**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




**x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




For
      year
      ended December 31, 2006




**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




For
      the
      transition period from _____ to _____




**LISKA
      BIOMETRY, INC.**


(Exact
      name of registrant as specified in its charter)




Florida
              333-94265
              06-1562447(State
                  or other jurisdiction of incorporation)
              (Commission
                  File Number)
              (I.R.S
                  Employer  Identification
                  No.)




100
      Main Street Dover, New Hampshire 03820


(Address
      of principal executive offices)





**1
      877 77 LISKA**


(Issuer's
      telephone number, including area code)




**Securities
      registered pursuant to Section 12(g) of the Act: Not
      Applicable**




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. o Yes x
      No




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
      not be contained, to the best of registrant's knowledge, in definitive proxy
      or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. o




Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Exchange Act Rule 12b-2).


Yes
o
      No x




State
      issuer's revenues for its most recent fiscal year. $ 6,226,032




The
      aggregate market value of the voting and non-voting equity held by
      non-affiliates computed by reference to the price at which common equity was
      sold, or the average bid and asked price of such common equity (i.e., does
      not
      include directors, executive officers or ten percent stockholders identified
      in
      Item 11 hereof) of the issuer as of May 10, 2007 was approximately $9,900,000,
      computed by referenced to the average of the high and low sale price on May
      10,
      2007.




As
      of May
      10, 2007, there were 74,578,869 shares of our common stock issued and
      outstanding.




Transitional
      Small Business Disclosure Format (check one) Yes o No x












**LISKA
      BIOMETRY, INC.**


**FORM
      10-KSB**




**For
      the Fiscal Year Ended December 31, 2006**




PagePart
                  IItem
                  1. Description of Business.
              1Item
                  2. Description of Property.
              14Item
                  3. Legal Proceedings.
              15Item
                  4. Submission of Matters to a Vote of Security Holders.
              15Part
                  IIItem
                  5. Market for Common Equity and Related Stockholder Matters.
              15Item
                  6. Management's Discussion and Analysis or Plan of Operation.
              19Item
                  7. Financial Statements
              33Item
                  8. Changes In and Disagreements With Accountants on Accounting
                  and
                  Financial Disclosure.
              33Item
                  8A. Controls and Procedures.
              33Item
                  8B. Other Information.
              34Part
                  IIIItem
                  9. Directors, Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a)of
                  the Exchange Act.
              35Item
                  10. Executive Compensation.
              37Item
                  11. Security Ownership of Certain Beneficial Owners and Management
                  and
                  Related Stockholder Matters
              39Item
                  12. Certain Relationships and Related Transactions.
              40Item
                  13. Exhibits.
              41Item
                  14. Principal Accountant Fees and Services.
              41Signatures.
              42




**PART
      I**





**FORWARD-LOOKING
      STATEMENTS:**





This
      Annual Report on Form 10-KSB (including the section regarding Management's
      Discussion and Analysis of Financial Condition and Results of Operations)
      contains forward-looking statements regarding our business, financial condition,
      results of operations and prospects. Words such as "expects," "anticipates,"
      "intends," "plans," "believes," "seeks," "estimates" and similar expressions
      or
      variations of such words are intended to identify forward-looking statements,
      but are not deemed to represent an all-inclusive means of identifying
      forward-looking statements as denoted in this Annual Report on Form 10-KSB.
      Additionally, statements concerning future matters are forward-looking
      statements.





Although
      forward-looking statements in this Annual Report on Form 10-KSB reflect the
      good
      faith judgment of our Management, such statements can only be based on facts
      and
      factors currently known by us. Consequently, forward-looking statements are
      inherently subject to risks and uncertainties and actual results and outcomes
      may differ materially from the results and outcomes discussed in or anticipated
      by the forward-looking statements. Factors that could cause or contribute to
      such differences in results and outcomes include, without limitation, those
      specifically addressed under the heading "Risks Related to Our Business" below,
      as well as those discussed elsewhere in this Annual Report on Form 10-KSB.
      Readers are urged not to place undue reliance on these forward-looking
      statements, which speak only as of the date of this Annual Report on Form
      10-KSB. We file reports with the Securities and Exchange Commission ("SEC")..
      You can obtain any materials we file with the SEC at the SEC's Public Reference
      Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional
      information about the operation of the Public Reference Room by calling the
      SEC
      at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov)
      that contains reports, proxy and information statements, and other information
      regarding issuers that file electronically with the SEC, including
      us.





We
      undertake no obligation to revise or update any forward-looking statements
      in
      order to reflect any event or circumstance that may arise after the date of
      this
      Annual Report on Form 10-KSB. Readers are urged to carefully review and consider
      the various disclosures made throughout the entirety of this annual Report,
      which attempt to advise interested parties of the risks and factors that may
      affect our business, financial condition, results of operations and
      prospects.





**Item
      1. DESCRIPTION OF BUSINESS**





**ORGANIZATIONAL
      BACKGROUND AND HISTORY**





We
      were
      incorporated in the State of Florida on October 26, 1999 under the name “3045
      Corporation”. In January 2001, we acquired all of the issued and outstanding
      common shares of H2O International, Inc. from its shareholders, in exchange
      for
      500,042 shares of our common stock (approximately 83% of our issued and
      outstanding shares after this issuance), so that we could obtain H2O
      International, Inc.'s licensing rights to a cleaning process technology for
      large-scale water and fluid treatment, filtering, and storage facilities. In
      March of 2002 we changed the name to Liska Biometry, Inc.





1




We
      were
      considered a development stage company through June 5, 2006, when we completed
      a
      series of mergers. Effective June 5, 2006, we commenced its planned operations.
      From inception through June 2006, we had no significant revenues and, as a
      result, we have sustained losses. All of our revenue in 2006 was a result of
      our
      acquisitions.





On
      November 2, 2004, the Company formed and acquired all of the issued and
      outstanding common shares of a Canadian subsidiary, Liska Biometry (Canada)
      Inc.
      That company’s primary purpose is to carry out research and development of the
      Company’s products and to generate sales in Canada for any resulting products.
      As of December 31, 2006 the company no longer sustains operations in Canada,
      additionally the Company has forfeited their security deposit for the leased
      premises in Canada.





On
      November 23, 2005 we formed Liska Biometry (Saudi Arabia) to focus on the sale
      of our products throughout the Middle East.





On
      June
      1, 2006 for 25,000,000 shares of common stock, valued at $5,000,000 based on
      market value, we acquired Digital Card Systems and all of its subsidiaries
      through a securities purchase agreement. DCS provided the Company with and
      international presence, proprietary image capture and a proprietary ID
      management suite.





On
      June
      5, 2006 we acquired certain assets of Markow Photo Properties of Phoenix, AZ.
      We
      paid $1,516,000 to Markow through an asset purchase agreement. The Company
      acquired inventory and capital equipment. In June 2006 we changed the name
      of
      Markow to Liska Imagaing.





Our
      principal executive offices are currently located at 100 Main Street, Suite
      230,
      Dover NH 03820. Our telephone number at this address is 1 877 77 LISKA.





**BUSINESS
      DEVELOPMENT**




Merger
      with Digital Card Systems, Inc.





On
      February 13, 2006 Liska Biometry entered into a definitive Share Exchange
      Agreement with Digital Card Systems, Inc. The agreement provided that upon
      the
      terms and subject to the conditions set forth in the Agreement, Liska would
      acquire all the issued and outstanding shares of DCS in exchange for the
      issuance of 25 million restricted shares of common stock of Liska, valued at
      $5,000,000 based on market value.





On
      June
      1, 2006 the Liska and DCS consummated the agreement and the agreement became
      effective on that date, the date that the Articles of Merger were accepted
      for
      filing by the Delaware Secretary of State. The transaction was restructured
      as a
      tax-free triangular merger, whereby DCS and two of its subsidiaries became
      wholly owned subsidiaries of Liska. The agreement provides that the Shares
      of
      Common Stock to be received by DCS shareholders are restricted and will not
      be
      registered under the Securities Act of 1933, or the securities laws of any
      state, and absent an exemption from registration contained in such laws, cannot
      be transferred, hypothecated, sold or otherwise disposed of until: (i) a
      registration statement with respect to such securities is declared effective
      under the Securities Act of 1933, or (ii) Liska receives an option of counsel
      for Liska that an exemption from the registration requirements of the Securities
      Act is available.





2




Formation
      of Liska Imaging Inc., and Acquisition of Markow Photo
      Properties





On
      June
      5, 2006 Liska Biometry entered into a financing arrangement with CAMOFI Master
      LDC, an affiliate of Centrecourt Asset Management LLC. Under the arrangement,
      Liska issued CAMOFI Master LDC two convertible promissory notes, one for
      $3,000,000and a second for $2,000,000. The Convertible notes will each mature
      on
      May 31, 2009 and bear an interest rate of 10% per annum. In addition to the
      Convertible Notes and pursuant to the financing arrangement, Liska issued CAMOFI
      Master LDC a warrant to purchase up to 12,500,000 shares of common stock. The
      Warrant has a five year term and exercise price of $0.40 per share.





On
      December 29, 2006 the Company amended and restated its convertible notes with
      CAMOFI Master LDC in the amount of $3,624,676 which reflected the original
      note
      value, outstanding bridge loan and accrued interest due. The amended note will
      mature on October 31, 2009 and bears interest at 10% per annum. The Convertible
      Notes are now convertible into shares of Liska common stock at $0.14 per share.
      Additionally on December 29, 2006 the company amended and restated its’ common
      stock purchase warrant issued to CAMOFI Master LDC to purchase up to 21,000,000
      shares of common stock. The Warrant has an amended exercise price of $0.14
      per
      share.





A
      portion
      of the proceeds of this financing were used to acquire Markow Photo Properties,
      of Phoenix AZ. The balance was used as working capital. A Phoenix-based
      wholly-owned subsidiary of Liska Biometry, Inc., Liska Imaging, Inc., was formed
      on June 5, 2006, and the companies previously subsidiary to Markow Photo
      Properties, were assigned within this company. These companies, Al-Cor ID
      Systems, Colormark, Inc, and Photomark, Inc., each doing business in Phoenix
      AZ.
      Al-Cor ID Systems has a satellite office in Las Vegas, NV.





**OVERVIEW**





We
      develop revolutionary fingerprint biometric solutions enabling fast individual
      authentication, precise identification searches, and cross-platform data
      interoperability. Our innovative, scalable technology generates a short,
      repeatable, unique, numerical identifier from an individual's fingerprint.
      This
      short number becomes a precise and universal biometric identifier number
      (BIN(TM)) capable of being embedded in credit cards, driver's licenses, travel
      documents such as visas and passports, and a host of other personal
      identification credentials. Liska's innovative technology allows for seamless,
      integrated identification searches across disparate databases at all levels
      of
      government and law enforcement.





Biometric
      technology is the science involving the identification of individuals through
      the measurement of distinguishing biological characteristics.





Our
      fingerprint biometric software solutions enable identification of individuals
      in
      large ID management systems and disparate legacy databases. Offerings can be
      used for:




·
            National
                ID Card Programs




·
            Secure
                Identification Documents (Visas,
                Passports)




·
            Transaction
                Authentication (ATMs, Credit Cards)




·
            Controlled
                access to secure areas and
                networks.


Our
        initial business plan was to develop, manufacture, market and integrate
        computer-based products and services pertaining to the identification of
        individuals by employing our fingerprint biometric technology. Our current
        business plan is to:
  ·
              License
                  our fingerprint biometric software product offering to OEM's, System
                  Integrators and Value Added Resellers;
                  and
  ·
              Develop
                  customized product applications utilizing the Company's core software
                  technology.
  3


Effective
      June 1, 2006, the Company acquired all of the outstanding equity interests
      of
      Digital Card Systems, Inc., a Delaware corporation, and its affiliates, DCS
      Europe, Inc., and Cosmo ID GmbH (collectively “DCS”). With offices in Boston and
      Germany, DCS is a developer of security and ID management solutions for
      government credentials including passports, driver’s licenses, voter cards,
      national IDs, military and police IDs, and commercial IDs for hospitals, private
      industry, schools and airports On June 5, 2006 the company acquired
      substantially all of the operating assets of Markow Photo Properties in Phoenix,
      Arizona, consisting of the companies Al-Cor Identification Systems, Colormark
      Inc. and Photomark Inc. The Phoenix location will serve as the operations center
      for Liska Biometry, Inc. in the United States. We intend to optimize the core
      competencies of ID System sales, retail sales, service, support, national and
      international distribution to support the entire corporation in the US and
      abroad.




**MARKET
      OVERVIEW**





The
      attitudes and needs of governments and private enterprise towards establishing
      the positive identity of its citizens, employees and foreign visitors using
      high
      level security applications dramatically changed as a consequence of the
      terrorist attacks of September 11, 2001. Identity confirmation, once required
      only in highly sensitive areas, is now given much more consideration in a myriad
      of scenarios involving access to borders and many public and private
      venues.





Civil
      administrative projects involving national security have been accelerated on
      a
      worldwide basis; proper and secure identification is viewed as critical to
      national defense and homeland security. Several national ID and border control
      projects, such as US VISIT, utilizing biometrics (e. g. fingerprints, facial
      and
      iris recognition, palm prints, voice) to identify citizens and control entry
      of
      foreign visitors have already progressed beyond conceptual stages toward
      contract procurement. Increased public awareness, and indeed demand, for more
      pervasive security protocols has become one of the biggest drivers of the
      biometrics industry as a whole. In the face of this strong demand, adoption
      of
      biometric technology is hindered by several key factors:




·
              inability
                  of current technology to facilitate rapid identification and verification
                  of subjects;
 ·
                The
                    lack of efficient methods to allow data interchange and interoperability;
                    and
 ·
                  Strong
                      concerns about privacy, accuracy and data
                      integrity.





**TECHNOLOGY**





Our
      revolutionary fingerprint biometric software solutions build on the established
      fact that every person's fingerprints are unique to that individual. Our
      technique captures the invariant elements of an individual's fingerprint pattern
      and generates a short, repeatable but unique fixed length number that represents
      the measurement of selected invariant elements of the fingerprint. This short,
      fixed number that the Company terms the "Biometric Identifier Number" (BIN(TM))
      can be encrypted and embedded in machine-readable travel documentation such
      as
      visas, passports and drivers licenses for one-to-one authentication. Using
      a
      BIN(TM) substantially accelerates accurate identification searches against
      disparate databases such as immigration data repositories and terrorist/law
      enforcement watch lists. Importantly and critical to all users and the
      individual, the BIN(TM) cannot be reverse-engineered, and thus an individual's
      biometric data integrity is kept private and secured.





Utilizing
      this technology, the Company has developed and continues to develop, software
      applications and integrated solutions.





4


DCS
        has
        sophisticated .NET software positioned as “middleware”, which incorporates
        digital imaging, biometrics, smart chips, and related proprietary capture
        and
        output hardware to offer full security ID solutions that comply with the
        latest
        ISO and ICAO standards. DCS develops programs which integrate and optimize
        fingerprint and facial recognition algorithms with smart chips and 2D bar
        codes,
        and from its German office presents smart chip seminars and conferences for
        government and industry. The acquisition of DCS will provide significant
        international growth opportunities and further diversification of product
        and
        service offerings.


The
      merger of Liska Biometry, Inc. and Digital Card Systems has brought
      complimentary software subsystems together that we believe form a marketable
      product offering for existing Digital Card Systems and Al-Cor ID Systems
      customers, as well as with new customers we intend to pursue. A structured
      software development methodology has been defined and, upon application for
      all
      software development across the merged companies, we believe will increase
      efficiency and reduce time to market and costs under the leadership of our
      Chief
      Technology Officer. During this period the biometric software developed by
      Liska
      Biometry, Inc. and the ID card and passport software developed by Digital Card
      Systems are intended to be integrated, tested and fielded.





**CURRENT
      PRODUCTS**





The
      following is a description of the status of each of the Company's current
      software offerings:





The
      BIN(TM) 1.0 Descriptor Authentication Software




The
      Company's BIN(TM) Descriptor Authentication Software is a means of delivering
      its patent-pending fingerprint Biometric Identifier Number Algorithm as an
      integrated software solution that can be retrofitted to existing hardware and
      IT
      infrastructure deployments for 1:1 biometric authentication and 1:N database
      search. The BIN(TM) Descriptor Authentication Algorithm is a software
      application that is licensed to original equipment manufacturers, systems
      integrators and value added resellers for use within their existing security
      infrastructure solution or integrated as part of a new application
      solution.





The
      BIN(TM) 1.0 Descriptor Enrollment Software




The
      Company's BIN(TM) Descriptor Enrollment Software is a means of delivering its
      patent-pending fingerprint Biometric Identifier Number Algorithm as an
      integrated software solution that can be retrofitted to existing hardware and
      IT
      infrastructure deployments for biometric and credential enrollment, token
      generation and database population, with 1:N database watch list search
      functionality. The BIN(TM) Descriptor Enrollment Algorithm is a software
      application that is licensed to original equipment manufacturers, systems
      integrators, and value added resellers for use within their existing security
      infrastructure solution or integrated as part of a new application
      solution.




The
      BIN(TM) 1.0 Database Management Software




The
      Company's BIN(TM) Database Management Software is a means of delivering its
      patent-pending fingerprint Biometric Identifier Number Algorithm as an
      integrated software solution that can be retrofitted to existing hardware and
      IT
      infrastructure deployments for centralized BIN(TM) based ID management and
      legacy database interoperability functionality. The BIN(TM) Database Management
      Algorithm is a software application that is licensed to original equipment
      manufacturers, systems integrators, and value added resellers for use within
      their existing security infrastructure solution or integrated as part of a
      new
      application solution.





ID
      Management Hardware, Supplies and Services




As
      a
      result of the merger with Data Card Systems and the acquisition of Markow Photo
      Properties companies in Phoenix AZ, the company now offers ID Card design
      software, printer hardware, camera hardware and software, accessories and
      supplies and services to support the sold products. The Company now offers
      a
      catalog of products, supplies and services for customers with ID management
      requirements.




5




**INVESTMENTS**





In
      February 2006, the
      Company made a loan to Sogedex of Paris, France, a company engaged in the
      business of making identification and other security-related products, in the
      aggregate principal amount of 100,000 Euros. The note receivable for this loan
      bears interest at 4.5% and expires five years from the date of issuance.




In
      connection with the loan, we also received an option to purchase 80% of the
      outstanding stock of Sogedex for approximately 2,400,000 Euros. The initial
      term
      of the option expired on July 31, 2006, but can be extended through December
      31,
      2006 by providing additional funds to Sogedex in the amount of 200,000 Euros.
      If
      the note is not converted into Sogedex common stock or the option to purchase
      additional stock is not exercised, the note is due in 20 quarterly installments
      commencing in 2007 and ending in 2012. As of December 31, 2006 the Company
      has
      not provided the additional funds to extend the note, however the Company does
      plan to extend the option to purchase Sogedex.





**CUSTOMERS**





The
      merger and acquisitions activity have brought an existing customer base to
      Liska
      Biometry, Inc. Digital Card Systems and Liska Imaging Inc. have a broad range
      of
      customers, international and within the United States. These customers reside
      in
      focused, key markets within which it is possible to introduce our developing
      and
      evolving products ID management solutions. Some of the most notable
      are:





Departments
      of State


National
      and Regional Passport Offices


National
      and State Departments of Motor Vehicle


State
      and
      Private Universities


Regional
      and Local School Districts


Large
      corporations


Small
      businesses





Because
      our customers potentially include selected national and regional government
      agencies, there is a risk that we will become dependent upon a few customers.





**GEOGRAPHIC
      MARKETS**





As
      of the
      date of this Form 10-KSB, we have developed our marketing plan for our ID
      Management System Software and our biometric fingerprint encoding and
      authentication business; these markets at present include North America, Europe,
      Africa, South America, the Middle East and Asia.





**TARGET
      MARKETS**





Our
      target markets include the following:





·
              All
                  branches of the United States
                  military;


·
              Federal
                  Bureau of Investigation;




·
              Office
                  of Homeland Security;




·
              Immigration
                  and Naturalization Service;




·
              Local
                  police and sheriff's
                  departments;




·
              Department
                  of Defense Biometrics Management
                  Office
  6
  ·
              United
                  States Army Communication Electronics
                  Command;




·
              National
                  Security Agency;




·
              Justice
                  Department Management Office;




·
              Airport
                  authorities;




·
              State
                  corrections departments;




·
                  State
                      judiciary
                      departments;




·
              Education
                  departments; and




·
              State
                  Probation and Parole
                  departments.




·
              Corporations
                  with ID Management
                  requirements




·
              Financial
                  institutions;




·
              Transportation
                  Industry




·
                Childcare;
  ·
              Securities
                  and gaming agencies; and




·
              Large
                  retail organizations.





**MARKETING**





As
      a
      result of the merger and acquisitions we have developed a marketing program
      for
      our biometric software and our developing and evolving ID Management System
      software. We have marketing and sales personnel dedicated to their geographic
      locations in the North America, Europe, Africa, Asia and South
      America.





**OPERATIONS**





With
      the
      acquisition of Markow Photo Properties and the core competency of shipping,
      receiving and distribution resident within Al-Cor, and considering the totality
      of our existing revenue is derived from the Liska Imaging Inc. companies in
      Phoenix AZ, we have relocated our Sr. Vice President of Operations, Jack Lecza,
      to Phoenix to raise operational efficiencies, prepare the companies for sales
      and distribution of ever-increasing products and prepare the company for
      integration of future acquisitions.





**SOURCES
      AND AVAILABILITY OF RAW MATERIALS/PRINCIPAL SUPPLIERS**





We
      will
      rely upon third party manufacturers to manufacture our hardware computer
      technology components that comprise our fingerprint biometric applications
      and
      other products. As such, we do not anticipate being dependent upon raw materials
      or suppliers for our proposed fingerprint encoding and authentication
      operations.





**PATENTS,
      TRADEMARKS AND LICENSES:**





On
      August
      16, 2001, Lam Ko Chau, our former President, filed a provisional United States
      (U.S.) patent application in the U.S. Patent and Trademark Office (USPTO),
      entitled "Method and System for Fingerprint Encoding and Authentication" and
      having serial number No. 60/312,371. On October 1, 2001, Lam Ko Chau, our former
      President, filed a non-provisional U.S. patent application in the USPTO,
      entitled "Method and System for Fingerprint Encoding and Authentication", having
      serial number No. 09/965,809 and claiming the benefit of said provisional U.S.
      patent application. On August 15, 2002, Lam Ko Chau, our former President,
      filed
      a PCT International Patent Application with the Canadian Intellectual Property
      Office (CIPO) acting as Receiving Office under the Patent Cooperation Treaty
      (PCT), entitled "Method and System for Fingerprint Encoding and Authentication",
      having serial number PCT/CA02/01274 and claiming priority from said provisional
      U.S. patent application and said non-provisional U.S. patent application. A
      Petition to Make Special (PTMS) was filed in the USPTO on December 23, 2002
      in
      order to accelerate the examination proceedings in respect of said
      non-provisional U.S. patent application and said petition was granted on
      September 2, 2003. On February 27, 2003, Lam Ko Chau, our former President,
      assigned the right, title and interest in and to all of the aforementioned
      patent applications to Liska Biometry, Inc. for consideration of $1. On July
      18,
      2003, we assigned the right, title and interest in and to all of the
      aforementioned patent applications to Liska Biometry Inc., a Florida Corporation
      for consideration of $1. The two aforementioned assignments were recorded with
      the USPTO on March 20, 2003 and on July 23, 2003, respectively. On February
      16,
      2004, said PCT International Patent Application entered the National Phase
      in
      Canada in the name of Liska Biometry, Inc. On June 25, 2004, we received word
      that the U.S. Patent Office had granted U.S. patent 6,757,411 on the
      above-identified application. As of March 22, 2005, said the Canadian National
      Phase patent application was pending before, with no official actions having
      yet
      been received.





7




On
      November 23, 2004, Manoj Hippola, our Chief Financial Officer and Chief
      Operating Officer, filed, on behalf of the Company, a trademark application
      with
      the Canadian Patent and Trademark Office for `BIN" the Company's acronym for
      Biometric Identifier Number having docket number 1 240 590. As of December
      31,
      2006, this patent application was still pending.





On
      December 16, 2004, Dr. Peter Wrage, our Vice President of Product Operations,
      filed, on behalf of Liska, a non-provisional United States (U.S.) patent
      application in the U.S. Patent and Trademark Office (USPTO), entitled "Method
      and Apparatus for Determining a Stable Repeatable Code From Biometric
      Information" having docket number 246-03 US. A Petition to Make Special (PTMS)
      was filed concurrently with the USPTO on December 16, 2004 in order to
      accelerate the examination proceedings in respect of said non-provisional U.S.
      patent application. As of December 31, 2006, this patent application was still
      pending.





On
      December 16, 2004, Dr. Peter Wrage, our Vice President of Product Operations,
      filed, on behalf of Liska, a non-provisional United States (U.S.) patent
      application in the U.S. Patent and Trademark Office (USPTO), entitled "Database
      Employing Biometric Indexing and Method Therefore" having docket number 246-04
      US. A Petition to Make Special (PTMS) was filed concurrently with the USPTO
      on
      December 16, 2004 in order to accelerate the examination proceedings in respect
      of said non-provisional U.S. patent application. As of December 31, 2006, this
      patent application was still pending.




Our
      ability to compete in the biometrics industry will depend on our ability to
      maintain the proprietary nature of our technology, products and manufacturing
      processes. We will rely upon patent, trademark, copyright, trade secret and
      contract law to establish and protect our proprietary rights; however, there
      are
      no assurances that we will have adequate protection of our proprietary rights
      or
      that our proprietary rights will not be challenged. The loss or circumvention
      of
      our proprietary rights would have a material adverse affect upon our operations
      and financial condition. As of December 31, 2006, this patent application was
      still pending.





**COMPETITION**





The
      markets for our potential products are increasingly competitive. Our competitors
      have substantially longer operating histories, greater name recognition, larger
      customer bases and greater financial and technical resources than us. Because
      we
      are financially and operationally smaller than our competitors, we will
      encounter difficulties in capturing market share. Our competitors are able
      to
      conduct extensive marketing campaigns and create more attractive pricing of
      their target markets than we are. In addition, we do not have an established
      brand name or reputation while our competitors have significantly greater brand
      recognition, customer bases, operating histories and financial and other
      resources. In addition, our markets are characterized by rapid technological
      change, which lead to frequent introductions of new features in products to
      respond to changing consumer needs and preferences. Our competitors will have
      greater financial and operational resources by which to respond to these
      consumer needs and preferences. At the present time, we have not formulated
      a
      plan to overcome the competitive advantages of our competitors, and we will
      not
      do so until we develop our product or products.





8




**GOVERNMENTAL
      REGULATIONS**





As
      of
      December 31, 2006 and through the date of this Form 10-KSB, we have not been
      subject to government regulations pertaining to our business. Our future
      operations will be subject to extensive and ever changing federal, state and
      local laws and regulations.





**RESEARCH
      AND DEVELOPMENT:**





During
      fiscal year 2006 and 2005, we spent $220,934 and $941,321, respectively, on
      research and development.





**EMPLOYEES:**





As
      of
      December 31, 2006, Liska Biometry, Inc and its subsidiaries on a consolidated
      basis have sixty-two (62) employees, of whom five (5) were engaged in research,
      development and engineering, fourteen (14) in sales, marketing and field service
      and forty-three (43) in general administration, finance and legal. The Company
      also has two engineering consultants who work on a part time basis. We consider
      our relations with our employees to be good.





**Risk
      Factors**





**RISKS
      RELATED TO BUSINESS**





**OUR
      ABILITY TO CONTINUE AS A GOING CONCERN IS CONTINGENT UPON OUR ABILITY TO ATTAIN
      PROFITABLE OPERATIONS AND SECURE FINANCING; IF WE FAIL TO DO SO, WE WILL BE
      FORCED INTO LIQUIDATION AND YOU WILL LOSE YOUR ENTIRE
      INVESTMENT.**





Our
      independent auditors, Stark Winter Schenkein & Co. LLP, have issued their
      report and opinion regarding our balance sheet as of December 31, 2006 and
      2005,
      and related statements of operations, stockholders' (deficit) and cash flows
      for
      the years ended December 31, 2006 and 2005, expressing substantial doubt about
      our ability to continue as a going concern. For the year ended December 31,
      2006
      and for the period from our inception to December 31, 2006, we incurred net
      losses of $11,368,134 and $22,310,379respectively. Accordingly, our ability
      to
      continue as going concern is contingent upon our ability to attain profitable
      operations and secure financing and must be considered in light of the problems,
      expenses, and complications frequently encountered by entrance into established
      markets and the competitive forces in which we operate. Although we will attempt
      to obtain equity financing for our operations, if we fail to do so, we may
      be
      unable to pay our obligations, pursue our Plan of Operations, or attain
      revenue-producing operations, and we will be forced into liquidation, in which
      case you will lose your entire investment.





9




**BECAUSE
      WE HAVE NO OPERATING HISTORY PERTAINING TO OUR BIOMETRICS BASED BUSINESS, IT
      WILL BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND FINANCIAL
      PROSPECTS.**





Although
      we have formulated our Plan of Operations, we cannot implement a biometrics
      based business into our operations until we have adequate financing. Because
      we
      have not fully implemented our Plan of Operations, you will have difficulty
      evaluating our business and future prospects.





**OUR
      BUSINESS IS A NEW BUSINESS, WHICH SUBJECTS US TO FINANCIAL AND OPERATIONAL
      RISKS.**





Our
      operations are subject to all of the risks inherent in a new business
      enterprise. We currently have no revenues or products and we have no operating
      history. As a new business enterprise, we are subject to risks of cash
      shortages, substantial product development expenses and increasing losses.
      We do
      not anticipate positive cash flow at any time in the foreseeable future; even
      if
      we obtain positive cash flow, we cannot give assurances that we will be
      operating at break-even levels at that time or in the future.





**FUTURE
      GROWTH BEYOND PRESENT CAPACITY WILL REQUIRE SIGNIFICANT EXPENDITURES FOR
      EXPANSION, MARKETING AND RESEARCH AND DEVELOPMENT.**





We
      are an
      early stage business in a new and rapidly evolving market, which makes it
      difficult for investors to determine whether we will accomplish our objectives.
      We have only recently begun our biometrics business and it will not become
      operational until we receive adequate funding, if ever. As a result, we have
      no
      operating history on which you may base an evaluation of our business and
      prospects. You should consider our prospects in light of the risks,
      uncertainties, expenses and difficulties we will face as an early stage
      business, given that we operate in new and rapidly evolving markets and that
      we
      are using a new and unproven business model. These risks may include our
      potential inability to reach profitability and our lack of operating
      history.




**IF
      WE FAIL TO KEEP PACE WITH THE RAPIDLY CHANGING MARKET OF FINGERPRINT
      IDENTIFICATION, OUR REVENUES AND FINANCIAL CONDITION WILL BE NEGATIVELY
      AFFECTED.**





We
      believe that the market for our potential products is rapidly changing with
      evolving industry standards. Our future success will depend in part upon our
      ability to introduce new products and features to meet changing customer
      requirements and emerging industry standards. There can be no assurance that
      we
      will successfully complete the development of future products or that our
      current or future products will achieve market acceptance. Any delay or failure
      of these products to achieve market acceptance would adversely affect our
      business. In addition, there can be no assurance that products or technologies
      developed by others will not render our products or technologies non-competitive
      or obsolete.





**WE
      MAY BE UNABLE TO OVERCOME COMPETITIVE FORCES IN OUR INDUSTRY, WHICH WOULD
      NEGATIVELY AFFECT OUR OPERATIONS AND OUR ABILITY TO GENERATE
      REVENUES.**





We
      are in
      competition with numerous competitors in the fingerprint identification field.
      These companies offer technologies for the same purposes to which we plan to
      develop and market our technologies. These companies have substantially greater
      financial and other resources available to them. There can be no assurance
      that
      we can compete successfully with such other companies. Competitive pressures
      or
      other factors could cause us to lose market share if it develops at all, or
      result in significant price erosion, all of which would have a material adverse
      effect on our results of operations. For further information regarding our
      competition, please see page 16 of this Form 10-KSB.





10




**WE
      MAY BE SUBJECT TO SUBSTANTIAL REGULATION, WHICH MAY INCREASE OUR COSTS AND
      NEGATIVELY AFFECT OUR POTENTIAL PROFITABILITY.**





Our
      operations may be subject to varying degrees of federal, state or local laws
      and
      regulations. Our operations may be subject to federal, state and local laws
      and
      regulations controlling the development of technologies. Any of these
      regulations may increase our costs and negatively affect our potential
      profitability.





**WE
      FACE PATENT PROTECTION RISKS THAT MAY NEGATIVELY AFFECT OUR BRAND NAME
      REPUTATION, REVENUES AND POTENTIAL PROFITABILITY.**





Even
      though we have applied for patent protection of a method and system for
      fingerprint encoding and authentication with the United States Patent and
      Trademark Office, that government agency may never approve of this patent.
      Our
      patent may violate the proprietary rights of others, which may subject us to
      damage awards or judgments prohibiting the use of our technology. There is
      no
      assurance that any of our rights in any of our intellectual property will be
      enforceable, even if registered, against any prior users of similar intellectual
      property. In addition, if we fail to provide adequate proprietary protection,
      our names, our brand name reputation, revenues and potential profitability
      may
      be negatively affected.





**OUR
      MANAGEMENT HAS SIGNIFICANT CONTROL OVER STOCKHOLDER MATTERS, WHICH MAY AFFECT
      THE ABILITY OF MINORITY STOCKHOLDERS TO INFLUENCE OUR
      ACTIVITIES.**





Our
      President, Chief Financial Officer and director Christopher J. LeClerc has
      beneficial ownership 6.4% of our outstanding common stock. As such, Mr. LeClerc
      controls the outcome of all matters submitted to a vote by the holders of our
      common stock, including the election of our directors, amendments to our
      Articles of Incorporation and approval of significant corporate transactions.
      Additionally, Mr. LeClerc could delay, deter or prevent a change in our control
      that might be beneficial to our other stockholders.





Our
      Chief
      Executive Officer and director Charles Benz has beneficial ownership of 11.5
      %
      of our outstanding common stock. As such, Mr. Benz controls the outcome of
      all
      matters submitted to a vote by the holders of our common stock, including the
      election of our directors, amendments to our Articles of Incorporation and
      approval of significant corporate transactions. Additionally, Mr. Benz could
      delay, deter or prevent a change in our control that might be beneficial to
      our
      other stockholders.





Former
      officer and director Lam Ko Chau, owns 4.2 % of our outstanding common stock.
      As
      such, Mr. Chau controls the outcome of all matters submitted to a vote by the
      holders of our common stock, including the election of our directors, amendments
      to our Articles of Incorporation and approval of significant corporate
      transactions. Additionally, Mr. Chau could delay, deter or prevent a change
      in
      our control that might be beneficial to our other stockholders.





11




**OUR
        COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC.**
  The
        Securities and Exchange Commission has adopted Rule 15g-9 which establishes
        the
        definition of a "penny stock," for the purposes relevant to us, as any equity
        security that has a market price of less than $5.00 per share or with an
        exercise price of less than $5.00 per share, subject to certain exceptions.
        For
        any transaction involving a penny stock, unless exempt, the rules require:


·
            that
                a broker or dealer approve a person's account for transactions in
                penny
                stocks; and






·
              the
                  broker or dealer receives from the investor a written agreement
                  to the
                  transaction, setting forth the identity and quantity of the penny
                  stock to
                  be purchased.





In
      order
      to approve a person's account for transactions in penny stocks, the broker
      or
      dealer must:





·
              obtain
                  financial information and investment experience objectives of the
                  person;
                  and


·
              make
                  a reasonable determination that the transactions in penny stocks
                  are
                  suitable for that person and the person has sufficient knowledge
                  and
                  experience in financial matters to be capable of evaluating the
                  risks of
                  transactions in penny stocks.





The
      broker or dealer must also deliver, prior to any transaction in a penny stock,
      a
      disclosure schedule prescribed by the Commission relating to the penny stock
      market, which, in highlight form:





·
              sets
                  forth the basis on which the broker or dealer made the suitability
                  determination; and


·
              that
                  the broker or dealer received a signed, written agreement from
                  the
                  investor prior to the transaction.





Generally,
      brokers may be less willing to execute transactions in securities subject to
      the
      "penny stock" rules. This may make it more difficult for investors to dispose
      of
      our common stock and cause a decline in the market value of our stock.





Disclosure
      also has to be made about the risks of investing in penny stocks in both public
      offerings and in secondary trading and about the commissions payable to both
      the
      broker-dealer and the registered representative, current quotations for the
      securities and the rights and remedies available to an investor in cases of
      fraud in penny stock transactions. Finally, monthly statements have to be sent
      disclosing recent price information for the penny stock held in the account
      and
      information on the limited market in penny stocks.





**OUR
      BUSINESS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR
      CONTROL.**





Our
      ability to increase sales, and to profitably distribute and sell our products
      and services, is subject to a number of risks, including changes in our business
      relationships with our principal distributors, competitive risks such as the
      entrance of additional competitors into our markets, pricing and technological
      competition, risks associated with the development and marketing of new products
      and services in order to remain competitive and risks associated with changing
      economic conditions and government regulation.





**OUR
      COMMON STOCK TRADES IN A LIMITED PUBLIC MARKET, THE OVER-THE-COUNTER BULLETIN
      BOARD; ACCORDINGLY, INVESTORS FACE POSSIBLE VOLATILITY OF SHARE
      PRICE.**




Our
      common stock is currently quoted on the Over-the-Counter Bulletin Board under
      the ticker symbol LSKA. As of May 10, 2007, there were approximately 74,578,869
      shares of Common Stock outstanding.





There
      can
      be no assurance that a trading market will be sustained in the future. Factors
      such as, but not limited to, technological innovations, new products,
      acquisitions or strategic alliances entered into by us or our competitors,
      government regulatory actions, patent or proprietary rights developments, and
      market conditions for penny stocks in general could have a material effect
      on
      the liquidity of our common stock and volatility of our stock
      price.





12




**SHOULD
      OUR STOCK BECOME LISTED ON THE OTC BULLETIN BOARD IF WE FAIL TO REMAIN CURRENT
      ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD
      WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND
      THE
      ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY
      MARKET.**




Companies
      trading on the Over-The-Counter Bulletin Board, such as us, must be reporting
      issuers under the Securities Exchange Act of 1934, as amended, and must be
      current in their reports under Section 13, in order to maintain price quotation
      privileges on the OTC Bulletin Board. If we fail to remain current on our
      reporting requirements, we could be removed from the OTC Bulletin Board. As
      a
      result, the market liquidity for our securities could be severely adversely
      affected by limiting the ability of broker-dealers to sell our securities and
      the ability of stockholders to sell their securities in the secondary market.
      In
      addition, we may be unable to get re-listed on the OTC Bulletin Board, which
      may
      have an adverse material effect on our Company.





**YOU
      MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP INTERESTS DUE TO THE FUTURE ISSUANCE
      OF ADDITIONAL SHARES OF THE COMPANY’S COMMON STOCK**





We
      may in
      the future issue our previously authorized and unissued securities, which will
      result in the dilution of the ownership interests of ours present stockholders.
      We are currently authorized to issue 100,000,000 shares of Common Stock] and
      10,000,000 shares of preferred stock with such designations, preferences and
      rights as determined by our board of directors. As of December 31, 2006 , we
      have issued 72,478,869 shares of Common Stock. We have outstanding options,
      warrants and promissory notes which may be exercised or converted, into an
      additional shares of Common Stock. Issuance of these shares of Common Stock
      may
      substantially dilute the ownership interests of our existing stockholders.
      The
      potential issuance of such additional shares of Common Stock may create downward
      pressure on the trading price of our Common Stock that in turn will require
      us
      to issue additional shares to raise funds through sales of our securities.
      We
      may also issue additional shares of our capital stock in connection with the
      hiring of personnel, future acquisitions, future private placements of our
      securities for capital raising purposes, or for other business purposes. This
      will further dilute the interests of our existing holders.





**WE
      HAVE NO PLANS TO PAY DIVIDENDS ON OUR COMMON STOCK. YOU MAY NOT RECEIVE FUNDS
      WITHOUT SELLING YOUR STOCK.**





We
      do not
      anticipate paying any cash dividends on our common stock in the foreseeable
      future. We currently intend to retain future earnings, if any, to finance the
      expansion of our business. Our future dividend policy is within the discretion
      of our board of directors and will depend upon various factors, including our
      business, financial condition, results of operations, capital requirements
      and
      investment opportunities. In addition, our credit facility prohibits us from
      paying dividends.





**WE
      MAY ISSUE SHARES OF PREFERRED STOCK WITH GREATER RIGHTS THAN OUR COMMON STOCK.**





Although
      we have no current plans, arrangements, understandings or agreements to issue
      any preferred stock, our certificate of incorporation authorizes our hoard
      of
      directors to issue one or more series of preferred stock and set the terms
      of
      the preferred stock without seeking any further approval from our shareholders.
      Any preferred stock that is issued may rank ahead of our common stock, with
      respect to dividends, liquidation rights and voting rights, among other things.
      Provisions under Nevada law could delay or prevent a change in control of our
      company, which could adversely affect the price of our common stock While we
      do
      not believe that we currently have any provisions in our organizational
      documents that could prevent or delay a change in control of our company (such
      as provisions calling for a staggered board of directors, or the issuance of
      stock with super-majority voting rights), the existence of some provisions
      under
      Nevada law could delay or prevent a change in control of our company, which
      could adversely affect the price of our common stock. Nevada law imposes some
      restrictions on mergers and other business combinations between us and any
      holder of 10% or more of our outstanding common stock.





13




**Item
      2. DESCRIPTION OF PROPERTY**





We
      maintain our principal office at 100 Main Street, Suite 230, Dover, NH 03820.
      We
      currently occupy three offices and a conference room totaling 1,950 square
      feet.
      We have a five-year lease agreement with Dover Mills, LLC expiring on January
      1,
      2010. We pay a total of $2,250 per month to Dover Mills, LLC, which consists
      of
      $13.84 per square foot and (b) $2.46 per square foot operating costs plus
      escalation. We believe that our current office space and facilities are
      sufficient to meet our present needs and do not anticipate any difficulty
      securing alternative or additional space, as needed, on terms acceptable to
      us.





Liska
      Biometry (Canada) Inc. (“LBC”) did maintain its offices at 1900 City Park Drive,
      Ottawa, Ontario K1J 9L8 LBC. This office space consists of fifteen offices
      totaling 5,570 square feet under a five-year lease agreement with IMC Realty
      Corporation expiring on March 31, 2010. LBC pays a total of C$10,754 (US$8,800)
      per month consisting of: (a) C$9 (US$7.38) per square foot per year plus
      escalation; and (b) C$15.17 (US$12.44) per month for operational costs. As
      of
      December 31, 2006, LBC ceased operations and as a result, it vacated this office
      space. As a result of this vacancy, the landlord collect an aggregate of
      $12,500, which includes LBC’s security deposit.




Digital
      Card Systems, Inc. (“DCS”) maintains its executive offices at 119 Russell
      Street, Littleton, Massachusetts. This office space consists of approximately
      8,742 square feet of space under the terms of a sublease with S1, Inc. Pursuant
      to the terms of the Sublease, DCS will pay S1, Inc. $4,583.33 a month, for
      an
      aggregate amount of $55,000, until the sublease expires on June 30, 2008. We
      believe that DCS’s current office space and facilities are sufficient to meet
      their present needs and do not anticipate any difficulty securing alternative
      or
      additional space, as needed, on terms acceptable to us.





Liska
      Imaging Inc. (“Liska Imaging”) maintains its executive offices 2222,
      2212, and 2202 East McDowell Road, Phoenix, Arizona, 85006. This office space
      consists of approximately 9,000 square feet of space under the terms of a lease
      with Markow Family Limited Partnership. Pursuant to the terms of the lease,
      Liska Imaging will pay the landlord $13,475 a month until the lease expires
      in
      June 2011. So long as Liska Imaging is not in default, it shall have the option
      to extend the term of the lease for a period of five years and a right of first
      refusal to purchase the property. We
      believe that Liska Imaging’s current office space and facilities are sufficient
      to meet their present needs and do not anticipate any difficulty securing
      alternative or additional space, as needed, on terms acceptable to
      us.





Digital
      Card Systems Europe, Inc. (“DCS-Europe”) maintains its executive offices at In
      der Lache 2-4, 78056 Villingen-Schwenningen Germany. This office space consists
      of approximately 2,400 square feet of space at a rate of $3,700 a month. We
      believe that DCS-Europe’s current office space and facilities are sufficient to
      meet their present needs and do not anticipate any difficulty securing
      alternative or additional space, as needed, on terms acceptable to
      us.





We
      do not
      own any real property or intend to own any real property in the future. We
      do
      not intend to renovate, improve or develop properties. We are not subject to
      any
      competitive conditions for property and currently have no property other than
      office equipment to insure. We have no policy with respect to investments in
      real estate or interests in real estate and no policy with respect to
      investments in real estate mortgages. Further, we have no policy with respect
      to
      investments in securities of or interests in persons primarily engaged in real
      estate activities.





14




**Item
      3. LEGAL PROCEEDINGS**





There
      are
      no material legal proceedings pending or, to our knowledge, threatened against
      us.





**Item
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





**None**





**PART
      II**





**Item
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





Our
      common stock had been previously quoted on the OTC Bulletin Board under the
      symbol "FLONE". In October 2001, our common stock was de-listed from the OTC
      Bulletin Board for failure to file required periodic filings with the Securities
      and Exchange Commission. From that time and until May 2004, our common stock
      was
      quoted on the "Gray Sheets."





In
      February 2004 we filed a Form 15c-211 to have our shares re-listed on the OTC
      Bulletin Board, having updated all of our delinquent Securities and Exchange
      Commission filings. On May 17, 2004, the National Association for Securities
      Dealers approved our Form 15c-211 and we subsequently re-listed our common
      stock
      on the OTC Bulletin Board on May 18, 2004 under the symbol “LSKA”.





For
      the
      periods indicated, the following table sets forth the high and low bid prices
      per share of common stock. These prices represent inter-dealer quotations
      without retail markup, markdown, or commission and may not necessarily represent
      actual transactions.





Fiscal
                Year 2005High
            
            LowFirst
                Quarter (1)
            
            $
            0.95
            
            $
            0.26Second
                Quarter
            
            $
            3.75
            
            $
            0.21Third
                Quarter
            
            $
            0.75
            
            $
            0.31Fourth
                Quarter
            
            $
            0.51
            
            $
            0.32





Fiscal
                Year 2006High
            
            
            LowFirst
                Quarter
            
            $
            0.40
            
            $
            0.14Second
                Quarter
            
            $
            0.29
            
            $
            0.16Third
                Quarter
            
            $
            0.27
            
            $
            0.11Fourth
                Quarter
            
            $
            0.15
            
            $
            0.08





Fiscal
                Year 2007High
            
            LowFirst
                Quarter
            
            $
            0.11
            
            $
            0.075Second
                Quarter (1)
            
            $
            0.19
            
            $
            0.15





As
      of May
      10, 2007.





15




**HOLDERS:**





As
      of
      December 31, 2006, we had approximately 437 holders of our common stock. The
      number of record holders was determined from the records of our transfer agent
      and does not include beneficial owners of common stock whose shares are held
      in
      the names of various security brokers, dealers, and registered clearing
      agencies. The transfer agent of our common stock is Securities Transfer
      Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.




**DIVIDEND
      POLICY**





We
      have
      never paid any cash dividends on our capital stock and do not anticipate paying
      any cash dividends on our common stock in the foreseeable future. Any future
      determination to pay cash dividends will be at the discretion of the Board
      and
      will be dependent upon our financial condition, results of operations, capital
      requirements and such other factors as the Board deems relevant.




***Equity
      Compensation Plan Information***




The
      following table summarizes the equity compensation plans under which our
      securities may be issued as of December 31, 2006.





*Plan
                Category*
            
            Number
                of securities to be issued upon exercise of outstanding optionsand
                warrants
            
            Weighted-average
                exercise price of outstanding optionsand
                warrants
            
            Number
                of securities remaining available for future issuance under
                equitycompensation plansEquity
                compensation plans approved by security holdersEquity
                compensation plan not approved by security holders
            
            
            2,300,000
            
            
            [___
            ]
            
            2,150,000





Option/SAR
      Grants in Last Fiscal Year





The
      following table sets forth stock options granted to the members of the Company
      in the Summary Compensation Table during fiscal 2005 and 2006 under the
      Company's two employee stock option plans. Since inception, the Company has
      not


granted
      any stock appreciation rights.




Date
                  of Grant
              
              Name
              
              Options
                  Granted
              
              Exercise
                  Price
              
              Expiration3/11/2005
              
              
              Verlise
                  Walker
              
              
              100,000
              
              
              0.39
              
              
              3/11/20103/11/2005
              
              
              Peter
                  Wrage
              
              
              250,000
              
              
              0.39
              
              
              3/11/20103/11/2005
              
              
              Khaled
                  Maamoun
              
              
              25,000
              
              
              0.39
              
              
              3/11/20103/11/2005
              
              
              Dong
                  Li Zhang
              
              
              25,000
              
              
              0.39
              
              
              3/11/20103/11/2005
              
              
              Yiming
                  Zhang
              
              
              150,000
              
              
              0.39
              
              
              3/11/20103/11/2005
              
              
              Will
                  Hansen
              
              
              25,000
              
              
              0.39
              
              
              3/11/20103/11/2005
              
              
              Colin
                  Jia
              
              
              25,000
              
              
              0.39
              
              
              3/11/2010
 3/11/2005
                
                
                Song
                    Guo
                
                
                50,000
                
                
                0.39
                
                
                3/11/20104/28/2005
                
                
                Song
                    Guo
                
                
                50,000
                
                
                0.32
                
                
                4/28/20104/28/2005
                
                
                Will
                    Hansen
                
                
                10,000
                
                
                0.32
                
                
                4/28/20104/28/2005
                
                
                Peter
                    Wrage
                
                
                150,000
                
                
                0.32
                
                
                4/28/20104/28/2005
                
                
                Dong
                    Li Zhang
                
                
                35,000
                
                
                0.32
                
                
                4/28/20104/28/2005
                
                
                Colin
                    Jia
                
                
                25,000
                
                
                0.32
                
                
                4/28/20054/28/2005
                
                
                Khaled
                    Maamoun
                
                
                25000
                
                
                0.32
                
                
                4/28/20107/9/2005
                
                
                Khaled
                    Maamoun
                
                
                15,000
                
                
                0.61
                
                
                7/9/20107/9/2005
                
                
                Will
                    Hansen
                
                
                15,000
                
                
                0.61
                
                
                7/9/20107/20/2006
                
                
                Manja
                    Hippola
                
                
                150,000
                
                
                0.20
                
                
                7/_20_/2011
 
 16


**RECENT
      SALES OF UNREGISTERED SECURITIES:**




Unless
      otherwise noted, the issuances noted below are all considered exempt from
      registration by reason of Section 4(2) of the Securities Act of 1933, as
      amended.





On
      October 26th, 2005 the company issued Mercatus Partners Limited 5,000,000 shares
      of restricted stock for equity priced at $.275. The funds to date have not
      yet
      been received, the shares are currently held in escrow as Brown Brothers
      Harriman. On March 27, 2007, Mercatus Partners returned the shares to the
      Company to be cancelled.





In
      February 2006, a bridge loan of $300,000 was received from CAMOFI Master LDC,
      an
      affiliate of Centrecourt Asset Management LLC ("CAMOFI"). The note bears
      interest at 8% and was originally due on April 30, 2006. The CAMOFI bridge
      loan
      was secured by the assets of the Company and by a pledge of 3,300,000 shares
      of
      the Company's common stock owned by the Company's president. In connection
      with
      the agreement, the investor received a warrant to purchase 300,000 shares of
      our
      common stock exercisable at $0.33 per share. We also issued the investor 500,000
      shares of our common stock.





On
      June
      5, 2006 we entered into a financing arrangement with
      CAMOFI for the sale of two secured convertible notes in the aggregate principal
      amount of $5,000,000, one
      for
      $3,000,000 and a second for $2,000,000. The convertible notes will each mature
      on May 31, 2009 and bear an interest rate of 10% per annum. The
      notes
      will be convertible at the option of the holder at any time into shares of
      common stock, at an initial conversion price equal to $0.40 and $0.60, for
      the
      $3,000,000 note and $2,000,000, respectively. In
      connection with this financing, CAMOFI received a warrant to purchase 12,500,000
      shares of our common stock exercisable at $0.40 per share. This warrant shall
      have a term of five years from the date of issuance.





On
      April
      30, 2006, we extended the term of the $300,000 note from April 30 th to July
      31st by issuing CAMOFI 833,333 shares of our common stock,




On
      July
      31, 2006, in connection with the terms of the $300,000 bridge loan, CAMOFI
      received a warrant to purchase 300,000 shares of our common stock exercisable
      at
      $0.33 per share. We also issued the investor 500,000 shares of our common stock.





On
      July
      31, 2006 the Company extended its bridge note with CAMOFI from July 31, 2006
      until October 31, 2006. In consideration for this extension, we issued CAMOFI
      1,500,000 shares of our common stock and we amended the exercise price of the
      warrant issued to CAMOFI, dated June 5, 2006 from $0.40 to $0.17.





On
      December 29, 2006 we amended and restated our convertible notes with CAMOFI
      in
      the amount of $3,624,676 which reflected the original note value, outstanding
      bridge loan and accrued interest due. The amended note will mature on October
      31, 2009 and bears interest at 10% per annum. These convertible notes are now
      convertible into shares of our common stock at $0.14 per share. Additionally
      on
      December 29, 2006 we amended and restated our common stock purchase warrant
      issued to CAMOFI whereby such warrant will now allow CAMOFI to purchase up
      to
      21,000,000 shares of our common stock at an amended exercise price of $0.14
      per
      share.




17




On
      February 13, 2006, we entered into a share exchange agreement with Digital
      Card
      Systems, Inc. Pursuant to the agreement, we acquired 100% of the outstanding
      securities in Digital Card Systems, Inc. and its subsidiaries. In consideration
      for 100% of the outstanding securities in Digital Card Systems, Inc. and its
      subsidiaries, we issued to the sellers 25,000,000 shares of our common stock,
      valued at $5,000,000 based on market value. We consummated this transaction
      on
      June 1, 2006. Each share of Digital Card Systems, Inc. and its subsidiaries
      common stock issued and outstanding immediately prior to the closing of the
      agreement were converted into the right to receive 500 shares of our common
      stock.




On
      May 1,
      2006, we entered into a subscription agreement with an accredited investor
      pursuant to which we issued 1,500,000 shares of our common stock in
      consideration for $150,000.





On
      May
      30, 2006, we entered into a subscription agreement with an accredited investor
      pursuant to which we issued 250,000 shares of our common stock in consideration
      for $25,000.





During
      the quarter ending March 31, 2006, the Company issued 312,500 shares for
      services rendered.





During
      the quarter ending June 30th, 2006, the Company issued 1,737,500 shares for
      services rendered.





During
      the quarter ended September 30, 2006, the Company issued 2,953,000 shares for
      services.





During
      the twelve months endedDecember 31, 2006, the Company issued 300,000 warrants
      pursuant to the $300,000 bridge financing with CAMOFI. Each warrant entitles
      the
      holder to purchase one share of common stock at an exercise price of $0.33
      and
      all warrants expire on July 31, 2009.





During
      the twelve months ended December 31, 2006, the Company granted options to
      purchase 150,000 shares of common stock at an exercise price of $.20.





On
      November 1, 2006, we entered into a subscription agreement with an accredited
      investor for the sale of promissory notes in the aggregate principal amount
      of
      $200,000. In connection with the agreement, the investor received a warrant
      to
      purchase 200,000 shares of our common stock exercisable at $0.20 per share.
      We
      also issued the investor 400,000 shares of our common stock. The notes bear
      interest at 12% and mature 120 days from the date of issuance. In February
      2007,
      the term under this note was extended for 90 days.





On
      November 1, 2006, we entered into a subscription agreement with an accredited
      investor for the sale of promissory notes in the aggregate principal amount
      of
      $25,000. In connection with the agreement, the investor received a warrant
      to
      purchase 25,000 shares of our common stock exercisable at $0.20 per share.
      We
      also issued the investor 50,000 shares of our common stock. The notes bear
      interest at 12% and mature 120 days from the date of issuance. In February
      2007,
      the term under this note was extended for 90 days.





During
      the fourth quarter the company issued 2,682,000 for services.




18




**ITEM
      6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATIONS**




**Item
      6. Management Discussion and Analysis or Plan of
      Operations**




**FORWARD
      LOOKING STATEMENTS**





The
      information in this report contains forward-looking statements. All statements
      other than statements of historical fact made in report are forward looking.
      In
      particular, the statements herein regarding industry prospects and future
      results of operations or financial position are forward-looking statements.
      These forward-looking statements can be identified by the use of words such
      as
“believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,”
“projects,” “expects,” “may,” “will,” or “should” or other variations or similar
      words. No assurances can be given that the future results anticipated by the
      forward-looking statements will be achieved. Forward-looking statements reflect
      management’s current expectations and are inherently uncertain. Our actual
      results may differ significantly from management’s expectations.





The
      following discussion and analysis should be read in conjunction with our
      financial statements, included herewith. This discussion should not be construed
      to imply that the results discussed herein will necessarily continue into the
      future, or that any conclusion reached herein will necessarily be indicative
      of
      actual operating results in the future. Such discussion represents only the
      best
      present assessment of our management.




**OVERVIEW**




Prior
      to
      June 2006, we had no significant revenues since our inception and, as a result,
      we have sustained losses since our inception.





Effective
      June 1, 2006, we acquired all of the outstanding equity interests of Digital
      Card Systems, Inc., a Delaware corporation, and its affiliates, DCS Europe,
      Inc., and Cosmo ID GmbH.(collectively “DCS”). The aggregate consideration to the
      DCS shareholders was 25,000,000 shares of common stock, valued at $5,000,000
      based on market value. The share purchase agreement with DCS provides that
      the
      shares of common stock issued to DCS shareholders are restricted and will not
      be
      registered under the Securities Act of 1933, or the securities laws of any
      state, and absent an exemption from registration contained in such laws, cannot
      be transferred, hypothecated, sold or otherwise disposed of until; (i) a
      registration statement with respect to such securities is declared effective
      under the Securities Act of 1933, or (ii) Liska receives an opinion of counsel
      for Liska that an exemption from the registration requirements of the Securities
      Act is available.





With
      offices in Boston and Germany, DCS is a developer of security and ID management
      solutions for government credentials including passports, driver’s licenses,
      voter cards, national IDs, military and police IDs, and commercial IDs for
      hospitals, private industry, schools and airports.





DCS
      has
      sophisticated .NET software positioned as “middleware”, which incorporates
      digital imaging, biometrics, smart chips, and related proprietary capture and
      output hardware to offer full security ID solutions **** that
      comply with the latest ISO and ICAO standards. DCS develops programs which
      integrate and optimize fingerprint and facial recognition algorithms with smart
      chips and 2D bar codes, and from its German office presents smart chip seminars
      and conferences for government and industry. The acquisition of DCS has provided
      significant international growth opportunities and further diversification
      of
      product and service offerings.




Effective
      June 5, 2006, DCS acquired certain operating properties, this was limited to
      the
      capital equipment and inventory, of Markow Photo Properties, Inc., an Arizona
      corporation (“Markow”). For $1,516,000 of cash the acquired assets were placed
      into a new wholly owned subsidiary called Liska Imaging, Inc. Liska Imaging,
      Inc, is a Phoenix-based provider of all major aspects of the Identity Management
      market. Comprised of Al-Cor Identification Systems, Colormark Inc., and
      Photomark, Inc.





19


Al-Cor
      Identification Systems sells Identification Management solutions to Arizona,
      Nevada and national organizations including regional and state education
      systems, law enforcement, and small and large corporations. These solutions
      include hardware for image and information capture, database management,
      credential design and printing, and supplies for continued support of solutions
      sold.





Photomark
      Inc. sells and services photographic equipment for the professional and high-end
      consumer focusing retail operations on the sales of brand-name cameras, software
      and photographic accessories. Photomark also provides seminars and classes
      on
      all aspects of the photographic arts.





Colormark
      Inc. is focused on the processing of images, both digital and analog, and the
      printing of these images on a variety of materials from simple photographic
      paper to specialty papers to canvas in small and very large format. The company
      serves the consumer and business markets with customers ranging from households
      to national restaurant chains requiring high quality images for menu boards,
      banners and signs.





Management
      currently considers the following events, trends and uncertainties to be
      important in understanding our results of operations and financial condition:





**Comparison
      of Results of Operations for the Fiscal Years Ended December 31, 2006 and 2005**





Effective
      June 5, 2006 we emerged from the development stage and commenced
      operations ****





Revenues





Revenues
      for the fiscal years ended December 31, 2006, and 2005 were $6,226,032 and
      $0, respectively. Revenue growth in 2006 was based on sales generated by the
      acquired Markow Photo Properties companies in Phoenix (Photomark, Colormark
      and
      Al-Cor ID Solutions) and DCS sales in the US and in Europe. Successful focus
      of
      sales and marketing resources at Al-Cor ID Solutions in key market verticals
      has
      yielded cornerstone system-level project awards in the transportation and
      education sectors that provide potential application of our biometric products.





Cost
      of Revenues





Cost
      of
      revenues for the fiscal years ended December 31, 2006, and 2005 were $4,385,257
      and $0, respectively. Cost of revenues are predominantly the cost of products
      that were resold. This number rose precipitously due to the acquisition of
      the
      Liska Imaging companies and the cost of items sold in the Liska Imaging
      companies, which are predominantly retail in nature. Photomark and Al-Cor
      businesses specifically purchase significant amounts of product from a large
      number of vendors for resale.





Operating
      Expenses





Operating
      Expenses for the fiscal years ended December 31, 2006, and 2005 were $11,422,343
      and $2,942,852, respectively. Operating expenses, consisting largely of payroll,
      facilities and normal daily expenses of the Liska Imaging companies, rose with
      the merger and acquisitions.




Selling,
      General and Administrative Expenses





General
      and administrative expenses for the fiscal years ended December 31, 2006, and
      2005 were $3,643,339 and $1,536,885, respectively. G & A costs rose as a
      result of the merger of Liska and DCS, and the G&A costs incurred through
      daily operations of our Liska Imaging companies.





20




Other
      Income (Expense)





Other
      income (expense), for the fiscal year ended December 31, 2006, was 1,786,556
      comprised largely of interest expense and amortization of debt discount.





Net
      Loss





Our
      net
      loss for the fiscal years ended December 31, 2006, and 2005, amounted to
      $11,368,134 and $2,942,852, respectively.





**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      December 31, 2006, we had a working capital deficit of approximately $5,147,856,
      which consisted of current assets of approximately $2,348,973 and current
      liabilities of $7,496,829.




*Operating
      activities* :
      Liska
      Biometry, Inc. management is focused on the growth of the existing businesses
      within Liska Imaging, while setting a framework for integration of our biometric
      software within the operations, sales and marketing activities of Al-Cor ID
      Solutions. As the Beta version of the software is released in April 2007, Al-Cor
      will itself be a beta site to test the software with real customers who rely
      on
      Al-Cor’s service bureau to manufacture ID cards for their companies. Al-Cor’s
      customer base will provide a number of beta sites for testing of the Liska
      ID
      Services software product at customer sites in place of their current ID
      management software.




Al-Cor
      also is concluding the successful pilot test with Clark County School District
      in Nevada, in which Al-Cor has installed and supported an RFID system that
      authenticates the identities of students and faculty on Western High School’s
      campus. Upon successful completion in May there is a potential for numerous
      other high schools within the district to purchase similar systems.





Al-Cor
      is
      currently installing an ID management system for employees of the Phoenix Valley
      Metro/Regional Public Transportation Authority and reduced fare riders
      throughout the Phoenix area. The system consists of ten facilities and the
      identification and management of thousands of ID and reduced fare rider cards.
      This project was the first of its kind for Liska, providing the corporation
      with
      another cornerstone project that can be used to pursue other major market
      transportation systems.





Colormark
      management has identified key markets and major upgrades required to grow sales.
      We continue to grow our sales staff, modernize our facilities and customer
      service capabilities and have added a marketing function that supports
      Colormark, Al-Cor and Photomark to begin direct marketing to consumers and
      professional photographers throughout the region. Web site sales continue to
      grow at a modest rate and a key to greater growth will be the upgrading and
      strategic use of the WWW, which is an area of management focus.





Photomark
      management has generated great interest within the fine art and affluent
      hobbyist markets above and beyond that which was seen prior to the acquisition.
      Photomark management continues to grow revenues by focusing on the areas of
      lighting and equipment rental, lighting consulting, education and sales, large
      format and high end digital camera sales; and accessory sales.




21


*Investing
      Activities* :
      In
      February 2006, the Company made a loan to Sogedex of Paris, France, a company
      engaged in the business of making identification and other security-related
      products, in the aggregate principal amount of 100,000 Euros. The note
      receivable for this loan bears interest at 4.5% and expires five years from
      the
      date of issuance. The
      Note
      may be convertible at our option at any time into shares of common stock of
      Sogedex.





In
      connection with the loan, we also received an option to purchase 80% of the
      outstanding stock of Sogedex for approximately 2,400,000 Euros. The initial
      term
      of the option expired on July 31, 2006, but can be extended through December
      31,
      2006 by providing additional funds to Sogedex in the amount of 200,000 Euros.
      If
      the note is not converted into Sogedex common stock or the option to purchase
      additional stock is not exercised, the note is due in 20 quarterly installments
      commencing in 2007 and ending in 2012. As of December 31, 2006 the Company
      has
      not provided the additional funds to extend the note, however the Company does
      plan to extend the option to purchase Sogedex.





*Financing
      Activities* :
      In
      February 2006, a bridge loan of $300,000 was received from CAMOFI Master LDC,
      an
      affiliate of Centrecourt Asset Management LLC ("CAMOFI"). The note bears
      interest at 8% and was originally due on April 30, 2006. The CAMOFI bridge
      loan
      was secured by the assets of the Company and by a pledge of 3,300,000 shares
      of
      the Company's common stock owned by the Company's president. In connection
      with
      the agreement, the investor received a warrant to purchase 300,000 shares of
      our
      common stock exercisable at $0.33 per share. We also issued the investor 500,000
      shares of our common stock.





On
      June
      5, 2006 we entered into a financing arrangement with
      CAMOFI for the sale of two secured convertible notes in the aggregate principal
      amount of $5,000,000, one
      for
      $3,000,000and a second for $2,000,000. The convertible notes will each mature
      on
      May 31, 2009 and bear an interest rate of 10% per annum. The
      notes
      will be convertible at the option of the holder at any time into shares of
      common stock, at an initial conversion price equal to $0.40 and $0.60, for
      the
      $3,000,000 note and $2,000,000, respectively. In
      connection with this financing, CAMOFI received a warrant to purchase 12,500,000
      shares of our common stock exercisable at $0.40 per share. This warrant shall
      have a term of five years from the date of issuance.





On
      April
      30, 2006, we extended the term of the $300,000 note from April 30 th to July
      31st by issuing CAMOFI 833,333 shares of our common stock,




On
      July
      31, 2006, in connection with the terms of the $300,000 bridge loan, CAMOFI
      received a warrant to purchase 300,000 shares of our common stock exercisable
      at
      $0.33 per share. We also issued the investor 500,000 shares of our common stock.





On
      July
      31, 2006 the Company extended its bridge note with CAMOFI from July 31, 2006
      until October 31, 2006. In consideration for this extension, we issued CAMOFI
      1,500,000 shares of our common stock and we amended the exercise price of the
      warrant issued to CAMOFI, dated June 5, 2006 from $0.40 to $0.17.





On
      December 29, 2006 we amended and restated our convertible notes with CAMOFI
      in
      the amount of $3,624,676 which reflected the original note value, outstanding
      bridge loan and accrued interest due. The amended note will mature on October
      31, 2009 and bears interest at 10% per annum. These convertible notes are now
      convertible into shares of our common stock at $0.14 per share. Additionally
      on
      December 29, 2006 we amended and restated our common stock purchase warrant
      issued to CAMOFI whereby such warrant will now allow CAMOFI to purchase up
      to
      21,000,000 shares of our common stock at an amended exercise price of $0.14
      per
      share.




22


On
      May 1,
      2006, we entered into a subscription agreement with an accredited investor
      pursuant to which we issued 1,500,000 shares of our common stock in
      consideration for $150,000.





On
      May
      30, 2006, we entered into a subscription agreement with an accredited investor
      pursuant to which we issued 250,000 shares of our common stock in consideration
      for $25,000.





During
      the nine months ended September 30, 2006, the Company issued 300,000 warrants
      pursuant to the $300,000 bridge financing with CAMOFI. Each warrant entitles
      the
      holder to purchase one share of common stock at an exercise price of $0.33
      and
      all warrants expire on July 31, 2009.





On
      November 1, 2006, we entered into a subscription agreement with an accredited
      investor for the sale of promissory notes in the aggregate principal amount
      of
      $200,000. In connection with the agreement, the investor received a warrant
      to
      purchase 200,000 shares of our common stock exercisable at $0.20 per share.
      We
      also issued the investor 400,000 shares of our common stock. The notes bear
      interest at 12% and mature 120 days from the date of issuance. In February
      2007,
      the term under this note was extended for 90 days.





On
      November 1, 2006, we entered into a subscription agreement with an accredited
      investor for the sale of promissory notes in the aggregate principal amount
      of
      $25,000. In connection with the agreement, the investor received a warrant
      to
      purchase 25,000 shares of our common stock exercisable at $0.20 per share.
      We
      also issued the investor 50,000 shares of our common stock. The notes bear
      interest at 12% and mature 120 days from the date of issuance. In February
      2007,
      the term under this note was extended for 90 days.





**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these financial statements requires us to make
      estimates and judgments that affect the reported amounts of assets and
      liabilities, revenues and expenses, and related disclosure of contingent assets
      and liabilities at the date of the Company's financial statements. Actual
      results may differ from these estimates under different assumptions or
      conditions.





Critical
      accounting policies are defined as those that are reflective of significant
      judgments and uncertainties, and potentially result in materially different
      results under different assumptions and conditions.




**Nature
      of Operations**





The
      Company was incorporated as 3045 Corporation under the laws of the State of
      Florida on October 26, 1999. On January 19, 2001 the name was changed to Floran
      International, Inc., on June 15, 2001, the name was changed to FTLA, Inc.,
      and
      on April 1 2002, the name was changed to Liska Biometry, Inc. The Company was
      in
      the development stage until June 5, 2006 (see DCS and Markow acquisitions,
      before). The Company’s business plan consists of providing biometric
      identification services, specifically products and technology for the
      identification and authentication of individuals using live scan
      fingerprints.





On
      January 9, 2001, the Company acquired all of the issued and outstanding common
      shares of H2O International, Inc. ("H2O") in exchange for 500,042 shares of
      its
      common stock (approximately 83% of the issued and outstanding shares of the
      Company after this issuance).





23


H2O
      was a
      development stage company formed for the purpose of marketing a cleaning process
      for large-scale water and fluid treatment filtering and storage facilities.
      This
      acquisition of H2O, the accounting acquirer, by the Company, a non-operating
      entity, was considered in substance a capital transaction and has been accounted
      for as a reverse acquisition, and no goodwill or other intangible assets have
      been recorded. On this basis, the historical financial statements as of and
      prior to the acquisition date represented the operations of H2O.





On
      November 2, 2004, the Company formed and acquired all of the issued and
      outstanding common shares of a Canadian subsidiary, Liska Biometry (Canada)
      Inc.
      That company's primary purpose is to carry out research and development of
      the
      Company's products and to generate sales in Canada for any resulting products.
      As of December 31, 2006 the company no longer sustains operations in Canada,
      additionally the company has forfeited their security deposit for the leased
      premises in Canada.





On
      June
      1, 2006 we acquired Digital Card Systems and all of its subsidiaries through
      a
      securities purchase agreement. DCS provided the company with an international
      presence, proprietary image capture and a proprietary ID Management suite.




On
      June
      5, 2006 we acquired certain assets of Markow Photo Properties of Phoenix
      Arizona. We paid $1,516,000 to Markow pursuant to an asset purchase agreement.
      The company acquired inventory and capital equipment. In June 2006 we changed
      the name of Markow to Liska Imaging.





**Consolidation**





On
      June
      1, 2006 Liska Biometry, Inc. and Digital Card Systems merged. On June 5, 2006
      the company acquired substantially all of the operating assets of Markow Photo
      Properties in Phoenix, Arizona, consisting of the companies Al-Cor
      Identification Systems, Colormark Inc. and Photomark Inc. The Phoenix location
      will serve as the operations center for Liska Biometry, Inc. in the United
      States. We intend to optimize the core competencies of ID System sales, retail
      sales, service, support, national and international distribution to support
      the
      entire corporation in the US and abroad. All intercompany transactions and
      balances have been eliminated in consolidation.





**Revenue
      Recognition**




Software
      Related Services - Software related services include services to customize
      or
      enhance the software so that the software performs in accordance with specific
      customer requirements. As these services are essential to provide the required
      functionality, revenue from these arrangements is recognized in accordance
      Statement of Position (SOP) 81-1, "Accounting for Certain Construction Type
      and
      Certain Production Type Contracts, using either the percentage-of-completion
      method or the completed contract method. The percentage-of-completion method
      is
      used when the required services are quantifiable, based on the estimated number
      of labor hours necessary to complete the project, and under that method revenues
      are recognized using labor hours incurred as the measure of progress towards
      completion but is limited to revenue that has been earned by the attainment
      of
      any milestones included in the contract. The completed contract method is used
      when the required services are not quantifiable, and under that method revenues
      are recognized only when we have satisfied all of our product and/or service
      delivery obligations to the customer.





24


For
      contracts of shorter duration, revenue is generally recognized when services
      are
      performed. Contractual terms may include the following payment arrangements:
      fixed fee, full-time equivalent, milestone, and time and material. In order
      to
      recognize revenue, the following criteria must be met:





·
            Signed
                agreement —
                The
                agreement must be signed by the
                customer.





·
            Fixed
                Fee — The signed agreement must specify the fees to be received
                for the services.





·
            Delivery
                has occurred — Delivery is substantiated by time cards and where
                applicable, supplemented by an acceptance from the customer that
                milestones as agreed in the statement have been
                met.





·
            Collectibility
                is probable — The Company conducts a credit review for significant
                transactions at the time of the engagement to determine the
                credit-worthiness of the customer. Collections are monitored over
                the term
                of each project, and if a customer becomes delinquent, the revenue
                may be
                deferred. The company does not recognize the revenue until cash is
                credited.




·
            The
                company’s policy of recognition through its subsidiary, Liska Imaging, is
                as follows: For cash transactions revenue is booked immediately,
                this
                includes all credit card transactions. Additionally once a customer
                is
                invoiced revenue is recognized, assuming collectability is
                probable.




**Inventory**





Inventory
      is valued at the lower of cost or market on a first-in, first-out basis.
      Substantially all of the inventory is comprised of finished goods.





**Cash
      and Cash Equivalents**





The
      Company considers all highly liquid investments with an original maturity of three
      months or less to be cash equivalents.





**Property,
      Equipment and Depreciation**





Property
      and equipment are stated at cost. Depreciation is calculated using the straight-line
      method over the estimated useful lives of the assets of three to seven
      years.





**Net
      Income (Loss) per Common Share**





The
      Company calculates net income (loss) per share as required by Statement of
      Financial Accounting Standards ("SFAS") 128, "Earnings per Share." Basic
      earnings (loss) per share is calculated by dividing net income (loss) by the
      weighted average number of common shares outstanding for the period. Diluted
      earnings (loss) per share is calculated by dividing net income (loss) by the
      weighted average number of common shares and dilutive common stock equivalents
      outstanding. During the periods when they would be anti-dilutive, common stock
      equivalents, if any, are not considered in the computation.





**Foreign
      Currency Translation**




The
      Company maintains its accounts in United States dollars for US operations,
      in
      Canadian dollars for Canadian-based subsidiaries, and in Euros for German-based
      subsidiaries. The financial statements have been translated into United States
      dollars in accordance with SFAS No. 52, Foreign Currency
      Translation.





25


Balance
      sheet accounts have been translated using the exchange rates in effect at the
      balance sheet date and historical rates. Statements of operations amounts have
      been translated using the average exchange rate for the year. The gains and
      losses resulting from the changes in exchange rates from year to year have
      been
      reported separately as a component of comprehensive income. The gain and losses
      resulting from any inter-company balances with different functional currencies
      are recognized in statement of operations.





**Goodwill**





Goodwill
      is evaluated for potential impairment on an annual basis or whenever events
      or
      circumstances indicate that impairment may have occurred. SFAS No. 142,
“Goodwill and Other Intangible Assets”, requires that goodwill be tested for
      impairment using a two-step process. The first step of the goodwill impairment
      test, used to identify potential impairment, compares the estimated fair value
      of the reporting unit containing goodwill with the related carrying amount.
      If
      the estimated fair value of the reporting unit exceeds its carrying amount,
      the
      reporting unit’s goodwill is not considered to be impaired and the second step
      of the impairment test is unnecessary. If the reporting unit’s carrying amount
      exceeds its estimated fair value, the second step test must be performed to
      measure the amount of the goodwill impairment loss, if any. The second step
      test
      compares the implied fair value of the reporting unit’s goodwill, determined in
      the same manner as the amount of goodwill recognized in a business combination,
      with the carrying amount of such goodwill. If the carrying amount of the
      reporting unit’s goodwill exceeds the implied fair value of the goodwill so
      calculated, an impairment loss is recognized in an amount equal to the excess.
      During the year ended December 31, 2006, the Company recognized an impairment
      loss of $6,437,195. As of December 31, 2006, the Company has fully impaired
      goodwill.




**Derivative
      Financial Instruments**





In
      connection with the sale of debt or equity instruments, the Company may sell
      warrants to purchase common stock. The Company may also issue warrants to
      non-employees in connection with consulting or other services they provide.
      In
      certain circumstances, these warrants may be classified as derivative
      liabilities, rather than as equity. Additionally, debt or equity instruments
      may
      contain embedded derivative instruments, such as conversion options, which
      in
      certain circumstances may be required to be bifurcated from the associated
      host
      instrument and accounted for separately as a derivative liability.





The
      Company reviews the terms of convertible debt, if any, and equity instruments,
      to determine whether there are embedded derivative financial instruments,
      including the embedded conversion rights that are required to be bifurcated
      and
      accounted for separately as a derivative financial instrument. In circumstances
      where the convertible instrument contains more than one embedded derivative
      financial instrument, including the conversion right, that is


required
      to be bifurcated, the bifurcated derivative financial instruments are accounted
      for as a single, compound derivative financial instrument.





In
      connection with the issue of convertible debt in 2006, the Company issued
      freestanding Warrants and a right to receive shares of common stock (the
      embedded conversion feature). Although the terms of the Warrants or issuance
      of
      common stock does not provide for net-cash settlement, in certain circumstances,
      physical or net-share settlement is deemed to be outside the control of the
      Company and, accordingly, the Company is required to account for these
      freestanding Warrants as derivative liabilities, rather than as equity. In
      these
      cases, the Company deducts the initial fair value of the derivative financial
      instrument from the proceeds of sales of the convertible debt, resulting in
      the
      debt being recorded at a discount. This discount is then amortized over the
      life
      of the debt, using the effective interest method.





26


The
      identification of, and accounting for, derivative financial instruments is
      extremely complex. Derivative financial instruments are initially measured
      at
      their fair value. The Company's derivative liabilities are re-valued at each reporting
      date, with changes in the estimated fair value reported as charges or credits
      to
      income, in the period in which the changes occur. For warrants and bifurcated
      conversion options that are accounted for as derivative liabilities, the Company
      determines the fair value of these instruments using the Cox-Ross-Rubinstein
      binomial option pricing model. That model requires assumptions related to the
      remaining term of the instruments and risk-free rates of return, the Company's
      current common stock price and expected dividend yield, and the expected
      volatility of its common stock price over the life of the instrument based
      upon
      certain historical measurements. The identification of, and accounting for,
      derivative financial instruments and the assumptions used to value them can
      significantly affect the Company's financial statements.




The
      classification of derivative instruments, including whether such instruments
      should be recorded as liabilities or as equity, is re-assessed at the end of
      each reporting period. Derivative instrument liabilities are classified in
      the


balance
      sheet as current or non-current based on whether or not net-cash settlement
      of
      the derivative instrument could be required within 12 months of the balance
      sheet date. The Company does do not use derivative instruments to hedge
      exposures to cash flow, market, or foreign currency risks.





**Fair
      Value of Financial Instruments**





SFAS
      107,
      "Disclosures About Fair Value of Financial Instruments," requires disclosure
      of
      fair value information about financial instruments. Fair value estimates
      discussed herein are based upon certain market assumptions and pertinent
      information available to management as of December 31, 2006.





The
      respective carrying value of certain on-balance-sheet financial instruments
      approximate their fair values. These financial instruments include cash,
      restricted cash, trade accounts receivables, accounts payable, accrued
      expenses,


notes
      payable and due to investors. Fair values were assumed to approximate carrying
      values for these financial instruments since they are short term in nature
      and
      their carrying amounts approximate fair value or they are receivable or payable
      on demand. The carrying value of the Company's long-term debt, notes payable
      and
      due to investors approximates fair values of similar debt
      instruments.




**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Actual results could differ from those
      estimates.





**Segment
      Information**





Prior
      to
      the 2006 acquisitions, the Company operated in one segment and all activity
      was located within the United States and Canada. Effective with the merger,
      the Company organized itself into three reportable operating segments plus
      corporate





The
      following tables present segment and geographic information for the year
      ended December 31, 2006.




**SALES:**Liska
            
            $
            -Liska
                Canada
            
            
            -Liska
                Imaging
            
            
            5,034,674DCS
            
            
            29,729DCS
                Europe
            
            
            825,580Cosmo
                ID
            
            
            336,049**Consolidated
                Total**
            
            $
            6,226,032




27




**DEPRECIATION
                AND AMORTIZATION:**Liska
            
            $
            1,163,224Liska
                Canada
            
            
            -Liska
                Imaging
            
            
            76,312DCSDCS
                Europe
            
            
            -Cosmo
                ID
            
            
            -**Consolidated
                Total**
            
            $
            1,239,536




**INTEREST
                EXPENSES:**Liska
            
            $
            328,232Liska
                Canada
            
            
            -Liska
                Imaging
            
            
            -DCS
            
            
            -DCS
                Europe
            
            
            -Cosmo
                ID
            
            
            -**Consolidated
                Total**
            
            $
            328,232




**NET
                INCOME (LOSS):**Liska
            
            $
            (10,528,315
            )Liska
                Canada
            
            
            (375,595
            )Liska
                Imaging
            
            
            58,180DCS
            
            
            (507,154
            )DCS
                Europe
            
            
            (13,884
            )Cosmo
                ID
            
            
            (1,366
            )**Consolidated
                Total**
            
            $
            (11,368,134
            )




**TOTAL
                CURRENT ASSETS**Liska
            
            $
            50,802Liska
                Canada
            
            
            2,164Liska
                Imaging
            
            
            1,624,455DCS
            
            
            48,710DCS
                Europe
            
            
            451,491Cosmo
                ID
            
            
            171,351**Consolidated
                Total**
            
            $
            2,348,973




28




**CAPITAL
                ASSETS (NET)**Liska
            
            $
            3,549Liska
                Canada
            
            
            0Liska
                Imaging
            
            
            535,785DCS
            
            
            9,889DCS
                Europe
            
            
            33,411Cosmo
                ID
            
            
            36,682**Consolidated
                Total**
            
            $
            619,316




**Income
      Taxes**





The
      Company follows SFAS 109, "Accounting for Income Taxes" for recording the provision
      for income taxes. Deferred tax assets and liabilities are computed based
      upon the difference between the financial statement and income tax basis of
      assets and liabilities using the enacted marginal tax rate applicable when
      the
      related asset or liability is expected to be realized or settled. Deferred
      income tax expenses or benefits are based on the changes in the asset or
      liability each period. If available evidence suggests that it is more likely
      than not that some portion or all of the deferred tax assets will not be
      realized, a valuation allowance is required to reduce the deferred tax assets
      to
      the amount that is more likely than not to be realized. Future changes in such
      valuation allowance are included in the provision for deferred income taxes
      in
      the period of change.





**Research
      and Development**





The
      Company expenses research and development costs as incurred. Such costs include
      certain prototype products, test parts, consulting fees, and costs incurred
      with third parties to determine feasibility of products. Costs incurred for
      research and development were $220,934 and $82,861 in 2006 and 2005 and are
      included in selling, general and administrative expenses.




**Stock-Based
      Compensation**





The
      Company accounts for equity instruments issued to employees for services based
      on
      the fair value of the equity instruments issued and accounts for equity
      instruments issued to other than employees based on the fair value of the
      consideration received or the fair value of the equity instruments, whichever
      is
      more reliably measurable. The Company accounts for stock based compensation
      in
      accordance with SFAS 123, "Accounting for Stock-Based Compensation." The
      provisions of SFAS 123 allow companies to either expense the estimated fair
      value of stock options or to continue to follow the intrinsic value method
      set
      forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued
      to
      Employees" ("APB 25") but disclose the pro forma effects on net income (loss)
      had the fair value of the options been expensed.





In
      December 2004, the FASB issued SFAS 123 (revised 2004) “Share-Based Payment”.
      This Statement requires that the cost resulting from all share-based
      transactions be recorded in the financial statements. The Statement establishes
      fair value as the measurement objective in accounting for share-based payment
      arrangements and requires all entities to apply a fair-value-based measurement
      in accounting for share-based payment transactions with employees. The Statement
      also establishes fair value as the measurement objective for transactions in
      which an entity acquires goods or services from non-employees in share-based
      payment transactions. The Statement replaces SFAS 123 “Accounting for
      Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for
      Stock Issued to Employees”. The provisions of this Statement were effective for
      the Company beginning with its fiscal year ended December 31, 2006. Stock-based
      awards to non-employees are accounted for whichever is more reliably measurable
      in accordance with the provisions of the FASB issued SFAS 123 (revised 2004)
      “Share-Based Payment” and Emerging Issues Task Force (“EITF”) Issue No. 96-18,
      Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods and Services.





29


**Reclassifications**





Certain
      items previously reported in the prior year have been reclassified to conform
      to current year presentation.




**New
      Pronouncements**





SFAS
      155
      - "Accounting for Certain Hybrid Financial Instruments--an amendment of FASB
      Statements No. 133 and 140" This Statement, issued in February 2006, amends
      FASB
      Statements No. 133, "Accounting for Derivative Instruments and Hedging
      Activities", and No. 140, "Accounting for Transfers and Servicing of Financial
      Assets and Extinguishments of Liabilities". This Statement resolves issues
      addressed in Statement 133 Implementation Issue No. D1, "Application of
      Statement 133 to Beneficial Interests in Securitized Financial
      Assets."





This
      Statement:




a.
      Permits fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require
      bifurcation





b.
      Clarifies which interest-only strips and principal-only strips are not subject
      to the requirements of Statement 133





c.
      Establishes a requirement to evaluate interests in securitized financial assets
      to identify interests that are freestanding derivatives or that are hybrid
      financial instruments that contain an embedded derivative requiring bifurcation





d.
      Clarifies that concentrations of credit risk in the form of subordination are
      not embedded derivatives





e. Amends
      Statement 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial
      instrument.





This
      Statement is effective for the Company for all financial instruments acquired
      or
      issued after the beginning of our fiscal year beginning January 1,
      2007.





The
      fair
      value election provided for in paragraph 4(c) of this Statement may also be
      applied upon adoption of this Statement for hybrid financial instruments that
      had been bifurcated under paragraph 12 of Statement 133 prior to the adoption
      of
      this Statement. Earlier adoption is permitted as of the beginning of our fiscal
      year, provided we have not yet issued financial statements, including financial
      statements for any interim period, for that fiscal year. Provisions of this
      Statement may be applied to instruments that we hold at the date of adoption
      on
      an instrument-by-instrument basis.





The
      Company is currently reviewing the effects of adoption of this statement but
      it
      is not expected to have a material impact on our financial
      statements.





SFAS
      156
      - "Accounting for Servicing of Financial Assets--an amendment of FASB Statement
      No. 140"





30





This
      Statement, issued in March 2006, amends FASB Statement No. 140, "Accounting
      for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
      with respect to the accounting for separately recognized servicing assets and
      servicing liabilities. This Statement:





1.
      Requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract in certain situations.





2.
      Requires all separately recognized servicing assets and servicing liabilities
      to
      be initially measured at fair value, if practicable.





3.
      Permits an entity to choose either the amortization method or the fair value
      measurement method for each class of separately recognized servicing assets
      and
      servicing liabilities.





4.
      At its
      initial adoption, permits a one-time reclassification of available-for-sale
      securities to trading securities by entities with recognized servicing rights,
      without calling into question the treatment of other available-for-sale
      securities under Statement 115, provided that the available-for-sale securities
      are identified in some manner as offsetting the entity's exposure to changes
      in
      fair value of servicing assets or servicing liabilities that a servicer elects
      to subsequently measure at fair value.





5.
      Requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities.





Adoption
      of this Statement is required as of the beginning of the first fiscal year
      that
      begins after September 15, 2006. The adoption of this statement is not expected
      to have a material impact on our financial statements.





In
      September 2006, the FASB issued Statement No. 157, "Fair Value Measurements".
      This Statement defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles and expands disclosure about
      fair value measurement. The implementation of this guidance is not expected
      to
      have any impact on the Company's financial statements.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 158, "Employers' Accounting for Defined
      Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
      No. 87, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires companies
      to
      recognize a net liability or asset and an offsetting adjustment to accumulated
      other comprehensive income to report the funded status of defined benefit
      pension and other postretirement benefit plans. SFAS No. 158 requires
      prospective application, recognition and disclosure requirements effective
      for
      the Company's fiscal year ending December 31, 2007. Additionally, SFAS No.
      158
      requires companies to measure plan assets and obligations at their year-end
      balance sheet date. This requirement is effective for the Company's fiscal
      year
      ending December 31, 2009. The Company does not expect that it will have a
      material impact on its financial statements.





SFAS
      159
      - ‘The Fair Value Option for Financial Assets and Financial
      Liabilities—Including an amendment of FASB Statement No. 115’


In
      February 2007, the FASB issued **** Financial
      Accounting Standard No. 159 ' *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115'* or SFAS
      159. This Statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. Most of the provisions of
      this Statement apply only to entities that elect the fair value option.




The
      following are eligible items for the measurement option established by this
      Statement:




1.
      Recognized financial assets and financial liabilities except:




a.
            An
                investment in a subsidiary that the entity is required to
                consolidate




31




b.
            An
                interest in a variable interest entity that the entity is required
                to
                consolidate




c.
            Employers’
                and plans’ obligations (or assets representing net overfunded positions)
                for pension benefits, other postretirement benefits (including health
                care
                and life insurance benefits), post employment benefits, employee
                stock
                option and stock purchase plans, and other forms of deferred compensation
                arrangements.




d.
            Financial
                assets and financial liabilities recognized under leases as defined
                in
                FASB Statement No. 13, '*Accounting
                for Leases.'*




e.
            Deposit
                liabilities, withdrawable on demand, of banks, savings and loan
                associations, credit unions, and other similar depository
                institutions




f.
            Financial
                instruments that are, in whole or in part, classified by the issuer
                as a
                component of shareholder’s equity (including “temporary equity”). An
                example is a convertible debt security with a noncontingent beneficial
                conversion feature.




2.
      Firm
      commitments that would otherwise not be recognized at inception and that involve
      only financial instruments




3.
      Nonfinancial insurance contracts and warranties that the insurer can settle
      by
      paying a third party to provide those goods or services




4.
      Host
      financial instruments resulting from separation of an embedded nonfinancial
      derivative instrument from a nonfinancial hybrid instrument.




The
      fair
      value option:




1.
      May be
      applied instrument by instrument, with a few exceptions, such as investments
      otherwise accounted for by the equity method




2.
      Is
      irrevocable (unless a new election date occurs)




3.
      Is
      applied only to entire instruments and not to portions of
      instruments.




The
      Statement is effective as of the beginning of an entity’s first fiscal year that
      begins after November 15, 2007. Early adoption is permitted as of the beginning
      of a fiscal year that begins on or before November 15, 2007, provided the entity
      also elects to apply the provisions of FASB Statement No. 157, ' *Fair
      Value Measurements'* .
      We have
      not yet determined what effect, if any, adoption of this Statement will have
      on
      our financial position or results of operations.





In
      September 2006, the United States Securities and Exchange Commission ("SEC")
      SAB
      No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements." This SAB provides guidance
      on the consideration of the effects of prior year misstatements in quantifying
      current year misstatements for the purpose of a materiality assessment. SAB
      108
      establishes an approach that requires quantification of financial statement
      errors based on the effects of each of the company's balance sheet and statement
      of operations financial statements and the related financial statement
      disclosures. The SAB permits existing public companies to record the cumulative
      effect of initially applying this approach in the first year ending after
      November 15, 2006 by recording the necessary correcting adjustments to the
      carrying values of assets and liabilities as of the beginning of that year
      with the offsetting adjustment recorded to the opening balance of retained
      earnings. Additionally, the use of the cumulative effect transition method
      requires detailed disclosure of the nature and amount of each individual error
      being corrected through the cumulative adjustment and how and when it arose.
      The
      Company is currently evaluating the impact, if any, that SAB 108 may have on
      the
      Company's results of operations or financial position.





32




In
      July
      2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes-an interpretation of FASB Statement No. 109." This Interpretation
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This Interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Interpretation is effective for fiscal
      years beginning after December 15, 2006 and the Company is currently evaluating
      the impact, if any, that FASB No. 48 may have on the Company's results of
      operations or financial position.





EITF
      00-19-2, "Accounting for Registration Payment Arrangements".




In
      December 2006, the FASB issued Staff Position FSP EITF 00-19-2, "Accounting
      for
      Registration Payment Arrangements". This statement is effective for existing
      registration payment arrangements as of January 1, 2007, with earlier
      application permitted in previously-unissued financial statements. As discussed
      in Note 9 and as permitted by the FSP, we adopted the provisions of this
      FSP in our fourth quarter of 2006, resulting in re-classification of certain
      of
      our outstanding warrants from derivative instrument liabilities to
      equity.




**Off
      Balance-Sheet Arrangements**





We
      have
      no material off-balance sheet arrangements as of December 31, 2006.




**ITEM
      7. FINANCIAL STATEMENTS.**




The
      financial statements begin on Page F-1.




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





There
      have been no disagreements between the Company and its accountants as to matters
      which require disclosure.





**ITEM
      8A - CONTROLS AND PROCEDURES**





(a)
      Evaluation of disclosure controls and procedures.





Our
      management, with the participation of our chief executive officer and chief
      financial officer, evaluated the effectiveness of our disclosure controls and
      procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934
      as
      of December 31, 2006. In designing and evaluating the disclosure controls
      and procedures, management recognizes that any controls and procedures, no
      matter how well designed and operated, can provide only reasonable assurance
      of
      achieving the desired control objectives. In addition, the design of disclosure
      controls and procedures must reflect the fact that there are resource
      constraints and that management is required to apply its judgment in evaluating
      the benefits of possible controls and procedures relative to their costs.





33


Based
      on our evaluation, our chief executive officer and chief financial officer
      concluded that our disclosure controls and procedures are designed at a
      reasonable assurance level and are effective to provide reasonable assurance
      that information we are required to disclose in reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in Securities and Exchange Commission rules and
      forms, and that such information is accumulated and communicated to our
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding required disclosure.





(b)
      Changes in internal control over financial reporting.





We regularly
      review our system of internal control over financial reporting and make changes
      to our processes and systems to improve controls and increase efficiency, while
      ensuring that we maintain an effective internal control environment. Changes
      may
      include such activities as implementing new, more efficient systems,
      consolidating activities, and migrating processes.





There
      were no changes in our internal control over financial reporting that occurred
      during the period covered by this Annual Report on Form 10-KSB that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.





**ITEM
      8B - Other Information**





None.





**PART
      III**





**Item
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH
      16(a) OF THE EXCHANGE ACT**





The
      following table sets forth certain information with respect to our directors
      and
      executive officers.





DIRECTORS
      AND EXECUTIVE OFFICERS





Names:
            
            Ages
            
            Titles:
            
            Board
                of DirectorsCharles
                Benz
            
            58
            
            Chief
                Executive Officer
            
            Chairman
                of the BoardChristopher
                J. LeClerc
            
            33
            
            President
                and Chief Financial Officer
            
            DirectorG.
                Bryan Thomas
            
            43
            
            
            
            DirectorJavaid
                Sheikh
            
            52
            
            
            
            DirectorBrian
                Hynes
            
            36
            
            
            
            Director




34


Directors
      are elected to serve until the next annual meeting of stockholders and until
      their successors are elected and qualified. Currently there are five seats
      on
      our board of directors.





Charles
      Benz- Mr. Benz has founded or acquired a number of companies in his career,
      including Imaging Technology Corporation (ITC), ISI International and
      International Publishing Corporation (IPC), publisher of Electronic News and,
      most recently, Digital Card Systems. He has held the position of Chairman in
      each of these companies. Mr. Benz' has had a successful track record in the
      secure credentialing market space. Under his leadership, ITC had developed
      one
      of the world's most successful digital ID software packages, selling tens of
      thousands of licenses to major partners and governments throughout the world.
      After merging ITC with ImageWare(symbol IW) in the year 2000, Mr. Benz became
      Chairman of the ID subsidiary of ImageWare, a division that generated 80% of
      the
      company's revenue. During his tenure at IW he was also responsible for several
      additional acquisitions that helped to increase sales by 400%, and the stock
      price by 2.5X. Benz has an undergraduate degree in economics from Duke
      University, and an MBA, with Honors, from Boston University.





Brian
      F.
      Hynes. is a Partner with Shefsky & Froelich of Chicago, IL where he advises
      clients on a variety of legal matters ranging from general corporate concerns
      to
      litigation, real estate and government relations. He also serves as a principal
      at Illinois Governmental Consulting Group, LLC, a government relations firm.
      He
      has served as litigation counsel for the Illinois Housing Development Authority
      and is an invited lecturer on matters of municipal importance, including
      electric deregulation and public medical aid. Mr. Hynes serves on the Board
      of
      Directors for the International Visitors' Center of Chicago and Chicago Gateway
      Green and previously served on the Board of Directors of the Illinois
      Development Finance Authority and as Commissioner for the Southwest Home Equity
      Assurance Commission. A member of the Illinois Supreme Court Bar, he holds
      a BA
      from the University of Illinois and a JD from Loyola University of
      Chicago.





Christopher
      J. LeClerc, is the President and Chief Financial Officer of the company. He
      joined the company from Andover Brokerage LLC, where he was responsible for
      a
      12-member proprietary trading desk specializing in a wide range of investment
      strategies. He has been a Director of Business Development and Head of OTC
      trading at Mercer Partners L.P., a New York-based investment bank and securities
      underwriter. Previously, he has served as financial consultant and equities
      trader for Merrill Lynch, M.H. Meyerson and ETG LLC.





Dr.
      Javaid I. Sheikh, is the Chief of Staff of the Veterans Affairs Palo Alto Health
      Care System (VAPAHCS) and is a Professor of Psychiatry and Behavioral Sciences
      as well as Associate Dean for Veterans Affairs at Stanford University School
      of
      Medicine. He is also the Medical Director of the National Center on the
      Psychology of Terrorism (NCPT). The NCPT works closely with the Naval
      Postgraduate Institute in Monterey, California, as part of the Homeland Security
      Leadership Development Program. Dr. Sheikh was listed in the "Best Doctors
      in
      America" from 1997 to 2001.





G.
      Bryan
      Thomas, is the President, Chief Executive Officer and Chairman of Cochran
      Management Services, Inc. (CCMSI). He joined CCMSI in 1987 and, as Account
      Executive, was responsible for marketing and program development for large
      individual self-insured groups and major associations. Promoted to Executive
      Vice-President and Chief Marketing Officer in 1998, he oversaw all sales and
      marketing efforts of the company. In addition, he specializes in developing
      risk
      financing and cost-containment alternatives for large employers and association
      insurance plans with emphasis on employee benefits and workers' compensation
      programs.





35


**Committees**





Our
      business, property and affairs are managed by or under the direction of the
      board of directors. Members of the board are kept informed of our business
      through discussion with the chief executive and financial officers and other
      officers, by reviewing materials provided to them and by participating at
      meetings of the board and its committees.




Our
      board
      of directors has had three committees - the audit committee, the compensation
      committee and the governance committee. The audit committee is comprised of
      Mr.
      LeClerc, with Mr. Thomas, as chairman. The compensation committee is comprised
      of Mr. Hynes, with Mr. Sheikh as chairman. The governance committee is comprised
      of Mr. Sheikh, with Mr. Hynes as chairman.





The
      Compensation Committee did not meet during the year ended December 31, 2006.
      All
      matters addressed by the Compensation Committee were decided on by the Board
      of
      Directors. The function of the Committee is to approve stock plans and option
      grants and review and make recommendations to the Board of Directors regarding
      executive compensation and benefits. The function of the Compensation Committee
      is to approve stock plans and option grants and review and make recommendations
      to the Board of Directors regarding executive compensation
      and benefits.





As
      of
      April 16, 2007, the Audit Committee consisted of the following members: Messrs
      LeClerc and Thomas. The Audit Committee did not met in fiscal year 2006.
      Responsibilities of the Committee include (1) reviewing financial statements
      and
      consulting with the independent auditors concerning the Company's financial
      statements, accounting and financial policies, and internal controls, (2)
      reviewing the scope of the independent auditors' activities and the fees of
      the
      independent auditors, and (3) reviewing the independence of the auditors. Our
      board of directors has not adopted a written charter for the audit
      committee.





The
      Governance Committee did not meet during the year ended December 31, 2006.
      All
      matters addressed by the Governance Committee were decided on by the Board
      of
      Directors. The function of the Governance Committee is to (a) oversee the
      evaluation of the Board and management and (b) develop, recommend and revise
      a
      set of corporate governance principles.





The
      total
      number of meetings of the Board of Directors during the fiscal year ended
      December 31, 2006 was eight. The Board of Directors did not decide any matters
      by written consent. Each of the incumbent directors attended a majority of
      (i)
      the meetings of the Board during the year and (ii) the total number of meetings
      of all committees of the Board on which the incumbent directors
      served.





Code
      of
      Ethics





We
      have
      adopted a Code of Ethics that applies to all officers, directors and employees.
      The Company will provide to any person without charge, upon request, a copy
      of
      such code of ethics by submitting a written request to Liska Biometry, Inc.,
      100
      Main Street, Suite 230, Dover, New Hampshire 03082, Attn: Chief Financial
      Officer.





36


COMPLIANCE
      WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT of 1934





Since
      the
      Company does not have securities registered pursuant to the Securities Exchange
      Act of 1934, as amended, this section is not applicable.




**Item
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth information concerning the annual and long-term
      compensation earned by or paid to our Chief Executive Officer and to other
      persons who served as executive officers as at and/or during the fiscal year
      ended December 31, 2006 who earned compensation exceeding $100,000 during 2006
      (the “named executive officers” ), for services as executive officers for the
      last three fiscal years.





**Summary
      Compensation Table**




Name
                & Principal Position
            
            Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Stock
                Awards($)
            
            Option
                Awards ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Non-Qualified Deferred Compensation Earnings
                ($)
            
            All
                Other Compensation ($)
            
            Total
                ($)Charles
                Benz, Chief Executive Officer
            
            
            2006
            
            $
            25,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            25,000Christopher
                LeClerc,President
                and
              former
                CEO(1)
            
            
            2006
            
            $
            83,261
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            83,261




(1)
      On
      June 1, 2006, Mr. LeClerc resigned as Chief Executive Officer pursuant to the
      terms of the acquisition of Digital Card Systems, Inc.




(2)On
      June 1, 2006, Mr. Benz became Chief Executive Officer pursuant to the terms
      of
      the acquisition of Digital Card Systems, Inc..




**Outstanding
      Equity Awards at Fiscal Year-End Table.**




Option
                Awards
            
            Stock
                AwardsName
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
            
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Securities
                Underlying
              Unexercised
              Unearned
              Options
              (#)
            
            Option
              Exercise
              Price
              ($)
            
            Option
              Expiration
              Date
            
            Number
              of
                Shares
              or
                Units
              of
                Stock
              That
                Have
              Not
              Vested
              (#)
            
            Market
              Value
                of
              Shares
                or
              Units
                of
              Stock
              That
                Have
              Not
              Vested
              ($)
            
            Equity
              Incentive
              Plan
                Awards:
              Number
              of
              Unearned
              Shares,
              Units
                or
              Other
                Rights
              That
                Have
              Not
              Vested
              (#)
            
            Equity
                Incentive
              Plan
                Awards:
              Market
                or Payout
              Value
              of
              Unearned
              Shares,
              Units
                or
              Other
              Rights
              That
                Have
              Not
              Vested
              ($)Charles
                Benz
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Christopher
                LeClerc
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -





37





**Employment
      Agreements and other Arrangements**





On
      April
      1, 2005, we entered into several employment agreements with key individuals:
      Mr.
      Chris LeClerc was reinstated to serve as our Chief Executive Officer and Mr.
      Manoj Hippola was reinstated to serve as the Company's Chief Financial Officer
      and Chief Operating Officer. On March 8th, 2006, Hippola resigned, his successor
      has not yet been appointed


Brian
      Walsh: In April of 2005 the company entered into an employment contract with
      Brian Walsh to serve as Vice President of Global Solutions. The approximate
      annual cost of this position is $80,000. All employment contracts renewed during
      fiscal year 2006.





**Election
      of Board of Directors**





The
      Company did not hold a shareholder meeting in 2006. The last shareholder meeting
      was held on August 18, 2005 which was held in Manchester, NH and elected five
      directors. Effective March 7, 2006 General Jean E. Boyle resigned as Chairman
      of
      the Board and Chris LeClerc was appointed Chairman and Chief Executive Officer.
      Through the acquisition of Digital Card Systems, Inc. Charles Benz became our
      Chairman and Chief Executive Officer and Chris LeClerc became President and
      Chief Financial Officer.





**Departure
      of Principal Officers. Appointment of Principal Officers.**





On
      March
      8, 2006, Liska issued a press release announcing the resignations of Jean Boyle,
      Chairman, Manoj Hippola, Chief Financial and Chief Operating Officer, and John
      Hollander, Corporate Secretary. The resignations were effective immediately.
      Christopher J. LeClerc, Chief Executive Officer, replaced Mr. Boyle as Chairman
      of the Board. Brian Hynes replaced John Hollander as Secretary. Through the
      acquisition of DCS Charles Benz became Chairman and Chief Executive Officer
      of
      the Company and Chris LecLerc was appointed President and Chief Financial
      Officer.





**Directors’
      Compensation**





Employee
      directors do not receive compensation for their services on the Board of
      Directors.





38


For
      the
      fiscal year ended December 31, 2005, each newly-elected non-employee director
      received at the time of his election, 50,000 shares of common stock for serving
      on the Board of Directors. Each non-employee director also received 15,000
      shares of common stock at the time of his election for serving on his respective
      committee(s) of the board of directors. The Company did not pay the directors
      any fees for the fiscal year ended December 31, 2006.





Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
              Awards
                ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
                ($)
            
            All
                Other Compensation
              ($)
            
            Total
              ($)G.
                Bryan Thomas
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Javaid
                Sheikh
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Bryan
                Hynes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




**Item
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





The
      following table sets forth certain information regarding the ownership of the
      Company’s common stock as of May __, 2007 by: (i) each director and nominee for
      director, (ii) all executive officers and directors of the Company as a group;
      and (iii) all those known by the Company to be beneficial owners of more than
      five percent of its common stock.





NAME
                AND ADDRESSOF
                OWNER
            
            NUMBER
                OF
              SHARES
                OWNED(1)
            
            PERCENTAGE
                OF CLASS (2)Charles
                Benz
            
            
            8,300,000
            
            
            11.45
            %Christopher
                J. LeClerc
            
            
            4,480,841
            
            
            6.18
            %G.
                Bryan Thomas
            
            
            687,375
            
            
            *Javaid
                Sheikh
            
            
            680,250
            
            
            *Bryan
                Hynes
            
            
            115,000
            
            
            *All
                Directors and Officersas
                a Group (5 Persons)
            
            
            14,263,466
            
            
            19.68
            %




*
      Less
      than one percent





39


(1)
      Except as otherwise indicated, the address of each beneficial owner is c/o
      Liska
      Biometry, Inc., 100 Main Street Dover, New Hampshire 03820.





(2)
      Applicable percentage ownership is based on 74,578,869 shares of common stock
      outstanding as of May 10, 2007, together with securities exercisable or
      convertible into shares of common stock within 60 days of May 10, 2007 for
      each
      stockholder. Beneficial ownership is determined in accordance with the rules
      of
      the Securities and Exchange Commission and generally includes voting or
      investment power with respect to securities. Shares of common stock that are
      currently exercisable or exercisable within 60 days of May 10, 2007 are deemed
      to be beneficially owned by the person holding such securities for the purpose
      of computing the percentage of ownership of such person, but are not treated
      as
      outstanding for the purpose of computing the percentage ownership of any other
      person.





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





Other
      than as set forth below, since the beginning of 2006, we have not entered into
      or been a participant in any transaction in which a related person had or will
      have a direct or indirect material interest in an amount that exceeds the lesser
      of $120,000 or 1% of the average of the company’s total assets for the last
      three completed fiscal years.




**Director
      Independence**




Three
      of
      our directors, Mssrs. Thomas, Hynes and Sheikh are independent directors, using
      the National Association of Securities Dealers definition of independence.
      Mr.
      Sheikh and Hynes comprise the compensation committee and the governance
      committee. Mr. Thomas, together with Mr. Christopher J. LeClerc, our president,
      comprises the audit committee. Mr. LeClerc is not an independent
      director.





40





**ITEM
      13. EXHIBITS.**





2.1
            Exchange
                Agreement dated as of February 8, 2006, by and among the Company,
                Digital
                Card Systems, Inc., DCS Europe, Inc., DCS America, Inc., DCS Latin
                America, Inc., Digital Card Systems Latina Amerca SAC, Cosmo ID,
                GmBH and
                the Stockholders of Digital Card Systems, Inc., DCS Europe, Inc.,
                DCS
                America, Inc. and DCS Latin America, Inc. (filed as Exhibit 10.1
                to the
                Company’s Current Report on Form 8-K, dated February 13, 2006 and
                incorporated herein by reference)2.2
            Asset
                Purchase Agreement, dated June 5, 2006, by and between Digital Card
                Systems, Markow Photo Properties, Inc., and Robert Markow, Beatrice
                Markow, Markow Family Trust, Paul Markow and Paul Taylor (filed as
                Exhibit
                10.1 to the Company’s Current Report on Form 8-K, dated June 6, 2006 and
                incorporated herein by reference)3.1
            Articles
                of Incorporation (filed as Exhibit 3(I) to the Company’s Registration
                Statement on Form SB-2, dated January 7, 2000 and incorporated herein
                by
                reference)3.2
            By-laws(filed
                as Exhibit 3(II) to the Company’s Registration Statement on Form SB-2,
                dated January 7, 2000 and incorporated herein by reference)4.1
            10%
                Senior Secured Convertible Notein
                the aggregate amount of $3,000,000 (filed as Exhibit 10.2 to the
                Company’s
                Current Report on Form 8-K, dated June 9, 2006 and incorporated herein
                by
                reference)4.2
            10%
                Senior Secured Convertible Notein
                the aggregate amount of $2,000,000 (filed as Exhibit 10.3 to the
                Company’s
                Current Report on Form 8-K, dated June 9, 2006 and incorporated herein
                by
                reference)4.3
            Warrant,
                dated May 31, 2006 (filed as Exhibit 10.5 to the Company’s Current Report
                on Form 8-K, dated June 9, 2006 and incorporated herein by
                reference)10.1
            Securities
                Purchase Agreement dated May 31, 2006, between the Company and CAMOFI
                Master LDC (filed as Exhibit 10.1 to the Company’s Current Report on Form
                8-K, dated June 9, 2006 and incorporated herein by reference)10.2
            Security
                Agreement, dated May 31, 2006, between the Company and CAMOFI Master
                LDC
                (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated
                June 9, 2006 and incorporated herein by reference)10.3
            Letter
                of Intent, dated November 25, 2005 (filed as Exhibit 10.1 to the
                Company’s
                Current Report on Form 8-K, dated December 21, 2005 and incorporated
                herein by reference)21.1
            List
                of Subsidiaries31.1
            Certification
                of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            Certification
                of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            Certification
                of chief executive officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 200232.2
            Certification
                of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002




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





Our
      board
      of directors reviews and approves audit and permissible non-audit services
      performed by its independent accountants, as well as the fees charged for such
      services. In its review of non-audit service fees and its appointment of Stark
      Winter Schenkein & Co., LLP as the Company's independent accountants, the
      board of directors considered whether the provision of such services is
      compatible with maintaining independence. All of the services provided and
      fees
      charged by Stark Winter Schenkein & Co., LLP in 2006 and 2005 were approved
      by the board of directors.





Audit
      Fees





The
      aggregate fees billed for professional services for the audit of the annual
      financial statements of the Company and the reviews of the financial statements
      included in the Company's quarterly reports on Form 10-QSB for 2006 and 2005
      were $55,000 and $28,000 respectively, net of expenses.





Audit-Related
      Fees




There
      were no other fees billed by during the last two fiscal years for assurance
      and
      related services that were reasonably related to the performance of the audit
      or
      review of the Company's financial statements and not reported under "Audit
      Fees"
      above.





Tax
      Fees




There
      was
      approximately $5,000 per year spent on tax filings.





All
      Other
      Fees




There
      were no other fees billed during the last two fiscal years for products and
      services provided.


41





**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.




**LISKA
                BIOMETRY, INC.**Date:
                  May
                  21, 2007
            By
            /s/ Charles
              BenzCharles
                BenzChief
                Executive Officer (Principal Executive
                Officer)




Date:
                May
                21, 2007
            By:
            /s/ Christopher
              J. LeClercChristopher
                J. LeClercPresident
                and Chief Financial Officer (Principal Financial Officer and
                Principal Accounting Officer)




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





Name
            
            Position
            
            Date/s/ Charles
                Benz
              
              Charles
                Benz
            
            Chief
                Executive Officer (Principal Executive Officer) and
                Director
            
            May
                21, 2007/s/ Christopher
                J. LeClerc
              
              Christopher
                J. LeClerc
            
            President,
                Chief Financial Officer (Principal Financial Officer and Principal
                Accounting Officer) and Director
            
            May
                21, 2007G.
                Bryan Thomas
            
            Director
            
            May
                  21, 2007Javaid
                Sheikh
            
            Director
            
            May
                  21, 2007Brian
                Hynes
            
            Director
            
            May
                  21, 2007




42




LISKA
      BIOMETRY, INC.





INDEX
      TO
      FINANCIAL STATEMENTS





PageReports
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheet as of December 31, 2006
            
            
            F-3Consolidated
                Statements of Operations for the years endedDecember
                31, 2006 and 2005
            
            
            F-4Consolidated
                Statement of Stockholders' (Deficit) for the years ended December
                31, 2006
                and 2005
            
            
            F-5Consolidated
                Statements of Cash Flows for the years endedDecember
                31, 2006 and 2005
            
            
            F-6Notes
                to Consolidated Financial Statements
            
            
            F-7




F-1




REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 Shareholders
        and Board of Directors
 Liska
        Biometry, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of Liska Biometry, Inc.
        as
        of December 31, 2006, and the related consolidated statements of operations,
        stockholders' equity (deficit), and cash flows for the years ended December
        31,
        2006 and 2005. These financial statements are the responsibility of the
        Company's management. Our responsibility is to express an opinion on these
        financial statements based on our audits. We did not audit the financial
        statements of DCS Cosmo and DCS Europe, which statements reflect 17% of total
        consolidated assets as of December 31, 2006, and 19% of consolidated revenues
        for the year ended December 31, 2006. Those financial statements were audited
        by
        other auditors whose report has been furnished to us, and our opinion, insofar
        as it relates to the amounts included for DCS Cosmo and DCS Europe as of
        December 31, 2006, and for the year ended December 31, 2006, is based solely
        on
        the report of the other auditor.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates by management, as well as evaluating
        the overall financial statement presentation. We believe that our audits
        provide
        a reasonable basis for our opinion
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Liska Biometry, Inc.
        as of
        December 31, 2006, and the results of its operations, and its cash flows
        for the
        years ended December 31, 2006 and 2005, in conformity with accounting principles
        generally accepted in the United States of America.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in the notes to the financial
        statements the Company has suffered recurring losses and has working capital
        and
        stockholders’ deficits. These factors raise substantial doubt about the
        Company's ability to continue as a going concern. The financial statements
        do
        not include any adjustments that might result from the outcome of this
        uncertainty.
 
 
 /s/
        Stark
        Winter Schenkein & Co., LLP
 
 Denver,
        Colorado
 May
        15,
        2007


F-2


Liska
                Biometry, Inc.Consolidated
                Balance Sheet*as
                of December 31, 2006*




AssetsCurrent
                assets:Cash
            
            $
            362,793Restricted
                cash
            
            
            224,728Trade
                accounts receivable
            
            
            663,001Inventory
            
            
            1,059,942Other
                current assets
            
            
            38,509Total
                Current Assets
            
            
            2,348,973Fixed
                assets, net
            
            
            619,316Note
                receivable
            
            
            125,000Other
                non-current assets
            
            
            48,788$
            3,142,077Liabilities
                and stockholders' (deficit)Current
                liabilities:Accounts
                payable & accrued expenses
            
            $
            1,628,148Related
                Party payable
            
            
            296,402Customer
                advances
            
            
            162,470Notes
                payable
            
            
            225,000Current
                portion of long-term debt
            
            
            874,923Due
                to investors
            
            
            755,167Derivative
                liabilities
            
            
            3,146,945Accrued
                financing penalties
            
            
            300,000Other
                current liabilities
            
            
            107,774Total
                current liabilities
            
            
            7,496,829Long-term
                debt, less current portion148,138Total
                liabilities
            
            
            7,644,967Stockholders'
                (deficit):Preferred
                stock, no par value,10,000,000
                shares authorized, none outstanding
            
            
            -Common
                stock, no par value,100,000,000
                shares authorized,72,478,869
                shares issued and outstanding
            
            
            18,292,232Receivable
                for common stock
            
            
            (1,375,000
            )Deferred
                compensation
            
            
            (51,263
            )Additional
                paid in capital
            
            
            1,016,834Accumulated
                deficit
            
            
            (22,310,379
            )(4,427,576
            )Other
                comprehensive income:Currency
                translation adjustment
            
            
            (75,314
            )Total
                stockholders' (deficit)
            
            
            (4,502,890
            )$
            3,142,077




See
        the
        accompanying notes to the consolidated financial statements.
  F-3


Liska
      Biometry, Inc.


Consolidated
      Statements of Operations


for
      the
      Years Ended December 31, 2006 and 2005





2006
            
            2005Sales
            
            $
            6,226,032
            
            $
            -Cost
                of goods sold
            
            
            4,385,257
            
            
            -Gross
                profit
            
            
            1,840,775
            
            
            -Operating
                expenses:Selling,
                general and administrative expenses -Non
                cash stock compensation
            
            
            1,265,497
            
            
            1,405,967Selling,
                general and administrative expenses
            
            
            3,643,339
            
            
            1,536,885Amortization
                and impairment of intangible assets
            
            
            6,437,195
            
            
            -Depreciation
                expense
            
            
            76,312
            
            
            -11,422,343
            
            
            2,942,852(Loss)
                from operations
            
            
            (9,581,568
            )
            
            (2,942,852
            )Other
                income (expense):Other
                income
            
            
            25,627
            
            
            -Interest
                (expense)
            
            
            (328,232
            )
            
            -Amortization
                of debt discount
            
            
            (1,163,224
            )
            
            -Change
                in value of derivative liabilities
            
            
            1,352,228
            
            
            -Loss
                on debt extinguishment
            
            
            (1,372,965
            )Financing
                penalties
            
            
            (300,000
            )
            
            -(1,786,566
            )
            
            -(Loss)
                before taxes
            
            
            (11,368,134
            )
            
            (2,942,852
            )Income
                tax expense (benefit)Current
            
            
            -
            
            
            -Deferred
            
            
            -
            
            
            --
            
            
            -Net
                (loss)
            
            
            (11,368,134
            )
            
            (2,942,852
            )Comprehensive
                income:Currency
                translation adjustment
            
            
            (45,952
            )
            
            (23,089
            )Comprehensive
                (loss)
            
            $
            (11,414,086
            )
            $
            (2,965,941
            )Per
                share information - basic and fully diluted:Weighted
                average shares outstanding
            
            
            55,786,962
            
            
            27,255,588(Loss)
                per share
            
            $
            (0.20
            )
            $
            (0.11
            )




See
        the
        accompanying notes to the consolidated financial
        statements.


F-4





**LISKA
                BIOMETRY, INC.****CONSOLIDATED
                STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                (DEFICIT)***For
                the years ended December 31, 2006 and 2005*




Number
                  of Common Shares
              
              Par
                  Value of Common Shares
              
              Additional
                  Paid - in Capital
              
              Stock
                  Subscriptions
              
              Treasury
                  Stock
              
              Deferred
                  Compensation
              
              Receivable
                  for Common Stock
              
              Accumulated
                  (Deficit)
              
              Other
                  Comprehensive Income (Loss)
              
              Total
                  Stockholders' Equity (Deficit)Balance,
                  December 31, 2004
              
              
              23,284,167
              
              $
              7,047,864
              
              $
              1,063,203
              
              $
              194,808
              
              $
              (200,000
              )
              $
              (67,417
              )
              $
              -
              
              $
              (7,999,393
              )
              
              (6,273
              )
              
              32,792Issuance
                  of shares subscribed for
              
              
              621,346
              
              
              185,808
              
              
              -
              
              
              (185,808
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Subscriptions
                  cancelled
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,000
              )Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              67,417
              
              
              -
              
              
              -
              
              
              -
              
              
              67,417Shares
                  issued in escrow for a receivable
              
              
              5,000,000
              
              
              1,375,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,375,000
              )
              
              -
              
              
              -
              
              
              -Shares
                  issued for the conversion of a note payable at $ .20 per share
              
              
              250,000
              
              
              50,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              50,000Shares
                  issued for services at $ .30 to $ .40 per share
              
              
              1,733,904
              
              
              619,378
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              619,378Shares
                  issued for services at $ .41 to $ .60 per share
              
              
              325,000
              
              
              168,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              168,000Shares
                  issued for cash at $ .20 to $ .28 per share
              
              
              3,130,499
              
              
              793,750
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              793,750Shares
                  issued for cash at $ .30 to $ .38 per share
              
              
              1,668,013
              
              
              524,500
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              524,500Increase
                  in intrinsic value of stock options
              
              
              -
              
              
              -
              
              
              70,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              70,000Cancellation
                  of treasury shares
              
              
              (1,871,666
              )
              
              -
              
              
              (200,000
              )
              
              -
              
              
              200,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Common
                  shares subscribed for services
              
              
              -
              
              
              -
              
              
              -
              
              
              481,172
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              481,172Currency
                  translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (23,089
              )
              
              (23,089
              )Net
                  (loss) for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,942,852
              )
              
              -
              
              
              (2,942,852
              )Balance,
                  December 31, 2005
              
              
              34,141,263
              
              
              10,764,300
              
              
              933,203
              
              
              481,172
              
              
              -
              
              
              -
              
              
              (1,375,000
              )
              
              (10,942,245
              )
              
              (29,362
              )
              
              (167,932
              )Issuance
                  of subscribed shares
              
              
              1,069,273
              
              
              481,172
              
              
              
              
              
              (481,172
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Shares
                  issued to lender as additional interest at $ .17 to $ .30 per share
              
              
              2,833,333
              
              
              555,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              555,000Shares
                  issued for cash at $ .10 per share
              
              
              1,750,000
              
              
              175,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              175,000Value
                  of warrants issued to lender
              
              
              -
              
              
              -
              
              
              83,631
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              83,631Shares
                  issued to acquire Digital Card Systems, Inc.
              
              
              25,000,000
              
              
              5,000,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,000,000Shares
                  issued for services at $ .22 to $ .30 per share
              
              
              500,000
              
              
              131,250
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              131,250Shares
                  issued for services at $ .18 to $ .19 per share
              
              
              525,000
              
              
              95,250
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              95,250Shares
                  issued for services at $ .21 per share
              
              
              1,800,000
              
              
              378,000
              
              
              -
              
              
              -
              
              
              -
              
              
              (51,263
              )
              
              -
              
              
              -
              
              
              -
              
              
              326,737Shares
                  issued for services at $ .20 per share
              
              
              2,178,000
              
              
              435,600
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              435,600Shares
                  issued for services at $ .10 to $ .13 per share
              
              
              2,682,000
              
              
              276,660
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              276,660Currency
                  translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (45,952
              )
              
              (45,952
              )Net
                  (loss) for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (11,368,134
              )
              
              -
              
              
              (11,368,134
              )Balance,
                  December 31, 2006
              
              
              72,478,869
              
              $
              18,292,232
              
              $
              1,016,834
              
              $
              -
              
              $
              -
              
              $
              (51,263
              )
              $
              (1,375,000
              )
              $
              (22,310,379
              )
              $
              (75,314
              )
              $
              (4,502,890
              )




See
      the
      accompanying notes to the consolidated financial statements




F-5




Liska
                Biometry, Inc.Consolidated
                Statements of Cash Flowsfor
                the Years Ended December 31, 2006 and
                2005






2006
            
            2005Cash
                flows from operating activities:Net
                (loss)
            
            $
            (11,368,134
            )
            $
            (2,942,852
            )Adjustments
                to reconcile net (loss) to cash(used
                in) operating activities:Depreciation
                and amortization
            
            
            76,312
            
            
            16,570Amortization
                and impairment of intangible assets
            
            
            6,437,195
            
            
            -Amortization
                of debt discount
            
            
            1,163,224
            
            
            -Common
                stock and options issued and subscribed for services
            
            
            1,265,497
            
            
            1,405,967Change
                in value of derivative liabilities
            
            
            (1,352,228
            )
            
            -Loss
                on debt extinguishment
            
            
            1,372,965
            
            
            -Net
                book value of assets disposed
            
            
            31,807
            
            
            -Changes
                in working capital itemsAccounts
                receivable
            
            
            (663,001
            )
            
            -Inventories
            
            
            (134,942
            )
            
            -Prepaid
                expenses and miscellaneous receivables
            
            
            26,431
            
            
            (30,047
            )Accounts
                payable and accrued expenses
            
            
            643,162
            
            
            164,901Related
                party payable
            
            
            296,402
            
            
            -Accrued
                financing penalties
            
            
            300,000
            
            
            -Customer
                advances
            
            
            162,470
            
            
            -Other
            
            
            (47,547
            )
            
            -Total
                adjustments
            
            
            9,577,747
            
            
            1,557,391Net
                cash (used in) operating activities
            
            
            (1,790,387
            )
            
            (1,385,461
            )Cash
                flows from investing activities:Cash
                paid for acquisitions
            
            
            (1,516,000
            )
            
            -Net
                cash in acquired companies
            
            
            169,675
            
            
            -Deposit
                on acquisition
            
            
            100,000
            
            
            (100,000
            )Note
                receivable
            
            
            (125,000
            )
            
            -Purchase
                of fixed assets
            
            
            (15,697
            )
            
            (44,074
            )Net
                cash (used in) investing activities
            
            
            (1,387,022
            )
            
            (144,074
            )Cash
                flows from financing activities:Proceeds
                from convertible notes
            
            
            5,000,000
            
            
            -Payments
                on convertible debt
            
            
            (2,000,000
            )
            
            -Proceeds
                allocated to restricted cash
            
            
            (224,728
            )
            
            -Proceeds
                from notes payable
            
            
            650,000
            
            
            50,000Repayment
                of notes payable
            
            
            (125,000
            )
            
            -Proceeds
                from investor loans
            
            
            155,000
            
            
            -Repayments
                on investor loans
            
            
            (77,833
            )
            
            (18,552
            )Common
                shares issued and subscriptions for cash
            
            
            175,000
            
            
            1,318,250Cancelled
                subscription
            
            
            -
            
            
            (9,000
            )Net
                cash provided by financing activities
            
            
            3,552,439
            
            
            1,340,698Net
                increase (decrease) in cash
            
            
            375,030
            
            
            (188,837
            )Effect
                of currency translation on cash
            
            
            (45,952
            )
            
            (23,089
            )Beginning
                - cash balance
            
            
            33,715
            
            
            245,641Ending
                -cash balance
            
            $
            362,793
            
            $
            33,715Supplemental
                cash flow information:Cash
                paid for income taxes
            
            $
            -
            
            $
            -Cash
                paid for interest
            
            $
            -
            
            $
            -Non
                cash investing and financing activities:Common
                stock issued for acquisition
            
            $
            5,000,000
            
            $
            -Common
                stock issued to settle notes payable
            
            $
            -
            
            $
            50,000Common
                stock issued for receivable
            
            $
            -
            
            $
            1,375,000Cancellation
                of treasury shares
            
            $
            -
            
            $
            200,000




See
        the
        accompanying notes to the consolidated financial statements.
  F-6


LISKA
      BIOMETRY, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2006




Note
      1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





**Nature
      of Operations**





The
      Company was incorporated as 3045 Corporation under the laws of the State of
      Florida on October 26, 1999. On January 19, 2001 the name was changed to Floran
      International, Inc., on June 15, 2001, the name was changed to FTLA, Inc.,
      and
      on April 1 2002, the name was changed to Liska Biometry, Inc. The Company was
      in
      the development stage until June 5, 2006. The Company’s business plan consists
      of providing biometric identification services, specifically products and
      technology for the identification and authentication of individuals using live
      scan fingerprints.





On
      January 9, 2001, the Company acquired all of the issued and outstanding common
      shares of H2O International, Inc. ("H2O") in exchange for 500,042 shares of
      its
      common stock (approximately 83% of the issued and outstanding shares of the
      Company after this issuance).





H2O
      was a
      development stage company formed for the purpose of marketing a cleaning process
      for large-scale water and fluid treatment filtering and storage facilities.
      This
      acquisition of H2O, the accounting acquirer, by the Company, a non-operating
      entity, was considered in substance a capital transaction and has been accounted
      for as a reverse acquisition, and no goodwill or other intangible assets have
      been recorded. On this basis, the historical financial statements as of and
      prior to the acquisition date represented the operations of H2O.





On
      November 2, 2004, the Company formed and acquired all of the issued and
      outstanding common shares of a Canadian subsidiary, Liska Biometry (Canada)
      Inc.
      That company's primary purpose is to carry out research and development of
      the
      Company's products and to generate sales in Canada for any resulting products.
      As of December 31, 2006 the company no longer sustains operations in Canada,
      additionally the company has forfeited their security deposit for the leased
      premises in Canada.





On
      June
      1, 2006 we acquired Digital Card Systems and all of its subsidiaries through
      a
      securities purchase agreement. DCS provided the company with an international
      presence, proprietary image capture and a proprietary ID Management suite.




On
      June
      5, 2006 we acquired certain assets of Markow Photo Properties of Phoenix
      Arizona. We paid $1,516,000 to Markow pursuant to an asset purchase agreement.
      The company acquired inventory and capital equipment. In June 2006 we changed
      the name of Markow to Liska Imaging.





**Consolidation**





On
      June
      1, 2006 Liska Biometry, Inc. and Digital Card Systems merged. On June 5, 2006
      the company acquired substantially all of the operating assets of Markow Photo
      Properties in Phoenix, Arizona, consisting of the companies Al-Cor
      Identification Systems, Colormark Inc. and Photomark Inc. The Phoenix location
      will serve as the operations center for Liska Biometry, Inc. in the United
      States. We intend to optimize the core competencies of ID System sales, retail
      sales, service, support, national and international distribution to support
      the
      entire corporation in the US and abroad. All intercompany transactions and
      balances have been eliminated in consolidation.


F-7


**Revenue
      Recognition**




Software
      Related Services - Software related services include services to customize
      or
      enhance the software so that the software performs in accordance with specific
      customer requirements. As these services are essential to provide the required
      functionality, revenue from these arrangements is recognized in accordance
      Statement of Position (SOP) 81-1, "Accounting for Certain Construction Type
      and
      Certain Production Type Contracts, using either the percentage-of-completion
      method or the completed contract method. The percentage-of-completion method
      is
      used when the required services are quantifiable, based on the estimated number
      of labor hours necessary to complete the project, and under that method revenues
      are recognized using labor hours incurred as the measure of progress towards
      completion but is limited to revenue that has been earned by the attainment
      of
      any milestones included in the contract. The completed contract method is used
      when the required services are not quantifiable, and under that method revenues
      are recognized only when we have satisfied all of our product and/or service
      delivery obligations to the customer.




For
      contracts of shorter duration, revenue is generally recognized when services
      are
      performed. Contractual terms may include the following payment arrangements:
      fixed fee, full-time equivalent, milestone, and time and material. In order
      to
      recognize revenue, the following criteria must be met:





·
            Signed
                agreement -- The agreement must be signed by the
                customer.





·
            Fixed
                Fee -- The signed agreement must specify the fees to be received
                for the
                services.





·
            Delivery
                has occurred -- Delivery is substantiated by time cards and where
                applicable, supplemented by an acceptance from the customer that
                milestones as agreed in the statement have been
                met.





·
            Collectibility
                is probable -- The Company conducts a credit review for significant
                transactions at the time of the engagement to determine the
                credit-worthiness of the customer. Collections are monitored over
                the term
                of each project, and if a customer becomes delinquent, the revenue
                may be
                deferred. The company does not recognize the revenue until cash is
                credited.





·
            The
                company’s policy of recognition through its subsidiary, Liska Imaging, is
                as follows: For cash transactions revenue is booked immediately,
                this
                includes all credit card transactions. Additionally once a customer
                is
                invoiced revenue is recognized, assuming collectability is
                probable.




**Inventory**





Inventory
      is valued at the lower of cost or market on a first-in, first-out basis.
      Substantially all of the inventory is comprised of finished goods.





**Cash
      and Cash Equivalents**





The
      Company considers all highly liquid investments with an original maturity of three
      months or less to be cash equivalents.





**Property,
      Equipment and Depreciation**





Property
      and equipment are stated at cost. Depreciation is calculated using the straight-line
      method over the estimated useful lives of the assets of three to seven
      years.





**Net
      Income (Loss) per Common Share**





The
      Company calculates net income (loss) per share as required by Statement of
      Financial Accounting Standards ("SFAS") 128, "Earnings per Share." Basic
      earnings (loss) per share is calculated by dividing net income (loss) by the
      weighted average number of common shares outstanding for the period. Diluted
      earnings (loss) per share is calculated by dividing net income (loss) by the
      weighted average number of common shares and dilutive common stock equivalents
      outstanding. During the periods when they would be anti-dilutive, common stock
      equivalents, if any, are not considered in the computation.




F-8




**Foreign
      Currency Translation**





The
      Company maintains its accounts in United States dollars for US operations,
      in
      Canadian dollars for Canadian-based subsidiaries, and in Euros for German-based
      subsidiaries. The financial statements have been translated into United States
      dollars in accordance with SFAS No. 52, Foreign Currency
      Translation.





Balance
      sheet accounts have been translated using the exchange rates in effect at the
      balance sheet date and historical rates. Statements of operations amounts have
      been translated using the average exchange rate for the year. The gains and
      losses resulting from the changes in exchange rates from year to year have
      been
      reported separately as a component of comprehensive income. The gain and losses
      resulting from any inter-company balances with different functional currencies
      are recognized in statement of operations.





**Goodwill**





Goodwill
      is evaluated for potential impairment on an annual basis or whenever events
      or
      circumstances indicate that impairment may have occurred. SFAS No. 142,
“Goodwill and Other Intangible Assets”, requires that goodwill be tested for
      impairment using a two-step process. The first step of the goodwill impairment
      test, used to identify potential impairment, compares the estimated fair value
      of the reporting unit containing goodwill with the related carrying amount.
      If
      the estimated fair value of the reporting unit exceeds its carrying amount,
      the
      reporting unit’s goodwill is not considered to be impaired and the second step
      of the impairment test is unnecessary. If the reporting unit’s carrying amount
      exceeds its estimated fair value, the second step test must be performed to
      measure the amount of the goodwill impairment loss, if any. The second step
      test
      compares the implied fair value of the reporting unit’s goodwill, determined in
      the same manner as the amount of goodwill recognized in a business combination,
      with the carrying amount of such goodwill. If the carrying amount of the
      reporting unit’s goodwill exceeds the implied fair value of the goodwill so
      calculated, an impairment loss is recognized in an amount equal to the excess.
      During the year ended December 31, 2006, the Company recognized an impairment
      loss of $6,437,195. As of December 31, 2006, the Company has fully impaired
      goodwill.




**Derivative
      Financial Instruments**





In
      connection with the sale of debt or equity instruments, the Company may sell
      warrants to purchase common stock. The Company may also issue warrants to
      non-employees in connection with consulting or other services they provide.
      In
      certain circumstances, these warrants may be classified as derivative
      liabilities, rather than as equity. Additionally, debt or equity instruments
      may
      contain embedded derivative instruments, such as conversion options, which
      in
      certain circumstances may be required to be bifurcated from the associated
      host
      instrument and accounted for separately as a derivative liability.





The
      Company reviews the terms of convertible debt, if any, and equity instruments,
      to determine whether there are embedded derivative financial instruments,
      including the embedded conversion rights that are required to be bifurcated
      and
      accounted for separately as a derivative financial instrument. In circumstances
      where the convertible instrument contains more than one embedded derivative
      financial instrument, including the conversion right, that is required
      to be bifurcated, the bifurcated derivative financial instruments are accounted
      for as a single, compound derivative financial instrument.





In
      connection with the issue of convertible debt in 2006, the Company issued
      freestanding Warrants and a right to receive shares of common stock (the
      embedded conversion feature). Although the terms of the Warrants or issuance
      of
      common stock does not provide for net-cash settlement, in certain circumstances,
      physical or net-share settlement is deemed to be outside the control of the
      Company and, accordingly, the Company is required to account for these
      freestanding Warrants as derivative liabilities, rather than as equity. In
      these
      cases, the Company deducts the initial fair value of the derivative financial
      instrument from the proceeds of sales of the convertible debt, resulting in
      the
      debt being recorded at a discount. This discount is then amortized over the
      life
      of the debt, using the effective interest method.




F-9




The
      identification of, and accounting for, derivative financial instruments is
      extremely complex. Derivative financial instruments are initially measured
      at
      their fair value. The Company's derivative liabilities are re-valued at each reporting
      date, with changes in the estimated fair value reported as charges or credits
      to
      income, in the period in which the changes occur. For warrants and bifurcated
      conversion options that are accounted for as derivative liabilities, the Company
      determines the fair value of these instruments using the Cox-Ross-Rubinstein
      binomial option pricing model. That model requires assumptions related to the
      remaining term of the instruments and risk-free rates of return, the Company's
      current common stock price and expected dividend yield, and the expected
      volatility of its common stock price over the life of the instrument based
      upon
      certain historical measurements. The identification of, and accounting for,
      derivative financial instruments and the assumptions used to value them can
      significantly affect the Company's financial statements.




The
      classification of derivative instruments, including whether such instruments
      should be recorded as liabilities or as equity, is re-assessed at the end of
      each reporting period. Derivative instrument liabilities are classified in
      the


balance
      sheet as current or non-current based on whether or not net-cash settlement
      of
      the derivative instrument could be required within 12 months of the balance
      sheet date. The Company does do not use derivative instruments to hedge
      exposures to cash flow, market, or foreign currency risks.





**Fair
      Value of Financial Instruments**





SFAS
      107,
      "Disclosures About Fair Value of Financial Instruments," requires disclosure
      of
      fair value information about financial instruments. Fair value estimates
      discussed herein are based upon certain market assumptions and pertinent
      information available to management as of December 31, 2006.





The
      respective carrying value of certain on-balance-sheet financial instruments
      approximate their fair values. These financial instruments include cash,
      restricted cash, trade accounts receivables, accounts payable, accrued
      expenses,


notes
      payable and due to investors. Fair values were assumed to approximate carrying
      values for these financial instruments since they are short term in nature
      and
      their carrying amounts approximate fair value or they are receivable or payable
      on demand. The carrying value of the Company's long-term debt, notes payable
      and
      due to investors approximates fair values of similar debt
      instruments.




**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Actual results could differ from those
      estimates.





**Segment
      Information**





Prior
      to
      the 2006 acquisitions, the Company operated in one segment and all activity
      was located within the United States and Canada. Effective with the merger,
      the Company organized itself into three reportable operating segments plus
      corporate





The
      following tables present segment and geographic information for the year ended
      December 31, 2006.





**SALES:**Liska
            
            $
            -Liska
                Canada
            
            
            -Liska
                Imaging
            
            
            5,034,674DCS
            
            
            29,729DCS
                Europe
            
            
            825,580Cosmo
                ID
            
            
            336,049**Consolidated
                Total**
            
            $
            6,226,032




F-10




**DEPRECIATION
                AND AMORTIZATION:**Liska
            
            $
            1,163,224Liska
                Canada
            
            
            -Liska
                Imaging
            
            
            76,312DCSDCS
                Europe
            
            
            -Cosmo
                ID
            
            
            -**Consolidated
                Total**
            
            $
            1,239,536




**INTEREST
                EXPENSES:**Liska
            
            $
            328,232Liska
                Canada
            
            
            -Liska
                Imaging
            
            
            -DCS
            
            
            -DCS
                Europe
            
            
            -Cosmo
                ID
            
            
            -**Consolidated
                Total**
            
            $
            328,232




**NET
                INCOME (LOSS):**Liska
            
            $
            (10,528,315
            )Liska
                Canada
            
            
            (375,595
            )Liska
                Imaging
            
            
            58,180DCS
            
            
            (507,154
            )DCS
                Europe
            
            
            (13,884
            )Cosmo
                ID
            
            
            (1,366
            )**Consolidated
                Total**
            
            $
            (11,368,134
            )




**TOTAL
                CURRENT ASSETS**Liska
            
            $
            50,802Liska
                Canada
            
            
            2,164Liska
                Imaging
            
            
            1,624,455DCS
            
            
            48,710DCS
                Europe
            
            
            451,491Cosmo
                ID
            
            
            171,351**Consolidated
                Total**
            
            $
            2,348,973




F-11




**CAPITAL
                ASSETS (NET)**Liska
            
            $
            3,549Liska
                Canada
            
            
            0Liska
                Imaging
            
            
            535,785DCS
            
            
            9,889DCS
                Europe
            
            
            33,411Cosmo
                ID
            
            
            36,682**Consolidated
                Total**
            
            $
            619,316




**Income
      Taxes**





The
      Company follows SFAS 109, "Accounting for Income Taxes" for recording the provision
      for income taxes. Deferred tax assets and liabilities are computed based
      upon the difference between the financial statement and income tax basis of
      assets and liabilities using the enacted marginal tax rate applicable when
      the
      related asset or liability is expected to be realized or settled. Deferred
      income tax expenses or benefits are based on the changes in the asset or
      liability each period. If available evidence suggests that it is more likely
      than not that some portion or all of the deferred tax assets will not be
      realized, a valuation allowance is required to reduce the deferred tax assets
      to
      the amount that is more likely than not to be realized. Future changes in such
      valuation allowance are included in the provision for deferred income taxes
      in
      the period of change.





**Research
      and Development**





The
      Company expenses research and development costs as incurred. Such costs include
      certain prototype products, test parts, consulting fees, and costs incurred
      with third parties to determine feasibility of products. Costs incurred for
      research and development were $220,934 and $82,861 in 2006 and 2005 and are
      included in selling, general and administrative expenses.




**Stock-Based
      Compensation**





The
      Company accounts for equity instruments issued to employees for services based
      on
      the fair value of the equity instruments issued and accounts for equity
      instruments issued to other than employees based on the fair value of the
      consideration received or the fair value of the equity instruments, whichever
      is
      more reliably measurable. The Company accounts for stock based compensation
      in
      accordance with SFAS 123, "Accounting for Stock-Based Compensation." The
      provisions of SFAS 123 allow companies to either expense the estimated fair
      value of stock options or to continue to follow the intrinsic value method
      set
      forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued
      to
      Employees" ("APB 25") but disclose the pro forma effects on net income (loss)
      had the fair value of the options been expensed.





In
      December 2004, the FASB issued SFAS 123 (revised 2004) “Share-Based Payment”.
      This Statement requires that the cost resulting from all share-based
      transactions be recorded in the financial statements. The Statement establishes
      fair value as the measurement objective in accounting for share-based payment
      arrangements and requires all entities to apply a fair-value-based measurement
      in accounting for share-based payment transactions with employees. The Statement
      also establishes fair value as the measurement objective for transactions in
      which an entity acquires goods or services from non-employees in share-based
      payment transactions. The Statement replaces SFAS 123 “Accounting for
      Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for
      Stock Issued to Employees”. The provisions of this Statement were effective for
      the Company beginning with its fiscal year ended December 31, 2006. Stock-based
      awards to non-employees are accounted for whichever is more reliably measurable
      in accordance with the provisions of the FASB issued SFAS 123 (revised 2004)
      “Share-Based Payment” and Emerging Issues Task Force (“EITF”) Issue No. 96-18,
      Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods and Services.




F-12





**Reclassifications**





Certain
      items previously reported in the prior year have been reclassified to conform
      to current year presentation.




**New
      Pronouncements**





SFAS
      155
      - "Accounting for Certain Hybrid Financial Instruments--an amendment of FASB
      Statements No. 133 and 140" This Statement, issued in February 2006, amends
      FASB
      Statements No. 133, "Accounting for Derivative Instruments and Hedging
      Activities", and No. 140, "Accounting for Transfers and Servicing of Financial
      Assets and Extinguishments of Liabilities". This Statement resolves issues
      addressed in Statement 133 Implementation Issue No. D1, "Application of
      Statement 133 to Beneficial Interests in Securitized Financial
      Assets."





This
      Statement:




a.
      Permits fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require
      bifurcation





b.
      Clarifies which interest-only strips and principal-only strips are not subject
      to the requirements of Statement 133





c.
      Establishes a requirement to evaluate interests in securitized financial assets
      to identify interests that are freestanding derivatives or that are hybrid
      financial instruments that contain an embedded derivative requiring bifurcation





d.
      Clarifies that concentrations of credit risk in the form of subordination are
      not embedded derivatives





e. Amends
      Statement 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial
      instrument.





This
      Statement is effective for the Company for all financial instruments acquired
      or
      issued after the beginning of our fiscal year beginning January 1,
      2007.





The
      fair
      value election provided for in paragraph 4(c) of this Statement may also be
      applied upon adoption of this Statement for hybrid financial instruments that
      had been bifurcated under paragraph 12 of Statement 133 prior to the adoption
      of
      this Statement. Earlier adoption is permitted as of the beginning of our fiscal
      year, provided we have not yet issued financial statements, including financial
      statements for any interim period, for that fiscal year. Provisions of this
      Statement may be applied to instruments that we hold at the date of adoption
      on
      an instrument-by-instrument basis.





The
      Company is currently reviewing the effects of adoption of this statement but
      it
      is not expected to have a material impact on our financial
      statements.





SFAS
      156
      - "Accounting for Servicing of Financial Assets--an amendment of FASB Statement
      No. 140"




This
      Statement, issued in March 2006, amends FASB Statement No. 140, "Accounting
      for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
      with respect to the accounting for separately recognized servicing assets and
      servicing liabilities. This Statement:





1.
      Requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract in certain situations.


F-13




2.
      Requires all separately recognized servicing assets and servicing liabilities
      to
      be initially measured at fair value, if practicable.





3.
      Permits an entity to choose either the amortization method or the fair value
      measurement method for each class of separately recognized servicing assets
      and
      servicing liabilities.





4.
      At its
      initial adoption, permits a one-time reclassification of available-for-sale
      securities to trading securities by entities with recognized servicing rights,
      without calling into question the treatment of other available-for-sale
      securities under Statement 115, provided that the available-for-sale securities
      are identified in some manner as offsetting the entity's exposure to changes
      in
      fair value of servicing assets or servicing liabilities that a servicer elects
      to subsequently measure at fair value.





5.
      Requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities.





Adoption
      of this Statement is required as of the beginning of the first fiscal year
      that
      begins after September 15, 2006. The adoption of this statement is not expected
      to have a material impact on our financial statements.





In
      September 2006, the FASB issued Statement No. 157, "Fair Value Measurements".
      This Statement defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles and expands disclosure about
      fair value measurement. The implementation of this guidance is not expected
      to
      have any impact on the Company's financial statements.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 158, "Employers' Accounting for Defined
      Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
      No. 87, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires companies
      to
      recognize a net liability or asset and an offsetting adjustment to accumulated
      other comprehensive income to report the funded status of defined benefit
      pension and other postretirement benefit plans. SFAS No. 158 requires
      prospective application, recognition and disclosure requirements effective
      for
      the Company's fiscal year ending December 31, 2007. Additionally, SFAS No.
      158
      requires companies to measure plan assets and obligations at their year-end
      balance sheet date. This requirement is effective for the Company's fiscal
      year
      ending December 31, 2009. The Company does not expect that it will have a
      material impact on its financial statements.





SFAS
      159
      - ‘The Fair Value Option for Financial Assets and Financial
      Liabilities—Including an amendment of FASB Statement No. 115’




In
      February 2007, the FASB issued **** Financial
      Accounting Standard No. 159 ' *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115'* or SFAS
      159. This Statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. Most of the provisions of
      this Statement apply only to entities that elect the fair value option.




The
      following are eligible items for the measurement option established by this
      Statement:




1.
      Recognized financial assets and financial liabilities except:




a.
            An
                investment in a subsidiary that the entity is required to
                consolidate




b.
            An
                interest in a variable interest entity that the entity is required
                to
                consolidate




c.
            Employers’
                and plans’ obligations (or assets representing net overfunded positions)
                for pension benefits, other postretirement benefits (including health
                care
                and life insurance benefits), post employment benefits, employee
                stock
                option and stock purchase plans, and other forms of deferred compensation
                arrangements.




F-14





d.
            Financial
                assets and financial liabilities recognized under leases as defined
                in
                FASB Statement No. 13, '*Accounting
                for Leases.'*




e.
            Deposit
                liabilities, withdrawable on demand, of banks, savings and loan
                associations, credit unions, and other similar depository
                institutions




f.
            Financial
                instruments that are, in whole or in part, classified by the issuer
                as a
                component of shareholder’s equity (including “temporary equity”). An
                example is a convertible debt security with a noncontingent beneficial
                conversion feature.




2.
      Firm
      commitments that would otherwise not be recognized at inception and that involve
      only financial instruments




3.
      Nonfinancial insurance contracts and warranties that the insurer can settle
      by
      paying a third party to provide those goods or services




4.
      Host
      financial instruments resulting from separation of an embedded nonfinancial
      derivative instrument from a nonfinancial hybrid instrument.




The
      fair
      value option:




1.
      May be
      applied instrument by instrument, with a few exceptions, such as investments
      otherwise accounted for by the equity method




2.
      Is
      irrevocable (unless a new election date occurs)




3.
      Is
      applied only to entire instruments and not to portions of
      instruments.




The
      Statement is effective as of the beginning of an entity’s first fiscal year that
      begins after November 15, 2007. Early adoption is permitted as of the beginning
      of a fiscal year that begins on or before November 15, 2007, provided the entity
      also elects to apply the provisions of FASB Statement No. 157, ' *Fair
      Value Measurements'* .
      We have
      not yet determined what effect, if any, adoption of this Statement will have
      on
      our financial position or results of operations.





In
      September 2006, the United States Securities and Exchange Commission ("SEC")
      SAB
      No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements." This SAB provides guidance
      on the consideration of the effects of prior year misstatements in quantifying
      current year misstatements for the purpose of a materiality assessment. SAB
      108
      establishes an approach that requires quantification of financial statement
      errors based on the effects of each of the company's balance sheet and statement
      of operations financial statements and the related financial statement
      disclosures. The SAB permits existing public companies to record the cumulative
      effect of initially applying this approach in the first year ending after
      November 15, 2006 by recording the necessary correcting adjustments to the
      carrying values of assets and liabilities as of the beginning of that year
      with the offsetting adjustment recorded to the opening balance of retained
      earnings. Additionally, the use of the cumulative effect transition method
      requires detailed disclosure of the nature and amount of each individual error
      being corrected through the cumulative adjustment and how and when it arose.
      The
      Company is currently evaluating the impact, if any, that SAB 108 may have on
      the
      Company's results of operations or financial position.




F-15




In
      July
      2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes-an interpretation of FASB Statement No. 109." This Interpretation
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This Interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Interpretation is effective for fiscal
      years beginning after December 15, 2006 and the Company is currently evaluating
      the impact, if any, that FASB No. 48 may have on the Company's results of
      operations or financial position.





EITF
      00-19-2, "Accounting for Registration Payment Arrangements".




In
      December 2006, the FASB issued Staff Position FSP EITF 00-19-2, "Accounting
      for
      Registration Payment Arrangements". This statement is effective for existing
      registration payment arrangements as of January 1, 2007, with earlier
      application permitted in previously-unissued financial statements. As discussed
      in Note 9 and as permitted by the FSP, we adopted the provisions of this
      FSP in our fourth quarter of 2006, resulting in re-classification of certain
      of
      our outstanding warrants from derivative instrument liabilities to
      equity.




**BASIS
      OF REPORTING**





The
      Company's financial statements are presented on a going concern basis, which contemplates
      the realization of assets and satisfaction of liabilities in the normal course
      of business.





The
      Company has experienced a significant loss from operations as a result of its
      investment necessary to achieve its operating plan, which is long-range in nature.
      For the year ended December 31, 2006, the Company incurred losses of $11,368,134 and
      has
      working capital and stockholders deficit as of December 31, 2006 of $5,147,856
      and $4,502,890 respectively.





The
      Company's ability to continue as a going concern is contingent upon its ability
      to attain profitable operations and secure financing. In addition, the Company's
      ability to continue as a going concern must be considered in light of the
      problems, expenses and complications frequently encountered by entrance into
      established markets and the competitive environment in which the Company
      operates.





The
      Company is pursuing equity financing for its operations. Failure to secure
      such
      financing or to raise additional capital or borrow additional funds may result
      in the Company depleting its available funds and not being able pay its
      obligations.




The
      financial statements do not include any adjustments to reflect the possible
      future effects on the recoverability and classification of assets or the amounts
      and classification of liabilities that may result from the possible inability
      of
      the Company to continue as a going concern.





**NOTES
      RECEIVABLE**





The
      note
      receivable represents a loan to Sogedex of Paris, France denominated as 100,000
      Euros. The note receivable bears interest at 4.5%. The note is convertible
      into
      common stock of Sogedex. In connection with the loan, the Company also received
      an option to purchase 80% of the outstanding stock of Sogedex for approximately
      2,400,000 Euros. The initial term of the option expired on July 31, 2006, but
      can be extended through December 31, 2006 by providing additional funds to
      Sogedex in the amount of 200,000 Euros. If the note is not converted into
      Sogedex common stock or the option to purchase additional stock is not
      exercised, the note is due in 20 quarterly installments commencing in 2007
      and
      ending in 2012. As of December 31, 2006 and throughMay 16, 2007 the Company
      has
      not provided the additional funds to extend the note, however the Company does
      plan to extend the option to purchase Sogedex.




F-16




**NOTES
      PAYABLE**




In
      February 2006, a bridge loan of $300,000 was received from CAMOFI Master LDC,an
      affiliate of Centrecourt Asset Management LLC ("CAMOFI"). The note bears
      interest at 8% and was originally due on April 30, 2006. The CAMOFI bridge
      loan
      was secured by all of the assets of the Company and by a pledge of 3,300,000
      shares of the Company's common stock owned by the Company's president. As
      additional consideration for the loan, the Company issued 500,000 shares of
      common stock and 300,000 warrants. The Company has valued the stock at its
      fair
      market value of $150,000. The Company has valued the warrants at $83,631 using
      the Black-Scholes option pricing model and recorded the amount as additional
      paid in capital and debt discount. The aggregate debt discount of $233,631
      was
      amortized to interest expense over the three-month term of the loan. On April
      30, 2006, the Company extended the term of the note to July 31, 2006 by issuing
      833,333 shares of common stock, which were valued at $150,000, based upon the
      market value of the common stock on April 30, 2006. The Company amortized the
      cost of $150,000 to interest expense over the three month term of the extension.
      As of July 31, 2006 the company extended the term of the note to October 31,
      2006 by issuing 1,500,000 shares of common stock, which were valued at $255,000,
      based upon the market value of the common stock on July 31, 2006. The company
      amortized the cost of the $255,000 to interest expense over the three month
      term
      of the extension, which resulted in charges of $170,000 during the period ended
      September 30, 2006. At December 31, 2006 this note and all interest was paid
      in
      full.





In
      November 2006 the company received bridge loans totaling $325,000. The note
      for
      $225,000 was made by two separate entities, Motivated Minds LLC, $200,000,
      and
      Arma Fund, $25,000. The loans carry a 120 day term and can be extended, as
      of
      May 16, 2007 these notes have been extended. The other loan of 100,000 was
      received from an employee, the applied interest rate is 8% per annum with no
      set
      term. The holder of the note received a warrant to purchase 700,000 shares
      of
      common stock at $0.14 on a cash basis.





**LONG
      TERM DEBT AND DERIVATIVE LIABILITIES**





On
      June
      5, 2006, the Company entered into a long term financing arrangement with CAMOFI.
      Under the arrangement, Liska issued to CAMOFI two convertible promissory notes,
      for $3,000,000 and $2,000,000 (collectively "the Convertible Notes"). The
      Convertible Notes were scheduled to mature on May 31, 2009 and bore interest
      at
      10% per annum. The Convertible Notes were convertible into shares of Liska
      common stock at $0.40 per share and $0.60 per share, respectively. Liska granted
      to CAMOFI a priority security interest in all of our assets. The terms of the
      Convertible Notes required that a certain portion of the proceeds be placed
      in
      an escrow account pending satisfaction of certain conditions





In
      addition to the Convertible Notes and pursuant to the financing arrangement,
      Liska issued to CAMOFI warrants to purchase up to 12,500,000 shares of our
      common stock ("the Warrants"). The Warrants have a five year term and initially
      had an exercise price of $0.40 per share.





The
      Company agreed to use its best efforts to register the shares of common stock
      underlying the Convertible Notes and the Warrants. The company was required
      to
      file the registration statement within 90 days and have it become effective
      within 180 days. In addition, the Company is required to maintain the
      effectiveness of the registration statement. In the event that these
      requirements are not met, the Company is required to pay cash penalties of
      1.5%
      per month of the face value of the notes, The Company was unable to file the
      registration statement within the prescribed time and, at December 31, 2006,
      has
      accrued penalties in the amount of $300,000.




F-17




On
      December 29, 2006 the Company and CAMOFI agreed to reset the conversion price
      of
      the Convertible Notes from $0.40 and $0.60 to $0.14, and to reset the exercise
      price of the Warrants from $0.40 to $0.14. In addition, the bridge loan of
      $300,000 and all accrued interest related to the bridge loan and the Convertible
      Notes was paid ($624,000) using the restricted cash held in escrow from the
      second of the Convertible Notes. The remaining funds held in escrow were
      returned to CAMOFI, leaving the company with one Convertible Note with a face
      value of $3,624,676. At present, the company is still negotiating penalties
      on
      its delinquency in filing the registration statement.





In
      addition, the company amended and restated the Warrants issued to CAMOFI, to
      provide for warrants to purchase 21,000,000 shares of common stock at an
      exercise price of $0.14, expiring on December 29, 2013. If, at any time while
      the Warrants are outstanding (a) the Company effects any merger or consolidation
      of the Company with or into another Person (b) the Company effects any sale
      of
      all or substantially all of its assets in one or a series of related
      transactions (c) any tender offer or exchange offer (whether by the Company
      or
      another Person) is completed pursuant to which holders of Common Stock are
      permitted to tender or exchange their shares for other securities, cash or
      property or (d) the Company effects any reclassification of the Common Stock
      or
      any compulsory share exchange pursuant to which the Common Stock is effectively
      converted into or exchanged for other securities, cash or property, then the
      Holder of the Warrants may elect to receive cash equal to the value of the
      Warrants as determined in accordance with the Black-Scholes option pricing
      formula.





Under
      applicable accounting rules, the Company accounted for the Convertible Notes
      and
      Warrants as derivative instrument liabilities. The derivative accounting was
      required by certain provisions in the financing documents which provided for
      adjustments in the amount of common stock which could be issued upon conversion
      of the derivative instruments in certain events, as described in Emerging Issues
      Task Force (EITF) Issue 00-19. Under the relevant provisions in such documents
      as originally constituted, if the Company issued rights, options or warrants
      to
      subscribe for or purchase common stock at a price per share which was less
      than
      the conversion or exercise price, the amount of common stock issueable upon
      conversion of the Convertible Notes or exercise of the Warrants would be
      adjusted upward under a formula. Further, because the Company has a maximum
      number of authorized common shares and theoretically might not have sufficient
      common stock available to satisfy such adjustments, the Company could be forced
      to settle such adjustments in cash. Although the terms of the Convertible Notes
      do not provide for net-cash settlement, in certain circumstances, physical
      or
      net-share settlement may be outside the Company's control and, accordingly,
      the
      Company accounted for the embedded conversion feature in the Convertible Notes
      as derivative financial instrument liabilities, rather than as equity. In
      addition, the ability of the Holder of the Warrants to elect to receive cash
      in
      certain circumstances, as described above, requires that the warrants be
      accounted for as derivative instrument liabilities.





In
      addition, the Company agreed that, during the term of the Notes, CAMOFI has
      the
      right (at its sole option) to require the Company to issue to CAMOFI additional
      notes in an aggregate principal amount of up to $2,500,000 on the same terms
      and
      conditions (including, without limitation, the same interest rate, conversion
      price then in effect (using the lowest conversion price of all of the Notes
      issued pursuant to the Agreement with CAMOFI), proportionate warrant coverage
      (at the same exercise prices) and amortization schedule. The Company has valued
      its derivative instrument liability for this Additional Investment Right based
      on the fair value of the underlying common stock and warrants that may be
      obtained by CAMOFI if it exercises its right.




F-18




When
      derivative instrument accounting is required, the Company deducts the fair
      value
      of the derivative instruments from the proceeds of sale of the related
      instrument. For derivative financial instruments that are accounted for as
      liabilities, the derivative instrument is re-valued at each reporting date,
      with
      changes in the fair value reported as charges or credits to income. The Company
      uses the Cox-Ross-Rubinstein binomial option pricing model to value the Warrants
      and the embedded conversion right components of any bifurcated embedded
      derivative instruments that are recorded as derivative liabilities.





In
      valuing the Warrants and the embedded conversion right components at the time
      they were issued and at December 31, 2006, the Company used the market price
      of
      our common stock on the date of valuation, an expected dividend yield of 0%,
      the
      remaining period to the expiration date of the Warrants or convertible notes,
      and an expected volatility of our common stock over the remaining life of the
      warrants or convertible notes of 50%. The risk-free rates of return used at
      December 31, 2006, applicable to the remaining life of the Warrants were 5.11%
      based on constant maturity rates published by the U.S. Federal
      Reserve.





The
      following long term debt and derivative instrument liabilities were outstanding
      at December 31, 2006:





December
                31, 200610%
                Senior Secured Convertible Note, due October 31, 2009
            
            $
            3,624,676Less:
                unamortized discount
            
            
            (2,601,615
            )$
            1,023,061





At
                Issuance
            
            December
                31, 2006Common
                Stock Warrants
            
            $
            1,053,524
            
            $
            1,134,478Additional
                Investment Rights
            
            
            1,154,652
            
            
            1,261,521Embedded
                Derivative Instrument bifurcated from 10% Senior Secured Convertible
                Note
            
            
            675,607
            
            
            750,946Derivative
                Instrument Liabilities
            
            
            
            
            $
            3,146,945





During
      the year ended December 31, 2006 we retired a significant portion of our
      outstanding derivative liabilities. The debt was retired using $2,000,000
      previously held in restricted cash, $300,000 was used to pay a bridge loan,
      $324,676 was used to pay the accrued interest on the $5,000,000 notes. The
      balance was returned to CAMOFI, as such we have charged operations in the form
      of a loss on extinguishment of $1,372,965.




**STOCKHOLDERS'
      (DEFICIT)**





Common
      Stock





At
      December 31, 2006, the Company's no par value common stock authorized was
      100,000,000 shares with 72,478,869 shares issued and outstanding and the
      Company's no par value preferred stock authorized was 10,000,000 shares. During
      October 2005, the Company signed a securities purchase agreement for the
      issuance of 5,000,000 shares of common stock at $0.275 or $1,375,000. The shares
      have been issued but to date, the cash proceeds have not been received, the
      shares are held in escrow and the $1,375,000 is shown as a reduction of
      stockholders' equity at December 31, 2006.




F-19




During
      the year ended December 31, 2004, the Company repurchased 1,871,666 shares
      of
      common stock held by a former officer for $200,000. The Company canceled these
      shares in July 2005.





During
      the year ended December 31, 2005, the Company issued 2,058,904 shares of common
      stock for services and agreed to issue 1,069,271 shares of common stock for
      services. The shares were valued at their fair market value of $787,378 and
      $481,172 respectively which has been charged to operations during the year.
      In
      addition, the Company amortized $67,417 of deferred compensation from December
      31, 2004, and charged the intrinsic value of options issued to employees of
      $70,000 to operations during the year.





In
      March
      2005, the Company issued 345,571 shares of restricted common stock to two
      employees pursuant to employee contract performance milestones and services
      rendered.





During
      the year ended December 31, 2005, the Company issued 4,798,512 shares of common
      stock for cash aggregating $1,318,250 pursuant to private
      placements.




During
      the year ended December 31, 2005, the Company issued 250,000 shares of common
      stock valued at its fair market value to settle a note payable of
      $50,000.





During
      January 2005, May 2005, and December 2005, the Company filed Form S-8
      registration statements registering a total of 1,814,271 shares of common stock
      to be issued pursuant to employment and consulting contracts which are included
      in the shares issued or subscribed for services described above.





During
      the twelve months ended December 31, 2006, the Company issued a total of
      38,337,606 shares of common stock.





In
      connection with the acquisition of DCS 25,000,000 shares of common stock were
      issued effective June 1, 2006, the shares were valued at the market price of
      $0.20 per share. The share purchase agreement with DCS provides that the shares
      of common stock issued to DCS shareholders are restricted and will not be
      registered under the Securities Act of 1933, or the securities laws of any
      state, and absent an exemption from registration contained in such laws, cannot
      be transferred, hypothecated, sold or otherwise disposed of until; (i) a
      registration statement with respect to such securities is declared effective
      under the Securities Act of 1933, or (ii) Liska receives an opinion of counsel
      for Liska that an exemption from the registration requirements of the Securities
      Act is available.





In
      private transactions, the Company sold 1,750,000 shares of common stock for
      cash proceeds
      of $175,000. The Company also issued 7,685,000 shares for services rendered
      pursuant to employment, consulting contracts, and investment banking contracts,
      both written and verbal. The shares were valued at their fair market value
      of
      $1,316,760, the allocable portion charged to non-cash compensation expense
      during the year was $1,265,497, $51,263 was deferred and will be recognized
      as
      an expense in future periods. The Company issued 2,833,333 shares as additional
      consideration pursuant to the note payable agreement with CAMOFI. The aggregate
      value of these shares was $555,000 (based upon quoted market value on the loan
      agreement date). The value of these shares is being amortized as debt discount
      over the term of the agreements.




F-20




During
      the twelve months ended December 31 2006, the Company issued 300,000 warrants,
      valued at $83,361 as additional consideration pursuant to the note payable
      agreement with CAMOFI. Each warrant entitles the holder to purchase one share
      of
      common stock at an exercise price of $0.33 and all warrants expire on July
      31,
      2009. These warrants are now associated with and part of the 21,000,000 warrants
      created through the debt restructure and are now exercisable at
      $.0.14





**Stock
      Options**





During
      the year ended December 31, 2006 the Company issued options to purchase 150,000
      shares of its common stock for a period of ten years at prices of $.20 to one
      former employee. These options vest one year from the date of issuance. No
      expense was charged to operations related to these options. During the year
      ended December 31, 2005 the Company issued options to purchase 975,000 shares
      of
      its common stock for a period of ten years at prices of $.32 and $.61 per share
      to employees for services rendered. These options vest one year from the date
      of
      issuance.





SFAS
      123
      requires the Company to provide pro forma information regarding net income
      and
      earnings per share as if compensation cost for the Company's stock option plans
      had been determined in accordance with the fair value based method prescribed
      in
      SFAS 123. The fair value of the option grants is estimated on the date of grant
      utilizing the Black-Scholes option pricing model with the following weighted
      average assumptions for grants during the year ended December 31, 2003: expected
      life of options of 10 years, expected volatility of 208%, risk-free interest
      rate of 3% and no dividend yield. The weighted average fair value at the date
      of
      grant for options granted during the year ended December 31, 2004, approximated
      $1.00 per option. The weighted average fair value at the date of grant for
      options granted during the year ended December 31, 2006, approximated $1.00
      per
      option. These results may not be representative of those to be expected in
      future years.





Effective
      January 1, 2006 the company adopted SFAS 123 (revised 2004) “share based
      payment” (SFAS 123 (R)). This statement requires compensation expense to be
      measured based on the estimated fair value of the share based awards and
      recognized in income on a straight line basis over the requisite service period,
      which is generally the vesting period. Prior to January 1, 2006 the company
      accounted for share based compensation under the provisions of SFAS 123 using
      the intrinsic value method prescribed by the Accounting Principles Board (APB)
      No. 25 and related interpretations.


2005Net
                  (loss)As
                  reported
              
              $
              (2,942,852
              )Proforma
              
              $
              (3,242,851
              )Basic
                  and diluted (loss) per shareAs
                  reported
              
              $
              (.11
              )Pro
                  forma
              
              $
              (.12
              )


F-21




A
      summary
      of stock option activity is as follows:


Number
                of
                shares
              
              Weighted
                average
                exercise
                price
              
              Weighted
                average
                fair
                valueBalance
                  atDecember
                  31, 2004
              
              
              350,000
              
              $
              .64Granted
              
              
              650,000
              
              $
              .39
              
              $
              .31Granted
              
              
              295,000
              
              $
              .32
              
              $
              .31Granted
              
              
              30,000
              
              $
              .61
              
              $
              .31Balance
                  atDecember
                  31, 2005
              
              
              1,325,000
              
              $
              .45Granted
              
              
              150,000
              
              $
              .20
              
              $
              nilBalance
                  atDecember
                  31, 2006
              
              
              1,475,000
              
              $
              40





The
      following table summarizes information about fixed-price stock options at December
      31, 2006:


Outstanding
                  ExercisableExercise
                Prices
              
              Number
                Outstanding
              
              Contractual
                Life
              
              Exercise
                Price
              
              Weighted
                Average
                Number
                Exercisable
              
              Weighted-
                Average
                Exercise
                Price$.64
              
              
              350,000
              
              
              10
                  years
              
              $
              .64
              
              
              350,000
              
              $
              .64$.32
                  to $.39
              
              
              945,000
              
              
              10
                  years
              
              $
              .35
              
              
              945,000
              
              $
              .35$.61
              
              
              30,000
              
              
              10
                  years
              
              $
              .61
              
              
              30,000
              
              $
              .61$.20
              
              
              150,000
              
              
              10
                  years
              
              $
              .20
              
              
              0
              
              
              N/A


**INCOME
      TAXES**





The
      Company accounts for income taxes under SFAS 109, which requires use of the
      liability method. SFAS 109 provides that deferred tax assets and liabilities
      are
      recorded based on the differences between the tax bases of assets and
      liabilities and their carrying amounts for financial reporting purposes,
      referred to as temporary differences. Deferred tax assets and liabilities at
      the
      end of each period are determined using the currently enacted tax rates applied
      to taxable income in the periods in which the deferred tax assets and
      liabilities are expected to be settled, or realized.





The
      provision for income taxes differs from the amount computed by applying the
      statutory federal income tax rate to income before provision for income taxes.
      The sources and tax effects of the differences are as follows:


Income
                  tax provision at the federal statutory rate
              
              
              34
              %Effect
                  of operating losses
              
              
              (34
              )%—
  F-22





As
      of
      December 31, 2006 the Company has a net operating loss carry forward of
      approximately $3,900,000(subject to any restrictions because of prior changes
      in
      ownership). This loss will be available to offset future taxable income. If
      not
      used, this carry forward will expire through 2026. The deferred tax asset of
      approximately $1,300,000 relating to the operating loss carry forward has been
      fully reserved at December 31, 2006. The principal difference between the net
      operating loss for income tax purposes and the net operating loss for financial
      reporting purposes results from stock based compensation of approximately
      $18,100,000. The change in the valuation reserve for the year ended December
      31,
      2006 was approximately $500,000.




**DUE
      TO INVESTORS**





During
      December 2000, the Company raised $86,000 from three investors based on a
      private placement offering at $1.00 per share.





During
      2001, the Company raised an additional $154,200 consisting of $42,000 in cash
      and $112,200 of expenses paid directly to third parties. During October 2001
      the
      Company issued 410,400 shares of common stock to retire $205,200 of this
      liability.





During
      2004 investors loaned the Company a net of $47,552 with no specified interest
      rate. The loans are due on demand.





During
      2005 investor loans of $18,552 were repaid, leaving the Company a net of loans
      payable on demand of $64,000 at December 31, 2005 with no specified interest
      rate.





During
      2006 the company borrowed $55,000 in demand loans with no interest rate and
      no
      specified maturity date. As of December 31, 2006 $19,000 of the due to investors
      was repaid.





On
      June
      1, 2006 the Company through its merger with Digital Card Systems assumed
      $555,167 in demand notes with no specified term nor interest rate, these loans
      were made by employees and shareholders of DCS. Subsequent to the merger, the
      Company repaid $58,833 to the employees and shareholders of DCS. Additionally
      our subsidiary borrowed $100,000 from an employee in October, there is no
      specified interest rate, although the holder of the note has a right to demand
      repayment if the Company receives $1,000,000 or greater in
      financing.





As
      of
      December 31, 2006 the Company had net amounts due to investors of
      $755,167.





**LEASE
      COMMITMENTS**





On
      December 8, 2004, the Company entered into a lease agreement for office premises
      in Dover, New Hampshire, requiring lease payments of $2,250 to $2,734 per month
      for the period January 1, 2005, through December 31, 2009.





On
      February 24, 2005, Liska Biometry (Canada) Inc. entered into an Agreement to
      Lease office premises in Ottawa, Canada requiring minimum lease payments of
      $8,819 per month beginning May 1, 2005, through March 31, 2010. In addition,
      the
      lease allows for annual escalation of certain operating costs. In support of
      that agreement, the Canadian Company agreed to sign an indemnification agreement
      guaranteeing all rental payments. At December 31, 2006 the company is not
      occupying this space, the space has been rented out and the Company has
      forfeited its security deposit of $12,500.




F-23




On
      June
      5, 2006 the company assumed the leases of Markow Photo properties and DCS
      Europe. These are 5 year leases with monthly payments of $13,475 and $3,150
      respectively.





Additionally
      in August 2006 the company leased 5,000 sq ft through a sublease with S1 in
      Littleton, MA. The sublease is a two year lease with monthly payments of
      $4,500.





Minimum
      lease payments under the above leases for the years ended December 31, are summarized
      below:


2007
              
              $
              284,2672008
              
              $
              258,2562009
              
              $
              232,3192010
              
              $
              199,5002011
              
              $
              88,125





**COMMITMENTS
      AND CONTINGENCIES**





During
      the periods covered by these financial statements the Company issued shares
      of
      common stock without registration under the Securities Act of 1933. Although
      the
      Company believes that the sales did not involve a public offering of its
      securities and that the Company did comply with the "safe harbor" exemptions
      from registration, provided required information and acquired necessary
      subscription agreements, it could be liable for rescission of the sales or
      other
      actions, including SEC enforcement actions, if such exemptions were found not
      to
      apply or other violations occurred. This could have a material negative impact
      on the Company's financial position and results of operations.




During
      the periods covered by these financial statements the Company entered into
      some
      employment, consulting and other agreements with third parties. Although the
      Company obtained settlement releases from a majority of the parties, settlement
      releases were not entered into with some of these parties or the settlement
      releases were verbal agreements. Future contingencies which cannot be estimated
      by management, may exists for the above matters including but not limited to
      issuance of capital stock and other financial obligations and may have a
      material negative impact on the Company's financial position and results of
      operations.





At
      April
      1, 2005 the Company had entered into an executive employment contract for one
      year, renewable each year, (it was renewed April 1, 2006). Through December
      2005
      with two officers for annual compensation of approximately $90,000. One of
      these
      executives resigned at March 8, 2006. During, 2006 the Company has not entered
      in any written employment contracts pre or post acquisition. The contracts
      previously in place have renewed. The total annual compensation of the renewed
      contracts is $290,000.





**ACQUISITION
      OF DIGITAL CARD SYSTEMS AND MARKOW PHOTO PROPERTIES**





Effective
      June 1, 2006, the Company acquired all of the outstanding equity interests
      of
      Digital Card Systems, Inc., a Delaware corporation, and its affiliates, DCS
      Europe, Inc., and Cosmo ID GmbH (collectively "DCS"). The aggregate
      consideration paid to the DCS shareholders was 25,000,000 shares of common
      stock, valued at $5,000,000. The share purchase agreement with DCS provides
      that
      the shares of common stock issued to DCS shareholders are restricted and will
      not be registered under the Securities Act of 1933, or the securities laws
      of
      any state, and absent an exemption from registration contained in such laws,
      cannot be transferred, hypothecated, sold or otherwise disposed of until; (i)
      a
      registration statement with respect to such securities is declared effective
      under the Securities Act of 1933, or (ii) Liska receives an opinion of counsel
      for Liska that an exemption from the registration requirements of the Securities
      Act is available.




F-24




With
      offices in Boston and Germany, DCS is a developer of security and ID management
      solutions for government credentials including passports, driver's licenses,
      voter cards, national IDs, military and police IDs, and commercial IDs for
      hospitals, private industry, schools and airports.





DCS
      has
      sophisticated .NET software positioned as "middleware", which incorporates
      digital imaging, biometrics, smart chips, and related proprietary capture and
      output hardware to offer full security ID solutions that comply with the latest
      ISO and ICAO standards. DCS develops programs which integrate and optimize
      fingerprint and facial recognition algorithms with smart chips and 2D bar codes,
      and from its German office presents smart chip seminars and conferences for
      government and industry. The acquisition of DCS will provide significant
      international growth opportunities and further diversification of product and
      service offerings.





The
      aggregate purchase price of DCS was determined to be $5,000,000, based upon
      the
      issuance of 25,000,000 shares of Liska common stock valued at the average
      trading price during the four day period commencing two days before the merger.
      The operating results of DCS are included in the consolidated results commencing on
      June
      1, 2006.





Effective
      June 5, 2006, DCS acquired certain operating assets (primarily comprised of
      capital equipment and inventory) of Markow Photo Properties, Inc., an Arizona
      corporation ("Markow") for $1,516,000 in cash consideration. The acquired assets
      were placed into a new wholly owned subsidiary called Liska Imaging, Inc. Liska
      Imaging is a Phoenix-based provider of all major aspects of the Identity
      Management market and operates under the trade names of Al-Cor Identification
      Systems, Colormark Inc., and Photomark, Inc.





Al-Cor
      Identification Systems sells Identification Management solutions to Arizona
      and
      Nevada organizations including regional and state education systems, law
      enforcement, and small and large corporations. These solutions include hardware
      for image and information capture, database management, credential design and
      printing, and supplies for continued support of systems sold.





Photomark
      Inc. sells and services photographic equipment for the professional and high-end
      consumer. Its retail operations focus on the sales of brand-name cameras,
      software and photographic accessories. Photomark also provides seminars and
      classes on all aspects of the photographic arts.





Colormark
      Inc. is focused on the processing of images, both digital and analog, and the
      printing of these images on a variety of materials from simple photographic
      paper to specialty papers to canvas in small and very large format. The company
      serves the consumer and business markets with customers ranging from households
      to national restaurant chains requiring high quality images for menu boards,
      banners and signs.





The
      acquisition of Markow will significantly expand the Company's range of biometric
      and secure identity solutions and provide extensive domestic growth
      opportunities.





The
      purchase price of Markow was cash consideration of $1,516,000. The source of
      financing was the $5,000,000 Convertible Note arrangement with CAMOFI. The
      results of operations of Markow are included in the Company's consolidated
      results commencing June 5, 2006.




The
      Company has allocated the aggregate purchase prices of the DCS and Markow
      acquisitions to the assets acquired and liabilities assumed at estimated fair
      values. The allocation process has not been completed and the amounts presented
      below are subject to future revision, which may include potential charges to
      the statement
      of operations. The excess of the aggregate purchase price over the net amounts
      allocated to the fair values of assets acquired and liabilities assumed is
      recorded as goodwill.




F-25




The
      Transaction described in above relating to the acquisition of DCS and Markow
      was
      accounted for as a business combination in accordance with SFAS No. 141.
      Goodwill and intangible assets were measured as fair value after the purchase
      price net off the fair value of tangible assets. A summary of the Transaction
      is
      presented below:




Fair
      value of net tangible assets acquired


Common
                  stock issued
              
              $
              5,000,000Cash
                  paid for assets
              
              
              1,516,000Equity
                  purchase price
              
              
              6,516,000Fair
                  value of net tangible assetsCash
                  and bank balances
              
              
              169,675Inventory
                  and supplies
              
              
              925,000Property
                  and equipment
              
              
              661,093Aggregate
                  tangible assets
              
              
              1,755,768Accounts
                  payable and accrued liabilities
              
              $
              (956,502
              )Accumulated
                  debt and capital lease
                obligations
              
              
              (614,000
              )Other
                  liabilities
              
              
              (106,461
              )78,805Goodwill
              
              $
              6,437,195Goodwill
                  impairment at December 31, 2006
              
              $
              6,437,195




Pro-forma
      Results





The
      following unaudited pro-forma financial information presents the combined
      results of operations of the Company and DCS and Markow as if the acquisitions
      had occurred on January 1, 2006 and 2005, respectively. The pro-forma financial
      information is not intended to represent or be indicative of the Company's
      consolidated results of operations or financial condition that would have been
      reported had the acquisitions been completed as of the beginning of the periods
      presented and should not be taken as indicative of the Company's future
      consolidated results of operations or financial condition.





YEAR
                ENDEDDECEMBER
                31,2006
            
            2005Revenues
                ($000)
            
            $
            10,439
            
            $
            10,444Net
                (loss) ($000) excluding charge on good will impairment
            
            $
            (4,002
            )
            $
            (4,007
            )(Loss)
                per share - basic and diluted
            
            $
            (0.08
            )
            $
            (0.08
            )





F-26





Adjustments
      to historical results that were used to prepare the pro-forma results include
      an
      increase in the number of weighted average shares outstanding consistent with
      the 25,000,000 shares issued to the DCS shareholders and an increase in interest
      expense consistent with the Convertible Note arrangement. The pro forma results
      include estimates and assumptions which management believes are reasonable.
      However, pro forma results do not include the realization of cost savings from
      operating efficiencies, synergies or other effects resulting from the merger,
      and are not necessarily indicative of the actual consolidated results of
      operations had the merger occurred on the date assumed, nor are they necessarily
      indicative of future consolidated results of operations.





**SUBSEQUENT
      EVENTS**





In
      February 2006 the company exercised its right to extend the bridge loan an
      additional 90 days, as such the company has issued and additional 1,440,000
      shares and 240,000 additional warrants to purchase common stock at $0.20. As
      of
      May 16, 2007 the shares remain a common stock issueable.





Additionally,
      as of May 16 , 2007 the Company has issued 2,100,000 additional shares for
      services rendered.





The
      company also reengaged Westminster Securities of New York, NY to act as
      investment advisor and non exclusive investment banker. As such the Company
      is
      presently pursuing equity based financing to continue to grow its
      operations.


Lastly
      the Company had signed an agreement to issue 5,000,000 shares for a receivable
      of $1,375,000 through Mercatus Partners in October of 2005. As of October 1,
      2006 the company had not received the funds, as such the board of directors
      ordered immediate return of the certificates, these certificates were received
      by the Company in March 2007, and the board has voted to cancel these
      certificates in order to reduce the outstanding.




F-27