described below.





We
      were
      advised by Manning Elliott LLP, our independent auditors that during their
      performance of audit procedures related to our financial statements for the
      fiscal year ended December 31, 2005, they identified "material weaknesses"
      in
      our internal controls as defined in Statement on Auditing Standards No. 60,
      "Communication of Internal Control Related Matters Noted in an Audit" ("SAS
      60"). The Company is in the process of rectifying the material weaknesses which
      are described below:


§
              We
                  have begun to identify a list of key policies and procedures needed
                  to
                  improve our financial statement preparation and review
                  process
 §
              Significant
                  transactions are reviewed and approved by a supervisor before recording
                  in
                  the accounting records and financial statements




-35-




·
              We
                  have implemented a uniform chart of accounts for all subsidiaries
                  so that
                  consolidation and review of accounting records are easier and more
                  accurate
 ·
              Some
                  administrative duties completed by our internal accountant have
                  been
                  transferred to other departments allowing the accounting department
                  to
                  focus on record keeping
 ·
              We
                  have enhanced our internal procedures for journal entry recording
                  and
                  approvals on a timely basis and for efficient and accurate consolidations
                  and reporting
 ·
              We
                  have added to our review procedures on, and documentation of, our
                  accounts, including the preparation of memoranda to support our
                  significant judgments and estimates each
                  quarter




INADEQUATE
      FINANCIAL STATEMENT PREPARATION AND REVIEW PROCEDURES. We do not have adequate
      procedures and controls to ensure that accurate financial statements can be
      prepared and reviewed on a timely basis, including insufficient a) review and
      supervision within the accounting and finance departments; b) underlying
      accurate data to ensure that balances are properly summarized and posted to
      the
      general ledger; and c) technical accounting resources. If we were not, or are
      not in future periods, successful in identifying these adjustments, our
      quarterly or annual financial statements could be materially misstated, which
      could require a restatement.





·
            We
                have begun to identify a list of key policies and procedures needed
                to
                improve our financial statement preparation and review
                process


·
            Significant
                transactions are reviewed and approved by a supervisor before recording
                in
                the accounting records and financial statements


·
            We
                have enhanced our internal procedures for journal entry recording
                and
                approvals on a timely basis and for efficient and accurate consolidations
                and reporting


·
            We
                have added to our review procedures on, and documentation of, our
                accounts, including the preparation of memoranda to support our
                significant judgments and estimates each
                quarter





INADEQUATE
      CONTROLS OVER EQUITY TRANSACTIONS. We do not have adequate review and
      supervision controls or sufficient supporting documentation of certain
      equity-related transactions to ensure that equity transactions are properly
      valued and recorded on a timely basis. As a result, adjustments in the equity
      accounts and financial statements could occur. If we were not, or are not in
      future periods, successful in identifying these adjustments, our quarterly
      or
      annual financial statements could be materially misstated, which could require
      a
      restatement.





·
            We
                disclosed on Form 8K filed in March 2006 that we inadvertently issued
                shares. This was an isolated situation related to Convertible Notes.
                The
                required procedures and controls to be followed by the Company and
                by the
                transfer agent have now been revised and corrected to prevent the
                same
                error from occurring.


·
            Significant
                transactions are reviewed and approved by senior management before
                recording in the accounting records and financial statements





INADEQUATE
      ENTITY LEVEL CONTROLS. We do not have effective entity level controls. These
      weaknesses include





(i)
            weaknesses
                in the risk assessment controls, including the lack of adequate mechanisms
                for anticipating and identifying financial reporting risks; and for
                reacting to changes in the operating environment that could have
                a
                potential effect on financial
                reporting;


(ii)
            weaknesses
                in monitoring controls, including the lack of adequate staffing and
                procedures to ensure periodic evaluations of internal controls to
                ensure
                that appropriate personnel regularly obtain evidence that controls
                are
                functioning effectively and that identified control deficiencies
                are
                timely remedied.





If
      we
      were not, or are not in future periods, successful in identifying these control
      weaknesses, our quarterly or annual financial statements could be materially
      misstated, which could require a restatement.





·
            To
                address the lack of adequate accounting and finance resources and
                lack of
                effective segregation of duties, we have implemented an increased
                level of
                internal reviews and approvals. These procedures include review and
                approval by the CEO of significant transactions with financial reporting
                risk.





INADEQUATE
      SEGREGATION OF DUTIES. We do not have adequate procedures and controls in place
      to ensure proper segregation of duties within the contract approval processes.
      As a result, adjustments in the financial statements could occur and not be
      prevented or detected by our controls in a timely manner.





·
            We
                will ensure that adequate procedures are in place so that all material
                agreements and contracts entered into by the Company are approved
                by the
                Board of Directors.


·
            Refer
                to the response in the above section on inadequate entity level controls
                for planned response.




-36-




INADEQUATE
      CONTROLS OVER TIMELY PREPARATION OF BANK RECONCILIATIONS. We do not have
      adequate controls to ensure timely preparation of bank reconciliations. This
      could prevent us from recording cash receipts/payments accurately and timely.
      As
      a result, misappropriation of assets and material misstatements in our financial
      statements could occur and not be prevented or detected by our controls in
      a
      timely manner. If we were not, or are not in future periods, successful in
      recording cash transactions supported by timely cash reconciliations, our
      quarterly or annual financial statements could be materially misstated, which
      could require a restatement.





·
            We
                enhanced our internal procedures for the timely preparation of bank
                reconciliations.





INADEQUATE
      CONTROLS OVER INVENTORY AND COST OF REVENUES. We do not have adequate procedures
      and controls to ensure that cost of revenues transactions are accurately
      recorded in the correct period, and that any resulting adjusting entries are
      accurately and timely recorded in our general ledger. We do not have adequate
      control over physical inventory quantities. As a result, material post-closing
      adjustments have been posted to our general ledger.





·
            We
                will implement internal control procedures to ensure our inventory
                quantities are updated on a timely basis and reflect the actual quantities
                on hand during our quarterly and annual reporting periods.





Our
      disclosure controls and procedures are designed to ensure that the information
      required to be disclosed in our reports filed under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the U.S. Securities and Exchange Commission's (the "SEC") rules and forms,
      and to reasonably assure that such information is accumulated and communicated
      to our management, including our Chief Executive Officer who is also acting
      as
      interim Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure. A control system, no matter how well conceived
      and operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met under all potential conditions,
      regardless of how remote, and may not prevent or detect all error and all fraud.
      Because of the inherent limitations in all control systems, no evaluation of
      controls can provide absolute assurance that all control issues and instances
      of
      fraud, if any, within our company have been prevented or detected.





We
      continue to improve and refine our internal controls as an ongoing process.
      Other than as summarized above, there have been no changes in our internal
      controls over financial reporting or other factors that have materially
      affected, or are reasonably likely to materially affect, our internal controls.





The
      certifications of our principal executive officer who is also our principal
      financial officer required in accordance with Section 302 of the Sarbanes-Oxley
      Act of 2002 are attached as exhibits to this Annual Report on Form 10-KSB.
      The
      disclosures set forth in this Item 8A contain information concerning (i) the
      evaluation of our disclosure controls and procedures, and changes in internal
      control over financial reporting, referred to in paragraph 4 of the
      certifications, and (ii) material weaknesses in the design or operation of
      our
      internal control over financial reporting, referred to in paragraph 5 of the
      certifications. Those certifications should be read in conjunction with this
      Item 8A for a more complete understanding of the matters covered by the
      certification.




PART
      II. OTHER INFORMATION




ITEM
      1. LEGAL PROCEEDINGS





In
      October 2002, the Company had licensed its OneView software to Global Alpha
      Corporation (“GAC”). In July 2003, the Company entered into a License Agreement
      (“the license”) with GAC for an exclusive license to commercialize a certain
      computer software system (“the System”) that is specified in the License
      Agreement (“the Agreement”). GAC alleges that the Agreement provides the Company
      (a) pay an annual license fee (b) agree to keep accurate account of its business
      and operations concerning the license and (c) the Company grant GAC the right
      (“the Put Right”) to sell the System to the Company and that the Company agrees
      to buy the System from GAC, on terms specified in the Agreement for the purchase
      price of $200,000. The Company has accrued the liability for the minimum annual
      license fees for the last two years to date amounting to $50,000 in its
      financial statements as at September 30, 2006.





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GAC
      has
      asserted a claim for breach of contract and breach of fiduciary duty in the
      Superior Court of California, Los Angeles County, Western District (“the
      Court”), which arise out of the alleged breach of the July 2003 Agreement
      discussed above. GAC is seeking damages on its breach of contract claim, damages
      for the Company’s alleged breach of the license fee provision, damages for
      breach of fiduciary duty claim, as well as attorney’s fees and pre-judgment
      interest on all damages according to proof at trial. On December 23, 2005,
      the
      Company filed a response to the complaint denying the material allegations
      and
      asserting numerous affirmative defenses. This matter is in the early stages
      of
      proceeding. GAC has added an additional defendant to the claim, and the trial
      setting conference scheduled for April, 2006 in which the Court was expected
      to
      set a trial date has been postponed. The Company intends to vigorously defend
      the matter and investigate the possibility of an out of court
      settlement.





Five
      former employees of Veridicom Inc. have filed claims against the Company with
      the Labor Commissioner in the State of California. The former employees allege
      that the Company owes unpaid wages, salaries and vacation pay for various
      periods between July 2000 and November 2003 amounting to a total of $122,099.
      The Company has accrued for this liability in its financial statements as at
      September 30, 2006. On March 21, 2005 one of the claimants signed a letter
      of
      agreement to convert his claim of $61,054 into stock based on the closing price
      of the Company’s common stock on that day of $2.40 per share, or a total of
      25,439 shares for his entire claim. However, this settlement is subject to
      obtaining certain waivers and documents from the holders of the Company’s
      Callable Secured Convertible Notes.





On
      March
      28, 2003, the Company and one of the company's stockholders filed a lawsuit
      in
      Superior Court in the State of California against a former CEO of the Company.
      The lawsuit alleges a breach of fiduciary duty, negligence, fraud and breach
      of
      contract claiming the CEO did not devote his efforts to the Company's product
      development and market strategies or maximize the profit of the business. The
      lawsuit was settled with the former CEO agreeing to pay over $200,000 to the
      Company. This amount has not been recorded in the financial statements as the
      Company has not succeeded in collection of the same.





In
      addition, the Company is a party to a number of other lawsuits arising in the
      normal course of business. In the opinion of management, the resolution of
      these
      matters will not have a material adverse effect on the Company's operations,
      cash flows or financial position.







ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




None




ITEM
      3. DEFAULTS UPON SENIOR SECURITIES




Since
      October 1, 2005 the Company is in default in making repayments of principal
      and
      interest due on the 10% callable convertible secured notes.





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





None




ITEM
      5. OTHER INFORMATION





None




ITEM
      6. EXHIBITS





31.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Item
                601(b)(31) of Regulation S-B, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.**
            This
                exhibit shall not be deemed "filed" for purposes of section 18 of
                the
                Securities Exchange Act of 1934 or otherwise subject to the liabilities
                of
                that section, no shall it be deemed incorporated by reference in
                any
                filing under the Securities Act of 1933 or the Securities Exchange
                Act of
                1934, whether before or after the date hereof and irrespective of
                any
                general incorporation language in any filings.





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SIGNATURES





Pursuant
      to the requirements 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





VERIDICOM
                INTERNATIONAL, INC.Date:
                November 20, 2006
            /s/
              Paul MannPaul
                Mann
              President,
                Chief Executive Officer and
              Chief
                Financial Officer
              (Duly
                Authorized Officer,
              Principal
                Executive Officer
              and
                Principal Financial and Accounting
                Officer)





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