**U.S. Securities and Exchange Commission**

**Washington, D.C. 20549**

 

**Form 10-KSB**

 

**(MarkOne)**

 
| **ý**                                       | **ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|-----------------------------------------------------------------------------------------|
| ** **                                       | ** **                                                                              |
| **For the  fiscal year ended December 31, 2004** |
|                                             |                                                                                    |
| **o**                                            | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number: 0-27321**

 

**ICOP Digital, Inc.**

(Name of small business issuer in its charter)

 
| **Colorado**                                                  | ** ** | **84-1493152**                      |
|---------------------------------------------------------------|------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |       | (I.R.S. EmployerIdentification No.) |

 

**11011 King Street, Suite 260, Overland Park, KS 66210**

(Address of principal executive offices, including ZIP Code)

 

Issuer’s telephone number: **(913) 338-5550**

 

**VistaExploration Corporation**

(Former name, address andfiscal year, if changed since last report)

 

Securities registered under Section 12(b) of the Exchange Act:

 
| **Title of each class** | ** ** | **Name of each exchange on which****registered** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| N/A                     |       | N/A                                              |       |

 

Securities registered under Section 12(g) of the Exchange Act:

 

**No par value common stock**

(Title of Class)

 

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

 

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

 

The issuer’s revenues for its most recent fiscal year ended December 31, 2004 were $51,000.

 

The aggregate market value of the 1,161,462 shares of the issuer’s outstanding common stock held by non-affiliates of the issuer was $6,968,772 as of March 31, 2005. The stock price for computation purposes was $6.00 per share which was the closing price for our shares on the OTC BB on March 30, 2005.

 

The issuer had 1,648,862 shares of its common stock issued and outstanding as of March 31, 2005, the latest practicable date before the filing of this report, after giving effect to a one share for ten share stock split completed February 28, 2005.

 

 

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ICOP DIGITAL, INC.

INDEX TO ANNUAL REPORT ON FORM 10-KSB

 
| PART I   |     |
|----------|----------|
|     |     |   |
|     | Item 1.  | Description of Business |   |
|     | Item 2.  | Description of Property |   |
|     | Item 3.  | Legal Proceedings |   |
|     | Item 4.  | Submission of Matters to a Vote of Security Holders |   |
|     |     |   |
| PART II  |     |
|     |     |   |
|     | Item 5.  | Market for Common Equity and Related Stockholder Matters |   |
|     | Item 6.  | Plan of Operation |   |
|     | Item 7.  | Financial Statements |   |
|     | Item 8.  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure |   |
|     | Item 8A. | Controls and  Procedures |   |
|     | Item 8B. | Other Information |   |
|     |     |   |
| PART III |     |
|     |     |   |
|     | Item 9.  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act; |   |
|     | Item 10. | Executive Compensation |   |
|     | Item 11. | Security Ownership Of Certain Beneficial Owners And Management and Related Stockholder Matters |   |
|     | Item 12. | Certain Relationships and Related Transactions |   |
|     | Item 13. | Exhibits |   |
|     | Item 14. | Principal Accountant Fees and Services |   |

 

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**PART I**

 

**Forward-LookingStatements**

 

We make forward-looking statements in thisreport that are subject to risks and uncertainties.  These forward-looking statements includeinformation about possible or assumed future results of our business, financialcondition, liquidity, results of operations, plans and objectives.  In some cases, you may identifyforward-looking statements by words such as “may,” “should,” “plan,” “intend,” “potential,”“continue,” “believe,” “expect,” “predict,” “anticipate” and “estimate,” thenegative of these words or other comparable words.  These statements are only predictions.  You should not place undue reliance on theseforward-looking statements.  Theforward-looking statements are qualified by their terms and/or importantfactors, many of which are outside our control, involve a number of risks,uncertainties and other factors, that could cause actual results and events todiffer materially from the statements made.  Such factors include, among other things,those listed under “Risk Factors” and described elsewhere in our registrationstatement on Form SB-2 as filed with the Securities and Exchange Commission onApril 4, 2005 (the “Form SB-2”) registeringan underwritten public offering of units of common stock and warrants topurchase common stock (the “public offering”) and described elsewhere in this report and the following:

 

1.                                       the possibility that the public offering is not consummatedand alternative financing is not available at all or on affordable terms;

2.                                       the *ICOP Model20/20* not being accepted by the law enforcement industry;

3.                                       difficulty meeting demand for in-car videotechnologies at a cost that results in a profit;

4.                                       our ability to improve our products and to developother products necessary to compete in the industry;

5.                                       our ability to bring future products to market;

6.                                       the *ICOP Model 20/20* being replaced by more advanced technologies andthereby becoming obsolete;

7.                                       the limited number of product offerings;

8.                                       budget cuts in the law enforcement industry affectingpurchasing levels;

9.                                       our lack of profitability and operating history;

10.                                 our limited ability to control interruptions inproduction by the outside manufacturer of the *ICOPModel 20/20*;

11.                                 successful infringement claims and our ability toprotect proprietary rights;

12.                                 a highly competitive and fragmented market;

13.                                 loss of key management personnel;

14.                                 our ability to manage rapid growth;

15.                                 criminal procedure court rulings regarding right toprivacy;

16.                                 general economic and business conditions in theUnited States; and

17.                                 defects in products could result in litigation andother significant costs.

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us.  These beliefs, assumptions and expectations can change as a result of many possible events or factors, including those events and factors described in “Risk Factors” in the Form SB-2, not all of which are known to us.  Neither we nor any other person assumes responsibility for the accuracy or completeness of these statements.  We will update this report only to the extent required under applicable securities laws.  If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

 

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**Item 1**.  Description of Business.

** **

**Company History**

 

We were formedas Bail Corporation in April 1998 with the purpose of acquiring or merging witha privately owned company.  In March2001, we began to engage in the oil and gas business and changed our name toVista Exploration Corporation.  We leasedoil and gas properties in Southeast Kansas to drill for coal bed methane gas,but due to a lack of funding in March 2003, we returned to our original plan ofseeking a merger with, or an acquisition of, an operating business that wantedto become a public company.  In January2004, ICOP Digital, Inc., a Nevada corporation (“ICOP Nevada”), merged with andinto our wholly owned subsidiary.  ICOPNevada commenced operations in May 2002 for the purpose of engaging in thedesign, development and marketing of an in-car digital video recorder for usein the law enforcement industry.  As aresult of the merger, our principal business became that of ICOP Nevada.  In November 2004, we changed our name to ICOPDigital, Inc. and in February 2005 we completed a ten shares for one sharereverse split of our common and preferred stock.  The effect of this change in share totals isreflected in this document, except for the financial statements in Item 7 whichinclude pre-split share totals.

 

**Introduction to Business**

 

We design,engineer and market a digital in-car video system – the *ICOP Model 20/20* – designed for the rugged demands of law enforcement agenciesand other first responder markets such as fire departments and emergencymedical personnel.  The product offers whatwe believe to be superior video and audio recording technology as well asproprietary compression technology that insures the integrity of the recordedinformation.  The *ICOP Model 20/20*technology also hasapplications in other commercial markets where surveillance and communicationsare critical to the safety of people and the security of property, includingpublic transportation such as trains, buses and airplanes; military andgovernment installations; financial institutions, telecommunications and energyfacilities; and transportation centers such as airports, seaports, trainstations and bus stations.  In the futurewe plan to develop and market other innovative surveillance and communicationssystems for the public and private security market.

 

**The Security Industry**

 

The security industry ischaracterized in general by a continual evolution of technology that enhancesboth security and convenience at increasingly lower costs.  Governments and privateindustry in the United States and worldwide are actively seeking to develop newproducts and services to meet the growing demands for homeland security.  Billions of dollars are being appropriated bythe federal and state governments of the U.S. and governments throughout theworld for coping with terrorism.  Theprivate sector is also increasing the demand for homeland security products andservices, especially, we believe, reliable integrated video surveillancetechnologies and communications solutions.

 

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There are three core marketsegments for the *ICOP Model 20/20* and otherproducts that we may develop based on this technology:

 

•                  *First responders*including law enforcement, military, fire departmentsand emergency medical personnel;

 

•                  *Operators of critical**assets and facilities*such as banking and financial institutions,buildings, energy and chemical sites (gas, electric power, water and nuclearpower plants), transportation facilities (rail, road transportation, marinetransportation and airports), telecommunications facilities, governmentfacilities, bridges, dams, border patrol, seaports, federal monuments andnational icons; and

 

•                  *Private industry.*

 

***The In-Car Video Industry***

 

The law enforcement industry haslong recognized the value of documenting critical incidents by means ofrecorded videotape.  Videotape providesaccurate portrayal of traffic violations, citizen behavior and other events asthey occur, documents police contacts with the public, offers persuasiveevidence in court, allows for officer performance monitoring and protects lawenforcement agents against false claims of police misconduct.  The result is increased likelihood ofcriminal prosecutions, less officer overtime spent in court, improved training,fewer citizen complaints and reduced exposure to civil liability and enhancedofficer safety, as well as the potential to improve accountability and trustbetween the police and the public.

 

The advent of the videotape camerain the early 1980s and improvements made in the field since then have givenrise to many new applications of video technology in law enforcement.  Agencies in the United States and around theworld are applying video technology to many facets of police operations byequipping vehicles with video recorders, monitoring public areas and recordingbooking and other police procedures.

 

In-car video was originally used,beginning in the 1980s, to record field sobriety tests to support driving underthe influence of alcohol allegations.  Inthe 1990s, in-car video cameras proved valuable to document drug interdictionstops.  By the late 1990s, the policewere also using in-car video to document traffic stops in response toallegations of racial profiling and to address the increase in assaults onofficers.  Since the terrorists’ attacksof September 11, 2001, video recordings from police vehicles have beenrecognized as a means by which information needed to locate terrorists can becollected, thereby improving homeland security.

 

Although there have been recenttechnological advances making the use of the mobile video recorder morepractical and affordable, nearly all video applications in law enforcementtoday still rely on outdated, analog VHS technology.  Problems with current in-car analogtechnologies include:

 

•                  poor video and audio quality that makesidentification difficult;

•                  high failure rates under normal circumstances andespecially when used in extreme temperatures, resulting in lost data and highmaintenance costs;

 

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•                  danger to the officer in the event of an accident asthe in-car unit and in some cases the cameras may become projectiles because oftheir installation constraints;

•                  occupation of valuable space in the trunk and cab;

•                  excessive time required to evaluate and catalogrecorded material;

•                  significant physical space for storage of the in-carunit and the data itself;

•                  lack of effective zoom capabilities; and

•                  limited area coverage when camera positioning isfixed.

 

Digital in-car video systems were first offered to the law enforcementindustry only recently and have been quickly recognized to be superior toanalog systems in many important respects. Digital video, for example, allows for pre-event recording while analogvideo does not.  Most digital systems arecontinually in the passive recording mode when the power is on.  When the record mode is activated, a periodof time, from ten seconds to five minutes depending on the manufacturer, isadded to the recording, possibly capturing the incident that prompted theofficer to begin recording.

 

Access to specific digitally recorded information is much quicker.  Rather than having to review a VHS cassetteby fast-forwarding and reversing, a scene can be selected from a menu andviewed instantly.  Also, digital videoproduces higher quality images and stores substantially more information thananalog video, including, on every frame, the date and officer name, trafficradar output, GPS coordinates, incident identification and status of emergencylights and other factors.

 

DVD disks can be stored in a fraction of the space of VHScassettes.  Digital video can also bearchived to a server, reducing storage space even further.  Video archived to a server can be viewed fromcomputers networked to the server instead of having to retrieve a video from aphysical storage facility, with the ability to control access andfunctions.  Also, “back end” managementsoftware, available from a few manufacturers, catalogs video informationallowing for easy retrieval through a computer.

 

Digital video systems also offer the advantage of being able to recordsimultaneously more than one channel of video, allowing two or more cameras torecord different views at once.  Inaddition, copies of video clips can be made more quickly than analog and do notdegrade over time like VHS.

 

**The ICOP Digital Solution**

 

Our *ICOP Model 20/20* digital in-car video systemaddresses the deficiencies of analog video technology by providing all theadvantages described above while differentiating itself fromcompeting digital systems by offering what we believe to be a superior product,at a lower price and with superior customer support.  We believe the *ICOP Model20/20* offers the highest quality digital system on the market, withthe following characteristics:

 

•                  *Prevention of unauthorized access and editing of video*.  Our proprietary compression algorithmprevents unauthorized access and editing of video.

 

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•                  *In-dash system.*  Our *ICOP Model 20/20* includes a built-in AM/FM radio and fitsinto the radio slot in the dashboard of the police vehicle, allowing for easierinstallation and maintenance and more available vehicle and trunk space.

 

•                  *Officer safety. *Our *ICOP Model 20/20* includes no dangling parts that couldendanger the officer in the event of an accident.

 

•                  *Improved picture quality*. Our *ICOP Model 20/20* features full videographics array (“VGA”) compared with 1⁄4 VGA used by many of our competitors,resulting in superior picture quality.

 

•                  *Easy storage and retrieval of video files*.  Our *ICOP Model 20/20*video is downloaded from the vehicle hard drive to a server, and video can beaccessed quickly and easily by ticket/case number, date/time, type of incident,vehicle number and other identifying characteristics.  The video files are convertible to WindowsMedia Player, VHS or MPEG-2 format.

 

•                  *Additional features*:

•                  Continuous looprecording stores 60 seconds of pre-event recording, possibly capturing theunderlying infraction that leads to a traffic stop or other event that triggersthe decision to record the event;

•                  High-qualitywireless 900 MHz microphone, with ability to remotely activate the recorder, arange of up to 1,000 feet and an “officer HELP” button that sends an alert todispatch, with GPS coordinates and vehicle identification (where compatiblewith other police equipment);

•                  Up to threecameras per vehicle, two of which can record simultaneously, with multipleangles and zoom capabilities;

•                  Password-protectedfiles;

•                  Built-in GPS,with continuous latitude/longitude display, allowing exact “marking” of eventlocations on every frame of video;

•                  Radar equipmentinterface (where compatible with other police equipment);

•                  Automaticindexing of video clips by date, time and event identification, officeidentification, racial profiling, GPS data, vehicle identification, case numberand type of incident; and

•                  Removablevehicle-grade hard drive.

 

The *ICOP Model 20/20* alsorequires for operation an adapter (hardware used to download data from vehicle-grade harddrive) and *The B.O.S.S.*(BackOffice System Server), an industrial-grade computer that includes thepreloaded, proprietary *ICOP Digital Video Management System* software.

 

Our strategyis to price the *ICOP Model 20/20* well below themarket, as municipalities and state governments are cost sensitive, oftenmandating competitive bidding.  We arethe only company we know of among our competitors to publish its pricingschedule for in-car video equipment.  Ourcompetitors have many pricing schedules, due to multiple layers ofdistributors, sometimes resulting in customers obtaining different quotes onthe same product from our competitors.

 

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The two-camera*ICOP Model 20/20*is priced at $4,500 perunit with volume discounts available for purchases of more than fiveunits.  *The B.O.S.S.*,which generally supports up to 10 units of the *ICOP Model20/20*, is priced at $4,500, adapter hardware used to download datafrom the hard drive is priced at $300, and a label maker for printing labelsfor DVDs is priced at $150.  Optionalequipment includes an additional 20GB removable vehicle hard drive priced at$350, a Sony color camera for rear window recording priced at $450 and anadditional 900 MHz wireless mic priced at $150. We can arrange lease-to-own financing of the purchase and installationof the *ICOP Model 20/20*through tax-exemptmunicipal leases which are available to certain qualified governmentalentities.  We provide a one-year partsand labor warranty on the *ICOP Model 20/20*withextended warranties available.

 

***Future Applications andProducts***

 

There is a substantial demand forsecurity solutions worldwide and a growing use of closed circuit television,biometrics, access control, radar and GPS technologies.  New applications for these technologies arebeing adopted at military installations, borders, airports, nuclear facilities,power plants and pipelines.

 

We continue to enhance the featuresand performance of the *ICOP Model 20/20*whileexploring new applications of the *ICOP**Model 20/20* specifically and video surveillance technologyin general.  We believe that our futuresuccess depends in large part on investing in research and development toenhance our ability to:

 

•                  identify and respond to emerging technological trendsin related markets;

•                  develop solutions to customers’ changing needs; and

•                  improve our *ICOP Model 20/20*byadding features and functionality that our customers want.

 

Currently video surveillancesystems are undergoing a transition from analog to digital.  The demand for video surveillance systemtoday is being driven primarily by the replacement of analog equipment withdigital equipment.  Digital technologyenables audio-video data compression that minimizes transmission bandwidth andstorage requirements and permits security cameras to operate on standard datanetworks without the expense of bulky coaxial cables.

 

An “intelligent” or “smart” camerahas all the needed functionality built into the unit and does not require aseparate computer to operate.  We arecurrently in the early stages of investigating the development of anintelligent camera, which we have named *ICOPOn Watch*, which could continuously monitor at-risk sites such asairports, borders, seaports, utilities and private industry facilities.  Using proprietary intelligent cameras andsurveillance image-analyzing software together with a standard cellular phonenetwork, we believe the system could provide a comprehensive view of a definedarea, centrally monitor contracted sites 24/7 in real time and detect threatsand issue warnings when there is an intrusion. The technology is being developed for us to design a system capable ofdetecting motions and distinguishing naturally occurring movements, such asleaves waving in the wind, from that of a human being.  With this automated monitoring andrecognition of possibly hostile intruders, large areas could be efficientlymonitored with minimal human involvement.

 

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We expect the *ICOP On Watch*camera, as contemplated, tohave the following benefits over existing analog technology:

 

•                  reduced security costs;

•                  fewer images to archive reducing storagerequirements;

•                  high-compression ratio for storage of high-resolutionimages, resulting in high integrity of data, high speed data transmission andlower storage requirements;

•                  faster searches through recorded information;

•                  lower bandwidth to support networked cameras;

•                  advanced capabilities such as motion detection andstabilization, with encryption;

•                  design flexibility for development of products formultiple applications sold at multiple price points;

•                  reduction of human error and human oversight; and

•                  wired, fiber and wireless media, greatly enhancingexpandability.

 

**Sales and Marketing**

 

We arecurrently marketing our *ICOP Model 20/20*only to law enforcement agencies.  In-carvideo, however, has applications in many other special use vehicles such asfire trucks, emergency medical technician (EMT) vehicles, school and publicbuses, trains, planes, military, border patrol vehicles and taxi cabs.

 

There are morethan 440,000 police vehicles currently in service in the U.S., andapproximately 70,000 new vehicles are leased or purchased by law enforcementagencies each year. At an averageselling price of at least $5,000 for the *ICOPModel 20/20*and related equipment, there is an estimated potential market of over $2 billion**for law enforcement vehicles in the U.S.alone.

 

In 2004,approximately 38% of local law enforcement and 72% of state highway patrolvehicles had VHS (analog) in-car video systems. Warranties on these VHS systemshave expired or will soon expire, and the systems will increasingly needservice and will eventually need to be replaced.  The market began transitioning to digitalsurveillance systems in 2004.

 

We market the *ICOP Model 20/20* directly to all levels ofcity, county, state and federal law enforcement agencies.  Our marketing efforts includeadvertising in police magazines, directmailings to law enforcement agencies and participation in industry tradeshows, conferences and seminars.  In addition to our full-time inside sales andregional sales staff, we plan to establish a national “Officer Sales Team”consisting of police officers across the country who will call on local policedepartments, typically within a 500-mile radius of their homes; these officerswill be part-time independent contractors. We also are expanding our user-friendly website to facilitatesharing of digital video files for training purposes, providepassword-protected access to the site to obtain software updates and allow realtime, 24/7 communication with technical support personnel.  We also planto include our products in direct mail industry catalogs and to secureendorsements from respected law enforcement agencies.

 

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Digital in-car video systems require an experiencedtechnical support team to respond to customer questions and to assist withtheir particular application.  We arecommitted to building a talented tech support team to meet this importantneed.  To support sales efforts, we alsoproduce promotional materials that include brochures, video presentations, datasheets and other technical materials along with our website to explain ourproduct.  We provide demonstrationsystems generally for 30- and 60-day trial periods, which affords prospectivecustomers an opportunity to have a hands-on experience with the *ICOP Model 20/20* and *The**B.O.S.S.*

 

Our sales cycle typically begins by initiatingcontact with a law enforcement agency or the receipt of a request forinformation from a prospective customer, usually through our website.  After making the contact or receiving the requestfor information, we assess the potential customer’s needs, make presentationsand product demonstrations at the customer’s place of business, present aformal proposal and negotiate a contract. The decision to purchase is typically made by a group of peopleincluding the chief of police or sheriff but may also include politicaldecision-makers such as city council members.

 

We will initially focus on development in the U.S. market and in Canadavia distributors.  We intend to addressother English-speaking markets, such as Australia, where we currently have adistributor, and the UK, beginning later in 2005.

 

We also plan to explore strategic partnerships for the development ofother products using our technology.  Weare currently in discussions with two Fortune 500 companies that are interestedin employing our ICOP Model 20/20 technology as well as our intelligent camera,which is currently in development, in applications in the security industry.

 

**Competition**

 

The lawenforcement market and specifically the in-car video market are highlycompetitive.  Digital in-car video is aquickly evolving technology, and the market is growing rapidly as the newtechnology is gaining widespread acceptance, new patrol cars are beingpurchased or leased and outdated analog video systems are being replaced bydigital systems.

 

Most majorin-car video manufacturers are in the process of developing, or have developed,digital video technology, and many have already introduced and sold digitalunits to law enforcement agencies.  Wehave three major competitors – Mobile-Vision, Inc., International PoliceTechnologies, Inc. and Kustom Signals – and many other competitors who sell ormay in the future sell in-car video systems to police departments.

 

In addition totheir existing relationships with law enforcement agencies, many of thesecompetitors have significant advantages over us, including greater financial,technical, marketing and manufacturing resources, preferred vendor status withour existing and potential customer base, more extensive distribution channels,larger customer bases and faster response times to new or emerging technologiesand changes in customer requirements.  Asa result, our competitors may develop superior products or beat us to marketwith products similar to ours.

 

We believe wecompete principally on the basis of:

 

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•                  productperformance and functionality;

•                  price;

•                  product qualityand reliability; and

•                  customer serviceand technical support.

 

While webelieve that our innovative product design and our proprietary compressiontechnology make the *ICOP Model 20/20*superior in quality to other products, some competitors offer features that wedo not.  For example, Mobile-Vision nowoffers wireless data transfer from the patrol car to police headquarters.  While we believe that existing wirelessuploading technology needs to improve before it can be successfully used inin-car systems, some law enforcement agencies may be attracted to this new technology,which we currently do not offer.

 

The market for digital in-car video systemsfor police and other first responder vehicles is expected to grow rapidly overthe next five years, as more cars are equipped with video surveillance and asupgrades to digital are made.  We feel weare positioned to become a leader in this market based on what we believe to bethe superiority of our innovative product and its attractive price.

 

**Manufacturing and Suppliers**

** **

We entered into a development andmanufacturing agreement dated February 10, 2005 with Tietech Co., Ltd., aJapanese company with ISO 9001 certification, pursuant to which Tietech hasexclusive rights to manufacture, and we have exclusive rights to sell, the *ICOP Model 20/20*.  Weowe 134 million Japanese yen (approximately $1,249,800 as of March 31, 2005) toTietech for non-recurring engineering work incurred in development of the *ICOP Model 20/20*.  Of this amount, 67 million yen (approximately$624,900 as of March 31, 2005) is expected to be paid from the proceeds of anunderwritten offering filed with the Securities and Exchange Commission on April4, 2005, with the balance paid over time as units are shipped.  On receipt of the initial payment of 67million yen, Tietech is to produce and deliver 600 units to us and will produceand deliver additional units upon receipt of a $1 million inventory depositwhich also is expected to be paid from the proceeds of the underwrittenoffering.  There can be no assurance,however, that the public offering will be consummated or, if not consummated,that we will be able to procure financing from other sources to make paymentsto the manufacturer.  The initial term ofthe agreement is 10 years.

 

While Tietech assisted in itsdevelopment, we maintain the intellectual property rights necessary to producethe *ICOP Model 20/20*.  The manufacturer does have certainintellectual property rights to a method of operating the data compression usedin the *ICOP Model 20/20*.  If this method were no longer available tous, another manufacturer could produce the unit, but a partial redesign wouldbe required and could result in a production delay.

 

We entered into an agreement withTriSquare Communications (Hong Kong) Co., Ltd. (“TriSquare”) dated February 11,2004 pursuant to which it is manufacturing a 900 MHz wireless microphone systemfor use with the *ICOP Model 20/20*.

 

We entered into a licenseagreement, effective December 2004, with Showlei Associates, pursuant to whichShowlei grants us the non-exclusive right to design, manufacture, use, sell anddistribute software that decodes, reconstructs and displays video images basedon Showlei’s proprietary technology, and agrees to sell us a supply ofsemiconductor chips that incorporate the proprietary technology.  The initial term of the agreement is 10years.

 

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We also rely on severalunaffiliated subcontractors to supply certain components and assemblies thatare incorporated in our *ICOP Model 20/20*.  We acquire our components on a purchase orderbasis and do not have long-term contracts with suppliers.

 

**Inventory Systems**

 

Inventory warehousing and shippingare managed from our Overland Park, Kansas facility.  We use standard warehousing systems to store,retrieve, monitor and manage our inventory.

 

**Intellectual Property**

 

We have filed U.S. patent applicationscovering aspects of the design and methods of operating the *ICOP Model 20/20*. Among other things, the claims, as drafted, generally describe the useof a digital recording device in an integrated and synchronized surveillancesystem able to record data from cameras, microphones and global positioningsystem equipment, with the recording media housed in a driver accessibleconsole opening originally manufactured into the vehicle, such as a car radioslot.  The claims also are drafted tocover particular features and capabilities of the *ICOP Model20/20*, such as the system’s in-dash recorder, back-end searchabledatabase and event marking capability. We also have secured trademarks for “ICOP,” “ICOP Digital” and the stylisticuse of our logo and are seeking trademark protection for *ICOPModel 20/20TM*, *ICOP On WatchTM*and *The B.O.S.S.TM*.  We intend to continue to seek formalintellectual property protections to protect our technologies, processes anddesigns.  We also use confidentialityagreements with employees and key suppliers to ensure the confidentiality ofour trade secrets.

 

**Employees**

 

As of March 31, 2005, we had elevenfull-time employees including four in management and administration, two insales and marketing and five in engineering.

 

**Item 2.** Description of Property.

 

Our offices are located in OverlandPark, Kansas in approximately 4,642 square feet of leased office space at$7,153 per month.  Our current leaseexpires on June 30, 2005, at which time we intend to lease 12,800 square feet,in nearby Lenexa, Kansas, for five years at a cost of $15,000 per month plustaxes and insurance.

 

**Item 3.** Legal Proceedings.

 

We do not know ofany pending or threatened legal proceedings to which we are or would be a partyor any proceedings being contemplated by governmental authorities against us,or any of our executive officers or directors relating to their services on ourbehalf.

 

**Item 4.** Submission of Matters to a Vote of Security Holders.

 

The Company held theAnnual Meeting of the Shareholders on November 5, 2004, at which four proposalswere presented.  Proposal One electedDavid C. Owen to a three year term as a Class A director by a vote of 1,231,000for and 36,300 against.

 

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Proposal Two electedCharles A. Ross, Sr. to a two year term as a Class B director by a vote of1,246,000 for and 21,300 against.  Inaddition to Mr. Owen and Mr. Ross, Roger Mason continues as a member of theboard of directors.  Proposal Threeapproved an amendment to the Company’s articles of incorporation to change thename of the Corporation to ICOP Digital, Inc. by a vote of 1,257,300 for and10,000 against.  Proposal Four approvedthe appointment of Cordovano and Honeck, LLP as auditor for the year endingDecember 31, 2004 by a vote of 1,252,300 for with 15,000 abstaining.

 

The Company held aSpecial Meeting of the Shareholders on February 28, 2005, at which one proposalwas presented.  The shareholders approveda reverse split of the common and preferred stock on a one for ten basis, bywhich each ten of our issued and outstanding common and preferred shares shallbecome one share, by a vote of 1,124,598 for and 4,290 against with 2,000abstaining.

 

**PART II**

 

**Item 5.**  Market for Common Equity and RelatedStockholder Matters

 

**Market andPrice Ranges of Common Stock**

 

Our common stocktrades on the OTC BB under the symbol “ICDG.OB.”  It traded under the symbol “VXPL” and thenunder the symbol “ICPD.OB” until March 16, 2005.  The first reported trading occurred onOctober 18, 2004.  Below are the priceranges of our common stock, adjusted for a 1-for-10 share reverse spliteffective February 28, 2005.

 
| ** **                              | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
| 2004                                    |       |     |       |    |       |
| Fourth Quarter (from October 18,  2004) |       | $        | 20.00      |    | $          | 5.10 |   |
| 2005                                    |       |     |       |    |       |
| First Quarter                           |       | $        | 8.20       |    | $          | 5.10 |   |

 

The last reportedsale price of our common stock on the OTC BB on March 31, 2005 was $6.00 per share.  According to the records of our transferagent, there were approximately 223 holders of record of our common stock as ofMarch 31, 2005.

 

**DividendPolicy**

** **

We have not declared or paid anydividends and do not intend to pay any dividends in the foreseeablefuture.  We intend to retain any futureearnings for use in the operation and expansion of our business.  Any future decision to pay dividends oncommon stock will be at the discretion of our board of directors and willdepend upon our financial condition, results of operations, capitalrequirements and other factors our board of directors may deem relevant.

 

**Recent Sales of UnregisteredSecurities.**

** **

In the last three years, theRegistrant has sold securities which were not registered as follows:

 

13

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In December2003, pursuant to an exemption under the Securities Act, we issued 60,000shares of our common stock to two accredited investors for an aggregate priceof $300,000.

 

In March 2004,pursuant to an exemption under Regulation D of the Securities Act, we concludedan offering of our Series A Preferred Stock and warrants to accreditedinvestors.  We issued an aggregate of25,000 shares of Series A Preferred Stock and 200,000 Series A warrants for$1,099,998.

 

In November2004, pursuant to an exemption under Regulation D of the Securities Act, weissued 19,500 shares of our common stock to five accredited investors for anaggregate price of $195,000.

 

In November2004, pursuant to a bridge loan, we collected $100,000 from two accreditedinvestors.  The bridge loan subsequentlywas abandoned; and, pursuant to an exemption under the Securities Act, thesetwo investors converted their loans into 12,000 shares of common stock inDecember 2004.

 

EffectiveDecember 2004, in connection with a software license agreement, we issued20,000 shares of common stock to Showlei Associates.  The shares were issued pursuant to anexemption under the Securities Act, and represented an initiation fee to securethe license.

 

In March 2005, pursuant to an exemption under Regulation D of the Securities Act, we completed a $2,200,000 bridge loan from 32 accredited investors pursuant to which we issued warrants to purchase our common stock.

 

**Item 6.**  Plan of Operation.

 

We are an early stage development company,and the first sales of our *ICOP Model 20/20*occurredin December 2004.  While we haveoutstanding unfilled purchase orders for $524,825 in *ICOP Model20/20*’s and related equipment as of March 31, 2005, we have soldonly seven units and related equipment to a total of five law enforcementagencies, generating total revenues of $51,000. Our plan of operation through the first half of 2006 is summarizedbelow.

 

On April 4,2005, we filed a registration statement on Form SB-2 with the Securities and ExchangeCommission registering an underwritten public offering of units of common stockand warrants to purchase common stock (the “public offering”).  The gross proceeds of the offering, assumingno exercise of the underwriters’ over-allotment option, is expected to totalapproximately $10 million.  There can beno assurance, however, that the public offering will be consummated. If it isnot consummated, we may not be able to procure financing from other sources onaffordable terms in order to fund our plan of operations.

 

We have entered into amanufacturing agreement on February 10, 2005 with a Japanese company to producea minimum of 10,000 *ICOP Model 20/20*units through December 31, 2008.  ThroughMarch 31, 2005, we received 10 units from this manufacturer.  Under this agreement, the manufacturer willbe responsible for purchasing the components and manufacturing the units, andwe will pay for the units when shipped.  Ifthe public offering is consummated, we plan to advance $1 million to themanufacturer to be used to purchase components after they have completedapproximately 700 units.  We arecurrently marketing the *ICOP Model 20/20*tolaw enforcement agencies.

 

If the public offering isconsummated, we plan to use the proceeds to repay bridge loans, make paymentsto third-party manufacturers, purchase inventory and increase our sales andmarketing efforts.  In March 2005, ourexpenses exceeded our cash flow by approximately $130,000 per month.  Prior to the receipt of material revenue fromsales of the *ICOP Model 20/20*, webelieve this 

 

14

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“burn rate” willincrease to approximately $150,000 per month. We believe that once sales of the *ICOPModel 20/20* reach approximately 200 units per month, which we expectwill occur in the second half of 2005, we will be operating at a break evenlevel.

 

Assuming the public offering isconsummated, through the first half of 2006, we expect to spend approximately$1.5 million on research and development to develop new products, including the*ICOP On Watch*camera.  We do not expect major purchases of plant andequipment during that period due to our contract manufacturingarrangements.  We do plan to leaseadditional facilities beginning in July 2005 to allow for expansion ofengineering, sales, technical support and shipping activities.  We expect to spend approximately $150,000 tomove and equip this new space and project an increase in monthly rental expenseof approximately $10,000.

 

We do not plan to increase ouradministrative staff substantially in the near term, since the manufacturing ofthe *ICOP Model 20/20* is handledby a third party.  Assuming the publicoffering is consummated, we will likely increase our sales and marketing staff,engineering and tech support staff as sales grow.

 

The timing of additional activitiesand the development of other markets and products depend on the speed withwhich we penetrate the law enforcement and other first responder markets aswell as whether the public offering is consummated.  Additionally, while it is not likely, we mayconsider manufacturing our own products once the process is substantiallyautomated and should we determine that we can do so cost effectively.

 

**Equity-BasedCompensation**

 

In December 2004, the Financial Accounting Standards Board issued Statement 123R, “Share-Based Payment.”  It addresses transactions in which an entity obtains employee services in share-based payment transactions. Share-based payment transactions include stock options. This Statement is effective for the Company on January 1, 2006.  Prior to January 1, 2006, the Company will continue to account for employee services in share-based payment transactions under the intrinsic method.  Under the intrinsic method, if the stock option is at the money or out of the money, no expense is recorded.  After January 1, 2006, the Company will apply the fair value method.  Under the fair value method, stock options will be expensed.  Statement 123 will apply to stock options granted prior to January 1, 2006 only if a previous award was modified, repurchased or cancelled after the implementation date.

 

**Item 7.**  Financial Statements.

 

The report of the independent registered public accounting firm and the financial statements listed on the accompanying index at page F-1 of this report are filed as part of this report and incorporated herein by reference.  All share amounts included in those financial statements are before the effect of the one share for ten share reverse split that was approved by shareholders on February 28, 2005.

 

15

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**Item 8.** Changes In andDisagreements With Accountants on Accounting and Financial Disclosure.

 

We did not have any disagreements on accounting and financial disclosure with our accounting firm during the reporting period.

 

**ITEM 8A.****  CONTROLS AND PROCEDURES**.

 

(a)                                  Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(c) and 15d-15(c) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2004, the end of the period covered by this report.

 

(b)                                 For the quarter ended December 31, 2004, there were no changes in our internal control over financial reporting 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, ExecutiveOfficers, Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act.

 

**Directors, Executive Officers andKey Employees**

 

Our executiveofficers, directors and key employees, and certain information about them,including their ages as of March 31, 2005, are as follows:

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                     |
|-----------------------|------------|---------|------------|------------------------------------------------------------------|
|                  |       |    |       |                                                             |
| Charles A. Ross,  Sr. |       | 64      |       | Chairman of the  Board                                           |
| David C. Owen         |       | 66      |       | President, Chief  Executive Officer and Director                 |
| Laura E. Owen         |       | 47      |       | Chief Operating  Officer, Vice President and Corporate Secretary |
| John C. Garrison      |       | 53      |       | Chief Financial  Officer and Treasurer                           |
| L. Derrick  Ashcroft  |       | 76      |       | Director                                                         |
| Noel Koch             |       | 66      |       | Director                                                         |
| Roger L. Mason        |       | 52      |       | Director                                                         |
| Steven E. Hathaway    |       | 52      |       | Director of  Engineering                                         |
| Kevin McDugle         |       | 37      |       | Director of  National Sales                                      |

 

16

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The followingis a brief description of the principal occupation and recent businessexperience of each of our directors, executive officers and key employees:

 

*Charles A. Ross, Sr.* has served as a director since April 2001 and as ourChairman since July 2004, and was our Chief Executive Officer from April 2001until July 2004.  From May 2002 until ouracquisition of ICOP Nevada in January 2004, Mr. Ross was Chief ExecutiveOfficer of ICOP Nevada.  From January2001 through March 2001, Mr. Ross explored opportunities in the oil and gasindustry. From July 1999 until December 2000, he owned and operated a businessthat supplied recruiting and business cards to a number of multi-levelmarketing companies.  Over the last 40years, Mr. Ross has founded or served as an officer in companies marketingmusical instrument amplifiers, traffic speed radar, luxury boats and satellitetelevision.

 

*David C. Owen* has served as a director since January 2003 and asour Chief Executive Officer since July 2004. From January 2004 to July 2004, he was our Chief Financial Officer.  Since 1985, Mr. Owen has been president ofOwen & Associates, Inc., a private investment and management entity.  Mr. Owen has more than 40 years of experiencein the financial industry and has served in executive management positions withboth retail and investment banks.  Heserved as a Kansas State Senator from 1968 to 1972 and as Lieutenant Governorof Kansas from 1972 to 1974.  He receiveda B.A. degree in Business Administration and Economics from Ottawa Universityin Ottawa, Kansas.  In September 2004, inconnection with an action brought by the Securities Commission of Kansasinvolving the private sale of a small amount of unregistered securities notinvolving us, Mr. Owen stipulated to a consent decree enjoining him and hisagents from acting as a broker-dealer in Kansas unless registered under theKansas Securities Act or exempt from registration, from offering or sellingunregistered securities in Kansas unless exempt from registration, and fromotherwise violating the Kansas Securities Act. Mr. Owen, who was not an officer, director or placement agent for thecompany involved,  stipulated to theconsent decree in order to dispose of the action expeditiously and did notadmit any of the allegations.  Mr. Owenis married to Laura E. Owen.

 

*Laura E. Owen*hasserved as our Corporate Secretary and as a Vice President since May 2003.  She has served as our Chief Operating Officersince March 2005.  From 1998 until May2003, she served as President of Unicard.com, Inc., a travel insurancecompany.  Ms. Owen has spent over two decades working on business issuesin the public and private sectors.  In1991, she became the first woman to be appointed Secretary of Commerce for theState of Kansas, the state’s economic development agency.  Ms. Owen received a B.S. degree in BusinessAdministration from Delaware Valley College in Philadelphia.  Ms. Owen is the wife of David C. Owen.

 

*John C. Garrison* hasserved as our Chief Financial Officer since July 2004 and as our Treasurersince March 2005.  He has providedaccounting services to the Company since April 2001.  Prior to joining us in 2004, Mr. Garrisonworked independently as a Certified Public Accountant.  Mr. Garrison serves on the boards ofdirectors of Quest Resource Corporation and Empire Energy CorporationInternational, both publicly traded companies.  He received a B.S. degree in BusinessAdministration and Accounting from Kansas State University.

 

17

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*Roger L. Mason* has served as a director since January 2004.  From May 2002 until January 2004, he servedas a director of ICOP Nevada.  Since 1995Mr. Mason has been a principal of Fishman & Company Realtors, a real estatebusiness in Olathe, Kansas.  He receiveda B.S. degree in Construction Technology from Pittsburg State University inPittsburg, Kansas.

 

*L. DerrickAshcroft*has served as a director since March2005.  Mr. Ashcroft is involved inbanking and tax consulting for high net worth individuals.  He currently owns and operates a cattle ranchin New Mexico, and over the last five years, he has served on boards of severalcompanies.  He currently serves on theboard of Dwango North America Corp, a publicly traded company.  Mr. Ashcroft received an M.A. degree fromOxford University in England.

 

*Noel Koch*hasserved as a director since March 2005. He is an expert on terrorism and security-related issues, with over 40years of experience in developing advanced analytical procedures foridentifying and assessing potential threats to individuals and to institutionand corporate assets.  Since August 1986,Mr. Koch has served as the president and chief executive officer ofInternational Security Management, Inc., a provider of security services toforeign and domestic government agencies, corporations and individuals inhigh-risk environments.  Since August 1986,he also has served as the president and chief executive officer of Transecur,Inc., an on-line, interactive global security information service with officesin the U.S. and Europe.  Mr. Koch also isa partner in Anchor Special Risks Registry, a computer-based system designed torecord and assess hostile activities towards corporations and otherinstitutions.  Mr. Koch is a formerinstructor for the U.S. State Department’s Anti-Terrorism Assistance Program,and served for over five years as Director of Special Planning in the U.S.Department of Defense.  Mr. Koch receiveda B.A. degree in English from Widener University and a M.A. degree in PoliticalScience from Bryn Mawr College.

 

There are no family relationshipsamong our officers and directors, except that Mr. and Ms. Owen are husband andwife.

 

*Steven E. Hathaway*has served as our Director of Engineering since February2005.  Mr. Hathaway was an engineeringmanager at Pivot International from February 2002 to February 2005.  From March 1999 to January 2002, he was VicePresident of Engineering at Avatar Engineering, Inc.  He studied business administration atSouthwestern College in Winfield, Kansas and studied at the Missouri Instituteof Technology and the University of Missouri-Kansas City, where he received aB.S. degree in Electrical Engineering. He also performed graduate studies at the University of Missouri-KansasCity.

 

*Kevin McDugle*hasserved as our Director of National Sales since March 2005.  Since 1997, Mr. McDugle has managed sales teamsselling technology products to Fortune 500 companies and providing surveillancesystems to law enforcement.  Inparticular, from September 2003 through February 2005, Mr. McDugle led thesales team at International Police Technologies, Inc., and from May 1999 toSeptember 2003, he served as Division Director at RHI Consulting.  Prior to becoming a sales manager, Mr.McDugle spent eight years with the United States Marine Corps, during whichtime he worked with anti-terrorism teams and security forces.  He holds an M.B.A. from the University ofPhoenix and a B.S. degree in Business from Southern Nazarene University inBethany, Oklahoma.

 

18

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**Board Classifications and Committees**

 

Our Board of Directors is dividedinto three classes as nearly equal in number as possible.  Each year the stockholders elect the membersof one of the three classes to three-year terms of office.  Currently, Mr. Owen serves as aClass A director, whose term expires in 2008, Mr. Ross serves as a Class Bdirector, whose term expires in 2007, and Mr. Mason serves as a Class Cdirector, whose term expires in 2006. Messrs. Ashcroft and Koch have been elected to serve as directors untilour 2005 annual meeting of shareholders, at which time they may be nominated tofill a vacancy in one or more of our director classes.

 

Our Board ofDirectors has three standing committees: an Audit Committee, a CompensationCommittee and a Nominating Committee.

 

*Audit Committee. *Our Audit Committeeoversees our accounting and financial reporting processes, internal systems ofaccounting and financial controls, relationships with independent auditors, andaudits of financial statements. Specific responsibilities include thefollowing:

 

•                  selecting,hiring and terminating our independent auditors;

•                  evaluating thequalifications, independence and performance of our independent auditors;

•                  approving theaudit and non-audit services to be performed by the independent auditors;

•                  reviewing thedesign, implementation, adequacy and effectiveness of our internal controls andcritical accounting policies;

•                  overseeing andmonitoring the integrity of our financial statements and our compliance withlegal and regulatory requirements as they relate to financial statements oraccounting matters;

•                  with managementand our independent auditors, reviewing any earnings announcements and otherpublic announcements regarding our results of operations; and

•                  preparing thereport that the Securities and Exchange Commission requires in our annual proxystatement.

 

Our AuditCommittee is comprised of Messrs. Ashcroft, Koch and Mason.  Mr. Ashcroft serves as Chairman of the AuditCommittee.  The Board has determined thatall members of the Audit Committee are independent under the rules of theSecurities and Exchange Commission and the Nasdaq Stock Market.  The Board has determined that Mr. Ashcroftqualifies as an “audit committee financial expert,” as defined by the rules ofthe Securities and Exchange Commission.

 

*Compensation Committee. *Our CompensationCommittee assists our Board of Directors in determining the development plansand compensation of our officers, directors and employees. Specificresponsibilities include the following:

 

•                  approving thecompensation and benefits of our executive officers;

•                  reviewing theperformance objectives and actual performance of our officers; and

•                  administeringour stock option and other equity compensation plans.

 

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OurCompensation Committee is comprised of Messrs. Ashcroft, Koch and Mason.  Mr. Mason serves as Chairman of theCompensation Committee.  The Board hasdetermined that all members of the Compensation Committee are independent underthe Nasdaq rules.

 

*Nominating Committee. *Our NominatingCommittee assists the Board by identifying and recommending individualsqualified to become members of our Board of Directors, reviewing correspondencefrom our stockholders, and establishing, evaluating and overseeing ourcorporate governance guidelines. Specific responsibilities include thefollowing:

 

•                  evaluating thecomposition, size and governance of our Board of Directors and its committeesand make recommendations regarding future planning and the appointment ofdirectors to our committees;

•                  establishing apolicy for considering stockholder nominees for election to our Board ofDirectors;

•                  evaluating andrecommending candidates for election to our Board of Directors;

 

Our NominatingCommittee is comprised of Messrs. Ashcroft, Koch and Mason.  Mr. Koch serves as Chairman of our NominatingCommittee.  The Board has determined thatall members of the Nominating Committee are independent under the Nasdaq rules.

 

**DirectorCompensation**

 

In March 2005, each of our non-employeedirectors received an option to purchase 5,000 shares of common stock forservice on the Board and an option to purchase an additional 2,500 shares forservice as Chairman of the Board and for each Board committee chaired.  In the future, we plan to grant to each ofour non-employee directors an option to purchase 2,500 shares of common stockat each annual meeting of stockholders at which the director is re-elected orcontinues to serve as a director for the ensuing year.  Non-employee directors also receive $500 foreach quarterly Board meeting attended in person, together with reimbursement ofexpenses incurred to attend the meeting and $250 for each Board meetingattended telephonically.

 

**Code of Ethics**

 

We have adopted a code of ethics that applies to our officers (including our principal executive, financial and accounting officers), directors, employees and consultants.  The text of our code of ethics is attached as an exhibit to this annual report.

 

**Item 10****.  Executive Compensation**

 

**Summary Compensation Table**

 

The following table sets forth certaininformation concerning total compensation received by our two Chief ExecutiveOfficers during 2004 and our other most highly compensated executive officersduring the last year (the “Named Executive Officers”) for services rendered toICOP in all capacities for the last three fiscal years, but is limited toexecutive officers other than our Chief Executive Officers who earned more than$100,000 in total compensation during the last fiscal year.

 

20

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| ** **                                                                                |   | ** **      |   | **Long-Term Compensation** | ** ** |
|-------------------------------------------------------------------------------------------|--------|-----------------|--------|----------------------------|------------|
| ** **                                                                                |   | ** **      |   | **Annual Compensation**    | ** ** | **Awards** | ** ** | ** ** | ** ** |
| **Name and  Principal Position**                                                          |   | **Fiscal Year** |   | **Salary**                 | ** ** | **Securities   Underlying   Options/ SARs** | ** ** | **All Other Comp.** | ** ** |
| ** **                                                                                |   | ** **      |   | **($)**                    | ** ** | **(#)** | ** ** | **($)** | ** ** |
| Charles A. Ross, Sr., Chief  Executive Officer(resigned July 22, 2004)                    |   | 2004            |   | 80,231                     | (1)        | 0 |   | 6,452 | (2) |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
|                                                                                      |   | 2003            |   | 58,564                     |       | 0 |   | 0 |   |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
|                                                                                      |   | 2002            |   | 0                          |       | 50,000 | (3) | 0 |   |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
| David C. Owen, President and   Chief Executive Officer                                    |   | 2004            |   | 149,047                    | (4)        | 50,000 |   | 11,806 | (5) |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
|                                                                                      |   | 2003            |   | 58,564                     |       | 0 |   | 0 |   |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
|                                                                                      |   | 2002            |   | 0                          |       | 0 |   | 0 |   |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
| Laura E.  Owen, Corporate Secretary and Vice  President of   Administration and Marketing |   | 2004            |   | 119,568                    | (6)        | 25,000 |   | 10,869 | (7) |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
|                                                                                      |   | 2003            |   | 47,654                     |       | 0 |   | 0 |   |
|                                                                                      |   |            |   |                       |       |   |   |   |   |
|                                                                                      |   | 2002            |   | 0                          |       | 0 |   | 0 |   |

 

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(1) Includes paid salary of $39,231 and unpaid salary of $41,000.

(2) Includes a $900 401(k) matching payment, car allowance of $4,322,and deferred 401(k) contribution of $1,230.

(3) Cancelled by agreement effective January 13, 2004.

(4) Includes paid salary of $40,506 and unpaid salary of $108,541.

(5) Includes paid car allowance of $1,275, unpaid car allowance of$6,375, a $900 401(k) matching payment and deferred 401(k) contribution of$3,256.

(6) Includes paid salary of $42,276 and unpaid salary of $77,292.

(7) Includes paid car allowance of $1,700, unpaid car allowance of$5,950, a $900 401(k) matching payment and deferred 401(k) contribution of$2,319.

 

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**Option Grants in Last Fiscal Year**

 

Option Grants in Fiscal Year 2004 (IndividualGrants)

** **
| **Name and  Principal Position**                                                        | ** ** | **Number of Securities  Underlying Options/SARs  granted (#)** | ** ** | **Percent of total   options/SARs granted to   employees in fiscal year** | ** ** | **Exercise or  base price  ($/sh)** | ** ** | **Expiration Date** | ** **     |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------|----------------|
| ** **                                                                              | ** ** | ** **                                                     | ** ** | ** **                                                                | ** ** | ** **                          | ** ** | ** **          | ** **     |
| Charles A. Ross, Sr.  (Chief Executive Officer,   resigned July 22, 2004)               |       | 0                                                              |       | 0                                                                         | %          | n/a                                 |       | n/a                 |           |
| David C. Owen  (President and CEO)                                                 |       | 50,000                                                         |       | 62                                                                        | %          | $                                   | 10.00      |                | Dec. 31, 2012  |   |
| Laura E. Owen  (Corporate Secretary and Vice President of Administration and Marketing) |       | 25,000                                                         |       | 31                                                                        | %          | $                                   | 10.00      |                | April 26, 2009 |   |

 

**Option Exercises and Holdings**

 

The followingtable sets forth, as to those Named Executive Officers, certain informationconcerning the number of shares subject to both exercisable and unexercisablestock options as of December 31, 2004, and the number of shares of common stockreceived upon exercise of options during the last fiscal year.  None of the outstanding options at December31, 2004 was “in-the-money.”

 

Aggregated Option Exercises in Fiscal Year2004

and Fiscal Year-End Option Values

** **
| **Name**             | ** ** | **Shares   Acquired   on Exercise** | ** ** | **Value   Realized** | ** ** | **Number of Shares   Underlying Unexercised   Options at**** December 31, 2004 (#)  Exercisable/Unexercisable** | ** ** | **Value of Unexercised In-  the-Money Options at   December 31, 2004 ($)**** Exercisable/Unexercisable** | ** ** |
|----------------------|------------|-------------------------------------|------------|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **(#)**                             | ** ** | **($)**              | ** ** | ** **                                                                                                                | ** ** | ** **                                                                                                    | ** ** |
| ** **           | ** ** | ** **                          | ** ** | ** **           | ** ** | ** **                                                                                                                | ** ** | ** **                                                                                                    | ** ** |
| Charles A. Ross, Sr. |       | 0                                   |       | 0                    |       | 0 / 0                                                                                                                     |       | 0 / 0                                                                                                         |       |
|                 |       |                                |       |                 |       |                                                                                                                      |       |                                                                                                          |       |
| David C. Owen        |       | 0                                   |       | 0                    |       | 50,000 / 0                                                                                                                |       | 0 / 0                                                                                                         |       |
|                 |       |                                |       |                 |       |                                                                                                                      |       |                                                                                                          |       |
| Laura E. Owen        |       | 5,000                               |       | 0                    |       | 37,500 / 0                                                                                                                |       | 0 / 0                                                                                                         |       |

 

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**Employment Agreements**

 

Charles A. Ross, Sr., ourChairman, had an annual salary pursuant to his Executive Employment Agreementof $60,000 beginning on March 24, 2003. Effective January 1, 2004, the annual compensation increased to$90,000.  Mr. Ross entered into anew Executive Employment Agreement on April 1, 2004 which provides forannual compensation of $180,000.  OnOctober 20, 2004, Mr. Ross voluntarily terminated his employment agreementeffective July 22, 2004, the date he resigned as CEO of the Company, and hewill not be paid any compensation for work performed after that date.  Mr. Ross has accrued $41,000 in unpaid salarywhich will be paid from the proceeds of this offering.

 

David C. Owen, our President and ChiefExecutive Officer, had an annual base salary pursuant to his ExecutiveEmployment Agreement of $60,000 beginning on March 24, 2003.  Effective January 1, 2004, the annualcompensation increased to $90,000. Mr. Owen entered into a new Executive Employment Agreement onApril 1, 2004 with annual compensation of $180,000 per year.  Effective October 20, 2004, Mr. Owenvoluntarily reduced his salary to $125,000 annually until we reach accumulatedgross revenues of $8 million, at which time his salary will be restored to$180,000 and $118,172 in accrued but unpaid salary and othercompensation will be paid in full.

 

Laura E. Owen, our Secretary andVice President of Administration and Marketing, commenced employment with us inJune 2003 with annual compensation of $24,000 pursuant to an ExecutiveEmployment Agreement.  Annualcompensation increased to $60,000 on August 1, 2003, to $75,000 on January 5,2004, to $120,000 on April 1, 2004, and to $150,000 on August 1, 2004.  Effective October 20, 2004, Ms. Owen voluntarilyreduced her annual salary to $125,000 until we reach accumulated gross revenuesof $8 million, at which time her salary will be restored to $150,000 and$85,561 in accrued but unpaid salary and other compensation willbe paid in full.

 

**Stock Option Plan**

 

In June 2002,the Board of Directors and stockholders of ICOP Nevada approved that company’s2002 Stock Option Plan (the “2002 Plan”). The plan authorized the grant and issuance of options, restricted sharesand other equity compensation to employees, officers and consultants of ICOPNevada.  Initially, 500,000 shares ofICOP Nevada common stock were reserved for issuance under the 2002 Plan;however, the number of shares reserved automatically increased, and willcontinue to increase on each anniversary of the 2002 Plan, by an amount equalto 0.5% of the then issued and outstanding shares of ICOP Nevada commonstock.  When we acquired ICOP Nevada inJanuary 2004, any rights to acquire ICOP Nevada common stock under the 2002Plan were converted so as to permit acquisition of our common stockinstead.  As of March 1, 2005 a total of514,192 shares were issued or reserved for issuance under the 2002 Plan.  Notwithstanding these automatic increases,the 2002 Plan requires that no more than 300,000 shares be issued in connectionwith the exercise of incentive stock options under the 2002 Plan.

 

The 2002 Plan is administered bythe Compensation Committee of the Board of Directors.  Subject to the provisions of the 2002 Plan,the Committee determines who will receive the options, the number of optionsgranted, the manner of exercise and the exercise price of the options.  The term of incentive stock options grantedunder the 2002 Plan may not exceed ten years, or five years

 

23

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for options grantedto an optionee owning more than 10% of our voting stock.  The exercise price of an incentive stockoption granted under the 2002 Plan must be equal to or greater than the fairmarket value of the shares of our common stock on the date the option isgranted.  The exercise price of anon-qualified option granted under the 2002 Plan must be equal to or greaterthan 85% of the fair market value of the shares of our common stock on the datethe option is granted.  An incentivestock option granted to an optionee owning more than 10% of our voting stockmust have an exercise price equal to or greater than 110% of the fair marketvalue of our common stock on the date the option is granted.

 

As of March 31, 2005, there were outstandingoptions to purchase 395,000 shares of common stock under the 2002 Plan, all ofwhich were non-qualified.

 

**Limitation of Liability andIndemnification**

** **

Our bylawsprovide that, in the event a director, officer or employee is made a party orthreatened to be made a party by reason of service as a director, officer oremployee of the Company (or by reason of service as a director, officer,employee or agent of another entity at the request of the Company), then weshall indemnify that individual against expenses (including attorneys’ fees)actually and reasonably incurred by the person in connection with the defenseor settlement of the action if the person acted in good faith and, in the caseof conduct in the person’s official capacity, in a manner the person reasonablybelieved to be in the best interests of the Company or, in all other cases, ina manner that was at least not opposed to the Company’s best interests.  Notwithstanding the foregoing, noindemnification shall be made if the person is adjudged to be liable to theCompany, or if the person is adjudged liable on the basis that the personderived an improper personal benefit. Under certain circumstances, we may pay expenses (including attorneys’fees) incurred in defending a civil or criminal action, suit or proceeding inadvance to the final disposition of the matter. Furthermore, our Articles ofIncorporation, as amended, provide for indemnification of our directors,officers, agents, fiduciaries and employees against any claim, liability orexpense arising against or incurred by such person because the person is or wasa director, officer, fiduciary, or employee of the Company (or because theperson served as a director, officer, employee, partner, trustee or agent ofanother entity at the request of the Company) to the maximum extent permittedunder Colorado law.  Colorado lawgenerally permits a corporation to provide indemnification if the individual:(i) acted in good faith; and (ii) reasonably believed that, in thecase of conduct in an official capacity, such conduct was in the corporation’sbest interests and, in all other cases, that such conduct was at least notopposed to the corporation’s best interests. In a criminal proceeding, the person must have had no reasonable causeto believe the person’s conduct was unlawful.

 

Insofar as we may permit indemnification forliabilities arising under the Securities Act to directors, officers, andcontrolling persons pursuant to the foregoing provisions, or otherwise, we havebeen advised that in the opinion of the Securities and Exchange Commission suchindemnification is against public policy, as expressed in the Securities Actand is, therefore, unenforceable.

 

24

----

 

**Item11. **Security Ownership ofCertain Beneficial owners and Management and Related Stockholder Matters.

** **

Set forth below is information regarding thebeneficial ownership of our common stock, as of March 31, 2005 by (i) eachperson whom we know owned, beneficially, more than 5% of the outstanding sharesof our common stock, (ii) each of our directors, (iii) each of ourNamed Executive Officers, and (iv) all of the current directors andexecutive officers as a group.  We believethat, except as otherwise noted below, each named beneficial owner has solevoting and investment power with respect to the shares listed.  Unless otherwise indicated herein, beneficialownership is determined in accordance with the rules of the Securities andExchange Commission, and includes voting or investment power with respect toshares beneficially owned.  Shares ofcommon stock to be received upon conversion of preferred stock, or subject tooptions or warrants currently exercisable or exercisable on or before May 30,2005, are deemed outstanding for computing the percentage ownership of theperson holding such options or warrants, but are not deemed outstanding forcomputing the percentage ownership of any other person.

 
| **Name of Beneficial Owner(1)**                     | ** ** | **No. of Shares  Beneficially   Owned** | ** ** | **%** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|-------|------------|
| David C. Owen                                       |       | 449,900                                 | (2)        | 27.3  | %          |
| Laura E. Owen                                       |       | 449,900                                 | (2)        | 27.3  | %          |
| Charles A. Ross, Sr.                                |       | 257,500                                 | (3)        | 15.6  | %          |
| Roger L. Mason                                      |       | 67,500                                  | (4)        | 4.1   | %          |
| L. Derrick Ashcroft                                 |       | 7,500                                   | (5)        | *     |       |
| Noel Koch                                           |       | 7,500                                   | (5)        | *     |       |
| *All directors and officers as a group  (seven)(6)* |       | 806,900                                 |       | 49.0  | %          |

 

----

* Less than 1%

(1) Theaddress of all persons named in this table is: c/o ICOP Digital, Inc., 11011King Street, Suite 260, Overland Park, KS 66210.

(2) Includes the following securitiesbeneficially owned by Mr. Owen and Ms. Owen: 40,000 shares of common stock heldby David & Laura Owen Trust under a trust dated 6/4/97; 60,400 shares ofcommon stock held by Owen Enterprises, LLC; 25,000 shares of common stock heldby Owen & Associates, Inc. Profit Sharing Plan; 5,000 shares of common stockheld by DBM, LP (of which Mr. and Ms. Owen are general partners); 5,000 sharesof common stock held by Emerson B. Wells, LP (of which Mr. and Ms. Owen aregeneral partners); 25,000 shares of common stock held by MDN, LP (of which Mr.and Ms. Owen are general partners); 2,000 shares of common stock held by Ms.Owen; options held by Owen Enterprises, LLC to purchase 100,000 shares ofcommon stock; options held by Mr. Owen to purchase 100,000 shares of commonstock; and options held by Ms. Owen to purchase 87,500 shares of common stock.

(3) Includes150,000 shares owned by Mr. Ross’s wife and options to purchase 7,500 shares ofcommon stock.

(4) Includes 60,000 shares of common stock and options topurchase 7,500 shares of common stock.

(5)Includes options to purchase 7,500 shares of common stock.

(6)Includes options to purchase 320,000 shares of common stock.

 

25

----

 

**Item 12. ****Certain Relationships and RelatedTransactions**

** **

**Transactions Involving Directors**

 

In November 2002, weborrowed $10,000 from a limited liability company managed and co-owned by DavidC. Owen, our CEO and a director.  Werepaid this amount in full in January 2004. We borrowed an additional $100,000 from a limited liability companymanaged and co-owned by Mr. Owen in January 2004.  The related note payable accrues no interestand is due and payable on demand.  Wehave repaid $40,000, leaving $60,000 in outstanding principal.  In connection with consulting services, wegranted options to the entity to purchase 100,000 shares of our commonstock.  These options may be exerciseduntil December 31, 2012 and have an exercise price of $10.00 per share.

 

In January 2004, we borrowed$100,000 from the wife of Charles A. Ross, Sr., our Chairman.  The related note payable accrues no interestand is due and payable on demand.  Wehave repaid $70,000, leaving $30,000 in outstanding principal.  In October 2004, we borrowed $9,000 from Mr.Ross which was repaid in February 2005 without interest.

 

In January 2004, wepurchased furniture from a limited liability company managed and co-ownedby Mr. Owen for $50,066 pursuant to a note that accrues no interest and is dueand payable on demand.  We have repaid$25,000, leaving $25,066 in outstanding principal.

 

The Board of Directorsbelieved that each of these loans was made on terms at least as favorable to usas could be obtained from independent third-party lenders.

 

 

**Acquisitionof ICOP Digital, Inc., a Nevada corporation**

 

In January 2004, we acquired ICOPNevada, by merging it with and into a whollyowned subsidiary we formed to effect the merger (“ICOP Acquisition”).  In connection with the merger, we issuedapproximately 1,454,000 shares of our common stock in exchange for theoutstanding shares of ICOP Nevada.

 

ICOP Nevada had been a privatelyowned company engaged primarily in the design, development and marketing of anin-car digital video recorder system for use in the law enforcementindustry.  At the time ofthe merger, Mr. Ross was our principal shareholder and served as our soledirector and officer.  He also was adirector, officer and shareholder of ICOP Nevada.  Mr. Owen held options to purchase shares ofour common stock  He also was a director,officer and shareholder of ICOP Nevada.

 

Prior to the merger, we receivedadditional capital investments sufficient to satisfy all of our outstandingdebts at the time of the merger.  As aresult, all outstanding notes, totaling $158,000 and which had been personallyguaranteed by Mr. Ross, were paid in full. ICOP Acquisition, as a newly formed entity, had no assets orliabilities.  Therefore, following themerger, the only assets and liabilities we had were those of ICOP Nevada priorto the merger.  While the merger was notan arms-length transaction, the boards of directors of both companies believedthe transaction was fair in all material respects to their respectivestockholders.

 

26

 

----

 

**Future Transactions**

 

Future transactions with our officers, directors or greater than five percent stockholders will be on terms no less favorable to us than could be obtained from independent third parties, and all such transactions will be reviewed and subject to approval by our Audit Committee.

 

**Item 13****. Exhibits.**

 

(a) The following exhibits are furnished as part of this report:

 
| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
| 3.1             |       |            | Articles of Incorporation (incorporated by reference to Exhibit 2.1 of the Registration Statement on Form 10 filed with the Commission on September 13, 1999). |
| 3.2             |       |            | First Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 8-K filed August 16, 2001). |
| 3.3             |       |            | Second Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 of theForm 8-K filed August 26, 2002). |
| 3.4             |       |            | Third Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.4 of theForm SB-2 registration statement filed April 4, 2005). |
| 3.5             |       |            | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Form 8-K filed August 16, 2001). |
| 10.1            |       |            | Agreement for the Purchase of Common Stock dated as of February 27, 2001, and effective as of March 3, 2001, by and between Corporate Management Services, Inc., Bail Corporation and Charles A. Ross, Sr. (incorporated by reference to Exhibit 7.1 of the Form 8-K filed March 9, 2001). |
| 10.2            |       |            | Mutual Release dated as of April 30, 2001, between Bail Corporation and Corporate Management Services, Inc. (incorporated by reference to Exhibit 10.2 of the 10-KSB for the period ended March 31, 2001). |
| 10.3            |       |            | Agreement dated June 22, 2002, between Bail Corporation, TCC Royalty Corp. and Austin Exploration L.L.C. regarding Shiloh Project/Cherokee Basin Coal Bed Methane (incorporated by reference to Exhibit 10.2 of the 10-KSB for the period ended March 31,2001). |
| 10.4            |       |            | Agreement and Plan of Merger with ICOP (incorporated by reference to Exhibit 2.1 to Form 8-K for event dated February 13, 2004). |
| 10.5            |       |            | McCoy Stock Purchase Agreement (incorporated by reference to Exhibit 10.5 to Form 10-KSB for period ended December 31, 2003). |
| 10.6            |       |            | First Amendment to Employment Agreement between Vista Exploration Corporation and Charles A. Ross, Sr. dated as of June 1, 2003 (incorporated by reference to Exhibit 10.6 to Form 10-KSB for year ended March 31, 2002 (file No. 000-27321)). |
| 14.1            |       |            | Code of Ethics that applies to our officers (including our principal executive, financial and accounting officers), directors, employees and consultants. |
| 23.1            |       |            | Consent of Independent Registered Public Accounting Firm |
| 31.1            |       |            | 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 2002. |
| 32.2            |       |            | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

27

 

**Item 14****. Principal Accountant Fees and Services**

 
| ** **                         | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| 1) Audit Fees                      |       | $        | 4,473      |     | $          | 28,789 |   |
| 2) Audit related fees and services |       | 0        |       | 0        |       |
| 3) Fees for tax related services   |       | 0        |       | 0        |       |
| 4) All other fees                  |       | 0        |       | 0        |       |
|                                    |            |          |            |          |            |  |  |

 

                The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors.  The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors.  Under the policy, pre-approval is detailed as to the scope and fees to be associated with the services.  The Audit Committee may delegate pre-approval authority to one or more of its independent members.  Such member must report any decisions to the Audit Committee at the Committee's regularly scheduled meetings.

28

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | ICOP Digital, Inc. |
|--------|--------------------|
|   |               |
|   |               |
|   | By:                | /s/ David C. Owen |   |
|   |               | David C. Owen, Chief Executive Officer |

 

Pursuant to the requirements of the Securities Act of 1933, as amended,this report has been signed below by the following persons on behalf of thecompany in the capacities and on the dates indicated.

 
| **Signature**            | ** ** | **Title**                                     | ** ** | **Date**           |
|--------------------------|------------|-----------------------------------------------|------------|--------------------|
|                     |       |                                          |       |               |
| /s/ Charles A. Ross, Sr. |       | Director                                      |       | April 4, 2005 |
| Charles A. Ross, Sr.     |       |                                          |       |               |
|                     |       |                                          |       |               |
| /s/ David C. Owen        |       | Director                                      |       | April 4, 2005 |
| David C. Owen            |       | (Principal Executive Officer)                 |       |               |
|                     |       |                                          |       |               |
| /s/ Roger L. Mason       |       | Director                                      |       | April 4, 2005 |
| Roger L. Mason           |       |                                          |       |               |
|                     |       |                                          |       |               |
| /s/ John C. Garrison     |       | Chief Financial Officer                       |       | April 4, 2005 |
| John C. Garrison         |       | (Principal Accounting and  Financial Officer) |       |               |
|                     |       |                                          |       |               |
| /s/ L. Derrick Ashcroft  |       | Director                                      |       | April 4, 2005 |
| L. Derrick Ashcroft      |       |                                          |       |               |
|                     |       |                                          |       |               |
| /s/ Noel Koch            |       | Director                                      |       | April 4, 2005 |
| Noel Koch                |       |                                          |       |               |

 

 

29

----

 

**INDEX TO FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public  Accounting Firm                                                                                                                          | F-2    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                              |   |
| Balance Sheet at December 31, 2004                                                                                                                                           | F-3    |
|                                                                                                                                                                              |   |
| Statements of Operations for the years ended December 31, 2004  and 2003 and for the period from May 24, 2002 (inception) through December 31,  2004               | F-4    |
|                                                                                                                                                                              |   |
| Statements of Other Comprehensive Loss for  the years ended December 31, 2004 and 2003 and for the period from  May 24, 2002 (inception) through December 31, 2004 | F-5    |
|                                                                                                                                                                              |   |
| Statement of Changes in Shareholders’  Deficit for the period from May 24, 2002 (inception) through December 31,  2004                                             | F-6    |
|                                                                                                                                                                              |   |
| Statements of Cash Flows for the years ended December 31, 2004  and 2003 and for the period from May 24, 2002 (inception) through December 31,  2004               | F-7    |
|                                                                                                                                                                              |   |
| Notes to Financial Statements                                                                                                                                                     | F-8    |

 

F-1

----

 

**Report of Independent Registered Public AccountingFirm**

 

The Board of Directors

ICOP Digital, Inc. (formerly Vista Exploration Corporation):

 

We have audited the accompanying balance sheet of ICOPDigital, Inc. (formerly Vista Exploration Corporation) (a developmentstage company) as of December 31, 2004, and the related statements ofoperations, comprehensive income, changes in shareholders’ deficit, and cashflows for the years ended December 31, 2004 and 2003 and for the periodfrom May 24, 2002 (inception) through December 31, 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conducted our audit in accordance with auditing standards of thePublic Companies Accounting Oversight Board. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of ICOPDigital, Inc. (formerly Vista Exploration Corporation) as of December 31,2004, and the results of its operations and its cash flows for the years ended December 31,2004 and 2003 and the period from May 24, 2002 (inception) through December 31,2004 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 1 tothe financial statements, the Company’s significant operating losses sinceinception raise substantial doubt about its ability to continue as a goingconcern. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

Cordovano and Honeck LLP

Denver, Colorado

March 11, 2005

 

F-2

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**BALANCE SHEET**

**DECEMBER 31, 2004**

 
| **Assets**                                                                                          |   |       |      |
|-----------------------------------------------------------------------------------------------------|--------|------------|-----------|
| Current assets:                                                                                     |   |       |      |
| Cash                                                                                                |   | $          | 4,242     |   |
| Accounts receivable, net                                                                            |   | 44,525     |      |
| Prepaid expenses                                                                                    |   | 33,223     |      |
| Total current assets                                                                                |   | 81,990     |      |
|                                                                                                |   |       |      |
| Property and equipment, less accumulated  depreciation of $38,180 (Note 1)                     |   | 119,298    |      |
|                                                                                                |   |       |      |
| Other assets:                                                                                       |   |       |      |
| Deferred patent costs                                                                               |   | 61,480     |      |
| Other                                                                                               |   | 250        |      |
|                                                                                                |   | $          | 263,018   |   |
| **Liabilities and Shareholders’ Deficit**                                                      |   |       |      |
| ** **                                                                                          |   |       |      |
| Current liabilities:                                                                                |   |       |      |
| Accounts payable                                                                                    |   | $          | 2,051,300 |   |
| Accrued liabilities                                                                                 |   | 380,426    |      |
| Unearned revenue                                                                                    |   | 109,102    |      |
| Notes and loans payable—Related party (Note  2)                                                |   | 139,066    |      |
| Notes payable (Note 5)                                                                              |   | 200,000    |      |
| Current maturities of long-term debt (Note  5)                                                      |   | 7,853      |      |
| Accrued interest payable (Note 5)                                                                   |   | 9,759      |      |
| Total current liabilities                                                                           |   | 2,897,506  |      |
|                                                                                                |   |       |      |
| Long-term debt, net of current maturities  (Note 5)                                                 |   | 35,011     |      |
| Total liabilities                                                                                   |   | 2,932,517  |      |
|                                                                                                |   |       |      |
| Shareholders’ deficit (Note 7):                                                                |   |       |      |
| Preferred stock, no par value; 5,000,000  shares authorized, 250,000 shares issued and outstanding  |   | 1,099,998  |      |
| Common stock, no par value; 50,000,000  shares authorized, 16,382,000 shares issued and outstanding |   | 3,221,268  |      |
| Accumulated other comprehensive loss, net of  tax                                                   |   | (117,595   | )         |
| Retained deficit                                                                                    |   | (6,873,170 | )         |
| Total shareholders’ deficit                                                                    |   | (2,669,499 | )         |
|                                                                                                |   | $          | 263,018   |   |

 

See accompanying notes to financialstatements

 

F-3

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**STATEMENTS OF OPERATIONS**

 
| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** | **May 24, 2002  (Inception)  Through  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                          | ** ** | **2003**                                                  | ** ** | **2004** | ** ** |
| Sales, net of returns                                         |       | $                                 | 50,657     |                                                      | $          | — |   | $ | 50,657 |   |
| Cost of sales                                                 |       | 31,755                            |       | —                                                    |       | 31,755 |   |
| Gross profit                                                  |       | 18,902                            |       | —                                                    |       | 18,902 |   |
| Operating expenses:                                           |       |                              |       |                                                      |       |   |   |
| Selling, general and administrative                           |       | 1,533,564                         |       | 1,055,264                                                 |       | 2,947,258 |   |
| Research and development                                      |       | 936,111                           |       | 2,828,113                                                 |       | 3,942,228 |   |
| Loss from the disposition of subsidiary  (Note 3)        |       | —                            |       | 450,000                                                   |       | 450,000 |   |
| Total operating expenses                                      |       | 2,469,675                         |       | 4,333,377                                                 |       | 7,339,486 |   |
| Loss from operations                                          |       | (2,450,773                        | )          | (4,333,377                                                | )          | (7,320,584 | ) |
|                                                          |       |                              |       |                                                      |       |   |   |
| Other income (expense):                                       |       |                              |       |                                                      |       |   |   |
| Realized loss on foreign currency  translation                |       | —                            |       | (4,221                                                    | )          | (4,221 | ) |
| Unusual item:                                                 |       |                              |       |                                                      |       |   |   |
| Gain on restructure of trade debt (Note 9)                    |       | 471,707                           |       | —                                                    |       | 471,707 |   |
| Interest expense                                              |       | (13,447                           | )          | (5,444                                                    | )          | (20,072 | ) |
| Loss before income taxes                                      |       | (1,992,513                        | )          | (4,343,042                                                | )          | (6,873,170 | ) |
| Income tax provision (Note 6)                                 |       | —                            |       | —                                                    |       | — |   |
| Net loss                                                      |       | $                                 | (1,992,513 | )                                                         | $          | (4,343,042 | ) | $ | (6,873,170 | ) |
| Basic and diluted loss per share                              |       | $                                 | (0.12      | )                                                         | $          | (0.32 | ) |   |   |
| Basic and diluted weighted average common  shares outstanding |       | 16,084,452                        |       | 13,435,832                                                |       |   |   |

 

See accompanying notes to financialstatements

 

F-4

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**STATEMENT OF OTHER COMPREHENSIVE LOSS**

 
| ** **                            | ** ** | **Years Ended December 31,** | ** ** | **May 24, 2002  (Inception)  Through  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                            | ** ** | **2004**                          | ** ** | **2003**                                                       | ** ** | **2004** | ** ** |
| Net loss                              |       | $                                 | (1,992,513 | )                                                              | $          | (4,343,042 | ) | $ | (6,873,170 | ) |
| Other comprehensive loss, net of tax: |       |                              |       |                                                           |       |   |   |
| Foreign currency translation          |       | (42,014                           | )          | (75,581                                                        | )          | (117,595 | ) |
| Comprehensive loss                    |       | $                                 | (2,034,527 | )                                                              | $          | (4,418,623 | ) | $ | (6,990,765 | ) |

 

See accompanying notes to financialstatements

 

F-5

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT**

 
| ** **                                                                                                     | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|---------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                                     | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**                            | ** ** | **Amount**   | ** ** | **Loss**   | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at May 24, 2002 (inception)                                                                       |       | —              |       | $                | —     |                                  | —     |         | $          | —     |       | $ | — |   | $ | — |   | $ | — |   |
| June to August 2002, shares sold in  private placement offering ($.01/share) (Note 7)           |       | —              |       | —           | *          | 10,620,000                            |       | 106,200      | *          | —     |       | — |   | 106,200 |   |
| September 2002, shares sold in private  placement offering ($.10/share) (Note 7)                     |       | —              |       | —           | *          | 1,000,000                             |       | 100,000      | *          | —     |       | — |   | 100,000 |   |
| October to November 2002, shares sold in  private placement offering ($1.00/share) (Note 7)     |       | —              |       | —           | *     | 150,000                               |       | 150,000      | *          | —     |       | — |   | 150,000 |   |
| December 2002, shares issued in exchange for  public relations services ($1.00/share) (Note 7)       |       | —              |       | —           | *          | 100,000                               |       | 100,000      | *          | —     |       | — |   | 100,000 |   |
| Net loss for the period ended December 31,  2002                                                          |       | —              |       | —           |       | —                                |       | —       |       | —     |       | (537,615 | ) | (537,615 | ) |
| Balance at December 31, 2002                                                                              |       | —              |       | —           |       | 11,870,000                            |       | 456,200      |       | —     |       | (537,615 | ) | (81,415 | ) |
| January to June 2003, shares sold in  private placement offering ($1.00/share) (Note 7)         |       | —              |       | —           | *          | 1,946,000                             |       | 1,923,500    | *          | —     |       | — |   | 1,923,500 |   |
| February 2003, shares issued in exchange for  equipment installation services ($1.00/share) (Note 7) |       | —              |       | —           | *          | 11,000                                |       | 11,000       | *          | —     |       | — |   | 11,000 |   |
| February 2003, shares issued in exchange for  design services ($1.00/share) (Note 7)                 |       | —              |       | —           | *          | 50,000                                |       | 50,000       | *          | —     |       | — |   | 50,000 |   |
| February 2003, shares issued to acquire McCoy’s  Lawline ($1.00/share) (Note 1)                 |       | —              |       | —           | *          | 700,000                               |       | 700,000      | *          | —     |       | — |   | 700,000 |   |
| Stock options issued in exchange for services  provided (Note 7)                                          |       | —              |       | —           |       | —                                |       | 90,000       |       | —     |       | — |   | 90,000 |   |
| Unrealized effect of the change in foreign  currency exchange rates                                            |       | —              |       | —           |       | —                                |       | —       |       | (75,581    | )          | — |   | (75,581 | ) |
| Net loss for the year ended December 31, 2003                                                             |       | —              |       | —           |       | —                                |       | —       |       | —     |       | (4,343,042 | ) | (4,343,042 | ) |
| Balance at December 30, 2003, before merger                                                               |       | —              |       | —           |       | 14,577,000                            |       | 3,230,700    |       | (75,581    | )          | (4,880,657 | ) | (1,725,538 | ) |
| December 31, 2003, shares issued in  conjunction with merger with ICOP Digital, Inc.                      |       | —              |       | —           |       | 1,790,000                             |       | (9,432       | )          | —     |       | — |   | (9,432 | ) |
| Balance at December 31, 2003                                                                              |       | —              |       | —           |       | 16,367,000                            |       | 3,221,268    |       | (75,581    | )          | (4,880,657 | ) | (1,734,970 | ) |
| January to December 2004, shares sold in  private placement offering ($1.00/share) (Note 7)     |       | —              |       | —           |       | 415,000                               |       | 395,000      | *          | —     |       | — |   | 395,000 |   |
| February 2003, preferred shares sold in  private placement offering ($6.00/share) (Note 7)           |       | 250,000             |       | 1,099,998        |       | —                                |       | —       | *          | —     |       | — |   | 1,099,998 |   |
| January and July 2004, stock issued in  exercise of stock options ($1.00/share) (Note 7)        |       | —              |       | —           |       | 100,000                               |       | 100,000      | *          | —     |       | — |   | 100,000 |   |
| March 2004, shares returned to divest McCoy’s  Lawline ($1.00/share) (Note 1)                   |       | —              |       | —           |       | (700,000                              | )          | (700,000     | )*         | —     |       | — |   | (700,000 | ) |
| December 2004, stock issued in exchange for  engineering agreement (Note 7)                          |       | —              |       | —           |       | 200,000                               |       | 200,000      |       | —     |       | — |   | 200,000 |   |
| Stock options issued in exchange for services  provided (Note 7)                                          |       | —              |       | —           |       | —                                |       | 5,000        |       | —     |       | — |   | 5,000 |   |
| Unrealized effect of the change in foreign  currency exchange rates                                            |       | —              |       | —           |       | —                                |       | —       |       | (42,014    | )          | — |   | (42,014 | ) |
| Net loss for the year ended December 31, 2004                                                             |       | —              |       | —           |       | —                                |       | —       |       | —     |       | (1,992,513 | ) | (1,992,513 | ) |
| Balance at December 31, 2004                                                                              |       | 250,000             |       | $                | 1,099,998  |                                  | 16,382,000 |         | $          | 3,221,268  |       | $ | (117,595 | ) | $ | (6,873,170 | ) | $ | (2,669,499 | ) |

 

----

*  Restated, see Note 1

 

See accompanying notes to financialstatements

 

F-6

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** | **May 24, 2002  (Inception)  Through  December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                          | ** ** | **2003**                                                  | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                        |       |                              |       |                                                      |       |   |   |
| Net loss                                                                     |       | $                                 | (1,992,513 | )                                                         | $          | (4,343,042 | ) | $ | (6,873,170 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                              |       |                                                      |       |   |   |
| Depreciation                                                                 |       | 28,320                            |       | 17,556                                                    |       | 51,228 |   |
| Book value of equipment retired                                              |       | 1,734                             |       | 27,102                                                    |       | 28,837 |   |
| Stock-based compensation (Notes 1 and 7)                                     |       | 200,000                           |       | 50,000                                                    |       | 350,000 |   |
| Stock options issued                                                         |       | 5,000                             |       | 90,000                                                    |       | 95,000 |   |
| Loss on unconsolidated subsidiary                                            |       | —                            |       | 450,000                                                   |       | 450,000 |   |
| Gain on restructured trade debt                                              |       | (471,707                          | )          | —                                                    |       | (471,707 | ) |
| Changes in operating liabilities:                                            |       |                              |       |                                                      |       |   |   |
| (Increase) in accounts receivable and  prepaid expenses                      |       | (72,348                           | )          | 226                                                       |       | (77,748 | ) |
| Increase in accounts payable and accrued  liabilities                        |       | 1,076,048                         |       | 1,756,649                                                 |       | 2,904,699 |   |
| Net cash used in operating activities                                        |       | (1,225,466                        | )          | (1,951,509                                                | )          | (3,542,861 | ) |
|                                                                         |       |                              |       |                                                      |       |   |   |
| Cash flows from investing activities:                                        |       |                              |       |                                                      |       |   |   |
| Purchases of property and equipment                                          |       | (26,678                           | )          | (20,626                                                   | )          | (91,648 | ) |
| Deferred patent costs                                                        |       | (61,730                           | )          | —                                                    |       | (61,730 | ) |
| Investment in Subsidiary                                                     |       | (450,000                          | )          | —                                                    |       | (450,000 | ) |
| Liabilities assumed in recapitalization                                      |       | —                            |       | 9,432                                                     |       | 9,432 |   |
| Deposits                                                                     |       | 3,000                             |       | —                                                    |       | — |   |
| Net cash used in investing activities                                        |       | (535,408                          | )          | (11,194                                                   | )          | (593,946 | ) |
|                                                                         |       |                              |       |                                                      |       |   |   |
| Cash flows from financing activities:                                        |       |                              |       |                                                      |       |   |   |
| Proceeds from issuance of notes payable                                      |       | 454,000                           |       | 374,418                                                   |       | 906,231 |   |
| Principal payments on notes payable                                          |       | (402,662                          | )          | (214,717                                                  | )          | (617,380 | ) |
| Proceeds from the sale of preferred stock                                    |       | 1,099,998                         |       | —                                                    |       | 1,099,998 |   |
| Proceeds from the sale of common stock                                       |       | 495,000                           |       | 1,923,500                                                 |       | 2,774,700 |   |
| Payment of offering costs                                                    |       | —                            |       | (22,500                                                   | )          | (22,500 | ) |
| Net cash provided by financing activities                                    |       | 1,646,336                         |       | 2,060,701                                                 |       | 4,141,049 |   |
| Net change in cash                                                           |       | (114,538                          | )          | 97,998                                                    |       | 4,242 |   |
| Cash, beginning of period                                                    |       | 118,780                           |       | 20,782                                                    |       | — |   |
| Cash, end of period                                                          |       | $                                 | 4,242      |                                                      | $          | 118,780 |   | $ | 4,242 |   |
| Supplemental disclosure of cash flow  information:                           |       |                              |       |                                                      |       |   |   |
| Income taxes                                                                 |       | $                                 | —     |                                                      | $          | — |   | $ | — |   |
| Interest                                                                     |       | $                                 | 6,439      |                                                      | $          | 6,627 |   | $ | 13,066 |   |
| Non-cash investing and financing  transactions:                              |       |                              |       |                                                      |       |   |   |
| Subsidiary acquired (disposed) with stock                                    |       | $                                 | —     |                                                      | $          | 700,000 |   | $ | 700,000 |   |
| Subsidiary divested for stock                                                |       | $                                 | (700,000   | )                                                         | $          | — |   | $ | (700,000 | ) |
| Foreign currency translation                                                 |       | $                                 | 42,014     |                                                      | $          | 75,581 |   | $ | 117,595 |   |
| Equipment acquired with notes payable                                        |       | $                                 | 96,714     |                                                      | $          | — |   | $ | 96,714 |   |
| Equipment acquired with stock                                                |       | $                                 | —     |                                                      | $          | 11,000 |   | $ | 11,000 |   |

 

See accompanying notes to financialstatements

 

F-7

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TO FINANCIAL STATEMENTS**

 

**Note 1: Nature of Operations, Merger,and Summary of Significant Accounting Policies**

 

***Operations andMerger***

 

ICOP Digital, Inc. (formerly Vista Exploration Corporation) (the “Company”),was incorporated in May 2002 in Nevada. Effective December 31, 2003,it merged into a Colorado corporation. It is a development stage enterpriseengaged in the design, development and marketing of an in-car video system foruse in the law enforcement industry. A small number of in-car video units havebeen sold. The Company’s offices are located in Overland Park, Kansas.

 

Certain changes have been made to the prior year’s financial statementsin order to conform to the current year’s presentation.

 

In February 2003, the Company purchased all of the issued andoutstanding common stock of McCoy’s Law Line, Inc. (“McCoy’s”). Theprimary reason for the purchase was to permit ICOP to sell and distribute lawenforcement-related products in addition to its in-car digital video recordersystem. The purchase price consisted of 700,000 shares of ICOP common stockvalued at $1.00 per share by the Company’s Board of Directors based oncontemporaneous stock sales to unrelated third parties. In March 2004, theCompany sold its entire investment in this subsidiary back to the originalowners in exchange for the 700,000 shares of ICOP common stock that the Companyhad paid for the original purchase. A loss of $450,000 was recorded from thisinvestment in 2003. No gain or loss was recorded in 2004 from this investmentor disposition of this investment.

 

Effective December 31, 2003, ICOP Digital, Inc., a Nevadacorporation, (ICOP-Nevada) exchanged 100 percent of its outstanding sharesof common stock for 14,577,000 shares of the common stock of Vista ExplorationCorporation, a Colorado corporation, (“Vista”.) On January 13, 2004, thetwo companies completed the merger. For clarity of disclosure, the accompanyingfinancial statements have been prepared as if the transaction was completed December 31,2003. The acquisition has been treated as a recapitalization of ICOP-Nevada,with Vista the legal surviving entity. Since Vista had, prior to therecapitalization of ICOP-Nevada, no assets and net liabilities (consistingprincipally of accounts payable) and no operations, the recapitalization hasbeen accounted for as the sale of 1,790,000 shares of ICOP-Nevada common stockfor the net liabilities of Vista. The historical financial statements presentedherein are those of ICOP-Nevada. Costs of the transaction have been charged tothe period. In November 2004, shareholders approved the change of theColorado corporation name from Vista Exploration Corporation (Vista) to ICOPDigital, Inc. (ICOP).

 

***Basis ofPresentation***

 

The accompanying financial statements have been prepared on a going concernbasis, which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. As shown in the accompanyingfinancial statements, the Company has suffered significant losses sinceinception. This factor, among others, may indicate that the Company will beunable to continue as a going concern.

 

The financial statements do not include any adjustments relating to therecoverability and classification of assets and/or liabilities that might benecessary should the Company be unable to continue as a going concern. TheCompany’s continuation as a going concern is dependent upon its ability to meetits obligations on a timely basis, and, ultimately to attain profitability.

 

F-8

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

Management has financed the Company through the sale of common andpreferred stock, the issuance of debt and the exercise of outstanding stockoptions. The Company’s long-term continued operations will depend on management’sability to raise additional funds through equity and debt financing forresearch and development and to support the manufacture and import of their newproducts as they come to market although there is no assurance that suchfinancing can be obtained at favorable rates, or at all. In the longer term,the Company plans to expand its acquired operations, commence sale of its newproducts and become profitable. However, there also is no assurance that theCompany’s new products will gain market acceptance or that the Company willattain profitability.

 

The Company is planning a registered offering of its common stock in2005. Through March 11, 2005, the Company has raised $2.2 million inrelated bridge financing. (See Note 10). Management estimates that thisbridge financing will be sufficient to fund operation at least until June 2005based on the expected level of expenditures in relation to research and developmentactivities and other ongoing operations of the Company. However, the Companywill be dependent upon the success of the planned registered common stockoffering to continue operations through the end of the year, and beyond.

 

***Use of Estimates***

 

The preparation of financial statements in accordance with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

***Cash and CashEquivalents***

 

The Company considers all highly liquid securities with originalmaturities of three months or less when acquired to be cash equivalents. Therewere no cash equivalents at December 31, 2004.

 

***Investment inUnconsolidated Subsidiary***

 

Such investments are accounted for using the equity method ofaccounting if the investment in a majority-owned company is consideredtemporary. The Company reflects its investment in equity-method investees onthe balance sheet as “Investment in unconsolidated subsidiary” and its share ofthe investees’ earnings or losses as “Equity in losses of equity-methodinvestee, net” on the statements of operations. ICOP disposed of itunconsolidated subsidiary effective December 31, 2004 and has nounconsolidated subsidiaries at December 31, 2004.

 

***Property andEquipment***

 

Property and equipment are stated at cost. Depreciation is calculatedusing the straight-line method over the estimated useful lives of the relatedassets, generally ranging from three to five years. Property and equipmentunder capital leases are stated at the present value of minimum lease paymentsand are amortized using the straight-line method over the shorter of the leaseterm or the estimated useful lives of the assets. Leasehold improvements areamortized using the straight-line method over the estimated useful lives of theassets or the term of the lease, whichever is shorter. The recoverability ofproperty and equipment is evaluated whenever

 

F-9

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

indicators of impairment are present and the undiscounted future cashflows estimated to be generated by those assets are less than the assets’carrying amount. No impairment charges have been recorded for the years ended December 31,2004 and 2003 and the period from May 24, 2002 (inception) through December 31,2004.

 

***Impairment ofLong-lived Assets***

 

The Company reviews long-lived assets and identifiable intangibleassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of these assets may not be recoverable. They assess theseassets for impairment based on estimated undiscounted future cash flows fromthese assets. If the carrying value of the assets exceeds the estimated futureundiscounted cash flows, a loss is recorded for the excess of the asset’scarrying value over the fair value. The Company did not recognize anyimpairment loss for long-lived assets for the years ended December 31,2004 and 2003 and the period from May 24, 2002 (inception) through December 31,2004.

 

***Recognition ofRevenue and Costs of Services***

 

Revenues consist of the sales of electronic parts and labor. Billingsare rendered as the goods are shipped and recognized at the time of shipment.Direct costs of services include compensation, related payroll taxes, benefitsand workers’ compensation insurance, and outsourcing costs. Costs of servicesare recognized at the time of shipment.

 

Emerging Issues Task Force (“EITF”) No. 99-19, “Reporting RevenuesGross as a Principal Versus Net as an Agent,” establishes criteria forrecognizing revenues on a gross or net basis. The Company is the primaryobligor in its transactions, has responsibility for fulfillment, including theacceptability of services ordered and purchased by customers. In addition, theCompany has all credit risk, retains substantially all risk and rewards of theproducts sold. Accordingly, the Company records all transactions at the grossrevenue amount billed, consistent with the provisions of EITF 99-19.

 

***Research andDevelopment***

 

Research and development costs are charged to the expense, as incurred.

 

***Deferred patentapplication cost***

 

Legal expenses incurred in preparation of patent application have beendeferred and will be amortized over the useful life of granted patents. Costsincurred in preparation of applications that are not granted will be charged toexpense at that time.

 

***Income Taxes***

 

The Company accounts for income taxes under the provisions of Statementof Financial Accounting Standards No. 109, *Accounting for Income Taxes*. Statement No. 109 requiresrecognition of deferred tax liabilities and assets for the expected future taxconsequences of events that have been included in the financial statements ortax returns. Under this method, deferred tax liabilities and assets aredetermined based on the difference between the financial statement and taxbases of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse.

 

F-10

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

***Foreign Currency***

 

The Company outsourced certain research and development to a Japanesefirm. Services and products were billed to the Company in the local currency.Liabilities in foreign currencies are translated at exchange rates prevailingat the balance sheet date. Costs and expenses are translated into United Statesdollars at average exchange rates for the period. Gains and losses resultingfrom translation are accumulated as a component of other comprehensive income(loss). Realized gains and losses from foreign currency transactions arerecognized as other income.

 

***Comprehensive Loss***

 

Comprehensive loss includes all changes in equity (net assets) during aperiod from non-owner sources. The change in accumulated other comprehensiveincome for all periods presented resulted from foreign currency translationlosses.

 

***Stock-basedCompensation***

 

The Company accounts for stock-based compensation arrangements inaccordance with Statement of financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation,” which permits entitiesto recognize as expense over the vesting period the fair value of all stock-basedawards on the date of grant. Alternatively, SFAS No. 123 allows entitiesto continue to apply the provisions of Accounting Principle Board (“APB”)Opinion No. 25 and provide pro forma net earnings (loss) disclosures foremployee stock option grants as if the fair-value-based method defined in SFASNo. 123 had been applied. The Company has elected to apply the provisionsof APB Opinion No. 25 and provide the pro forma disclosure provisions ofSFAS No. 123. For options granted prior to the merger with ICOP, the fairvalue of option grants was determined using the Black-Scholes option-pricingmodel with a zero volatility assumption. For options granted subsequent to themerger, the fair value of option grants was determined using the Black-Scholesoption-pricing model with volatility assumptions based on actual or expectedfluctuations in the price of our common stock.

 

Generally accepted accounting principles require companies who chooseto account for stock option grants using the intrinsic value method to alsodetermine the fair value of option grants using an option-pricing model, suchas the Black-Scholes model, and to disclose the impact of fair value accountingin a note to the financial statements. In December 2002, the FinancialAccounting Standards Board, or FASB, issued Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation Transition andDisclosure, an Amendment of FASB Statement No. 123.” The Company did notelect to voluntarily change to the fair value based method of accounting forstock based employee compensation and record such amounts as charges tooperating expense.

 

The Company accounts for stock-based arrangements issued tonon-employees using the fair value based method, which

 

F-11

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

calculates compensation expense based on the fair value of the stockoption granted using the Black-Scholes option pricing model at the date ofgrant, or over the period of performance, as appropriate.

 
| Risk-free interest rate        |   | 1.98    | %      |
|--------------------------------|--------|---------|--------|
| Dividend yield                 |   | 0.00    | %      |
| Volatility factor              |   | 10.00   | %      |
| Weighted-average expected life |   | 4 years |   |

 

***Loss per CommonShare***

 

The Company reports loss per share using a dual presentation of basicand diluted loss per share. Basic loss per share excludes the impact of commonstock equivalents. Diluted loss per share uses the average market price pershare when applying the treasury stock method in determining common stockequivalents. However, the Company has a simple capital structure for the periodpresented and has incurred operating losses, therefore, there is no variancebetween the basic and diluted loss per share.

 

***Concentrations***

 

During the year ended and as of December 31, 2003, one supplieraccounted for 84% of the Company’s research and development costs. The Companydid not incur significant additional expense with this supplier during the yearended December 31, 2004, but anticipates that approximately 55% ofinventory will be purchased from this supplier in the coming year.

 

***Fair Value ofFinancial Instruments***

 

The Company has determined, based on available market information andappropriate valuation methodologies, the fair values of its financialinstruments approximate carrying values. The carrying amounts of cash,receivables, payables, and other current liabilities at December 31, 2004approximate fair value due to the short-term maturity of the instruments. At December 31,2004, based on rates for similar types of debt, the fair value of notespayable, related party was not materially different from its carrying amount.

 

**Note 2: Related Party Transactions**

 

Notes and loans payable to related parties consisted of unsecuredadvances made to the Company under promissory note agreements for workingcapital purposes and accrued interest at from 8 to 10 percent thereon. Thenotes payable and related interest are due on demand. During the year ended December 31,2003, shareholders and affiliates advanced $304,000 to the Company and duringthat period the Company repaid $104,000. $200,000 was owed to one shareholderas of December 31, 2003. The Company recorded interest expense of $13,447,$5,444 and $20,072 on the notes for the years ended December 31, 2004 and2003 and the period from May 24, 2002 (inception) through December 31,2004, respectively. Accrued interest payable to a related party was $816, and$2,762 as of December 31, 2004 and 2003, respectively. During the yearended December 31, 2004, the $200,000 shareholder note was repaidincluding accrued interest and other shareholders advanced $295,066 to theCompany under primarily non-interest bearing demand notes against which theCompany repaid $165,000. In addition, another shareholder loaned the company$9,000 which remained outstanding at December 31, 2004.

 

F-12

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

Notes and loans payable to related parties at December 31, 2004,consisted of the following:

 
| Note to D&L Owen Trust, payable on  demand, non-interest bearing           |   | $      | 60,000  |   |
|--------------------------------------------------------------------------------|--------|--------|---------|--------|
| Note to Owen Enterprises, payable on  demand, with interest at 10 percent |   | 5,000  |    |
| Note to Owen & Assoc., payable on  demand, non-interest bearing            |   | 25,066 |    |
| Note to Gunilla Ross, payable on demand,  non-interest bearing                 |   | 40,000 |    |
| Loan from Charles Ross, payable on demand,  non-interest bearing               |   | 9,000  |    |
| Total notes and loans payable to related  parties                              |   | $      | 139,066 |   |

 

The Company purchased furnishings and equipment totaling $50,066 froman affiliate during the year ended December 31, 2004. The Companypurchased equipment totaling $5,250 from a shareholder during the year ended December 31,2003. The prices paid were the predecessor’s depreciated cost, which the boardof directors determined to represent the fair value of the property.

 

The Company paid automobile lease payments of $720 per month on behalfof the Chairman of the Board. Total payments related to the lease were $6,100in 2003 and $4,320 in 2004 before the payments were discontinued.

 

The Company paid consulting fees totaling $16,000 to a shareholderduring the year ended December 31, 2003.

 

During 2003, certain shareholders advanced to the Company $70,418 forworking capital. The Company repaid $36,541 to those shareholders during thesame period. The advances were interest free and payable as cash becameavailable. The Company owed the shareholders $33,877 as of December 31,2003 which was repaid in 2004.

 

**Note 3: Investment in UnconsolidatedSubsidiary**

 

Summarized financial information for the Company’s investment in itsunconsolidated subsidiary, McCoy’s Law line, Inc. is as follows as of December 31,2003:

 
| Financial position information:  |   |   |      |
|----------------------------------|--------|--------|-----------|
| Current assets                   |   | $      | 753,932   |   |
| Noncurrent assets                |   | $      | 16,296    |   |
| Current liabilities              |   | $      | 1,555,050 |   |
| Net worth                        |   | $      | (784,822  | ) |
|                             |   |   |      |
| Operating statement information: |   |   |      |
| Revenues                         |   | $      | 4,541,883 |   |
| Operating loss                   |   | $      | (760,505  | ) |
| Net loss                         |   | $      | (806,938  | ) |

 

The Company’s share of McCoy’s Law Line, Inc. net loss for 2003was $450,000.

 

In March 2004, the Company transferred $450,000 to McCoy’s LawLine, Inc to repay bank debt incurred during the preceding year. The Companyalso sold its entire investment in this subsidiary to McCoy’s original ownersin exchange for the 700,000 shares of ICOP common stock that the Company hadpaid for the original purchase. No gain or loss was recorded in 2004 from thisinvestment or disposition of this investment.

 

F-13

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

**Note 4: Property and Equipment**

 

Property and equipment consisted of the following as of December 31,2004:

 
| Equipment                      |   | $       | 120,936 |   |
|--------------------------------|--------|---------|---------|--------|
| Furniture                      |   | 33,118  |    |
| Leasehold improvements         |   | 3,424   |    |
|                           |   | 157,478 |    |
| Less: accumulated depreciation |   | (38,180 | )       |
|                           |   | $       | 119,298 |   |

 

Depreciation expense was $28,320, $17,556 and $51,228 for the yearsended December 31, 2004 and 2003 and the period from May 24, 2002(inception) through December 31, 2004, respectively.

 

**Note 5: Notes Payable**

 

Notes payable at December 31, 2004 and December 31, 2003consisted of the following:

 
| Six percent note payable to Ford Motor  Credit, monthly payments of $429, collateralized by vehicle, matures April 2009      |   | $      | 19,837 |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Seven percent note payable to Ford Motor  Credit, monthly payments of $482, collateralized by vehicle, matures November 2009 |   | 23,027 |   |
|                                                                                                                              |   | 42,864 |   |
| Less: current maturities                                                                                                          |   | 7,853  |   |
| Long-term debt                                                                                                                    |   | $      | 35,011 |   |

 

In July 2004, the Company obtained a six-month unsecured notepayable in the amount of $200,000, bearing interest at the rate of 10% perannum. This note was repaid in 2005 by payment of accrued interest andinclusion of principal in the bridge loan described in Note 10.

 

**Note 6: Income Taxes**

 

A reconciliation of the U.S. statutory federal income tax rate to theeffective rate is as follows:

 
| ** **                                                                | ** ** | **Years Ended December 31,** | ** ** | **May 24, 2002  (Inception)  Through  December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                          | ** ** | **2003**                                                  | ** ** | **2004** | ** ** |
| U.S. statutory federal rate                                               |       | 34                                | %          | 34                                                        | %          | 34 | % |
| State income tax rate, net of federal  benefits                           |       | 3                                 | %          | 3                                                         | %          | 3 | % |
| Net operating loss (NOL) for which no tax  benefit is currently available |       | (37                               | )%         | (37                                                       | )%         | (37 | )% |
|                                                                      |       | 0                                 | %          | 0                                                         | %          | 0 | % |

 

F-14

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

At December 31, 2004, deferred taxes consisted of a net tax assetof $2,543,000 due to operating loss carryforwards of $6,873,000, which wasfully allowed for, in the valuation allowance of $2,543,000. The valuationallowance offsets the net deferred tax asset for which there is no assurance ofrecovery. The changes in the valuation allowance for the year ended December 31,2004 was $737,000. Net operating loss carryforwards will expire through 2024.

 

At December 31, 2003, deferred taxes consisted of a net tax assetof $1,806,000 due to operating loss carryforwards of $4,881,000, which wasfully allowed for, in the valuation allowance of $1,806,000. The valuationallowance offsets the net deferred tax asset for which there is no assurance ofrecovery. The changes in the valuation allowance for the year ended December 31,2003 was $1,607,000.

 

The valuation allowance will be evaluated at the end of each year,considering positive and negative evidence about whether the asset will berealized. At that time, the allowance will either be increased or reduced;reduction could result in the complete elimination of the allowance if positiveevidence indicates that the value of the deferred tax asset is no longerimpaired and the allowance is no longer required.

 

Should the Company undergo an ownership change, as defined in Section 382of the Internal Revenue Code, the Company’s tax net operating losscarryforwards generated prior to the ownership change will be subject to anannual limitation, which could reduce or defer the utilization of those losses.

 

**Note 7: Shareholders’ Equity**

 

***Preferred Stock***

 

No par preferred stock may be issued in series. Designations,preferences, stated values, rights, qualifications or limitations are to bedetermined by the Board of Directors.

 

From January through March 2004, the Company sold 250,000shares of convertible preferred stock for total proceeds of $1,099,998. Eachshare can be converted into eight shares of common stock and carries a warrantthat allows the purchase of an additional eight common shares at a price of $1.80per share.

 

***Stock Issued forCash***

 

From June through August 2002, the Company sold an aggregateof 10,620,000 shares of its common stock to founders for a total of $106,200,or $.01 per share. The shares of common stock were sold in the absence of objectivelydeterminable values.

 

In September 2002, the Company sold an aggregate of 1,000,000shares of its common stock to founders for a total of $100,000, or $.10 pershare. The shares of common stock were sold in the absence of objectivelydeterminable values.

 

During October and November 2002, the Company circulated aprivate offering memorandum relating to the private offering of up to2.5 million shares of its common stock at $1.00 per share. The Companyclosed the offering after selling 150,000 shares of common stock for proceedsof $150,000.

 

From January to December 2003, the Company circulated aprivate offering memorandum relating to the private offering of 

 

F-15

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**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

up to 2 million shares of its common stock at $1.00 per share. TheCompany closed the offering after selling 1,946,000 shares of common stock fornet proceeds of $1,923,500, after deducting offering costs totaling $22,500.

 

In 2004, the Company issued 415,000 shares of its common stock for atotal of $395,000. The shares of common stock were sold under a privateoffering memorandum relating to the private offering of up to 2 millionshares of its common stock at $1.00 per share.

 

In January and July 2004, the Company sold 100,000 shares ofits common stock for a total of $100,000 through the exercise of stock optionsgranted in 2002.

 

The securities sold have not been registered pursuant to the SecuritiesAct of 1933, as amended (the “Act”), nor have they been registered under thesecurities act of any state. These securities were offered pursuant to anexemption from registration requirements of the Act and exemptions from registrationprovided by applicable state securities laws. Management of the Company, whowere not paid any commission or compensation for offering or selling thesecurities, sold the securities.

 

***Stock Issued forConsideration Other than Cash***

 

In December 2002, the Company issued 100,000 shares of its commonstock for public relations services. The shares were valued by the Board ofDirectors at $1.00 per share based upon contemporaneous sales of stock for cashto unrelated third parties. Because the shares of common stock were notregistered, the stock certificate bears a legend regarding transferability. TheCompany recorded compensation expense in the amount of $100,000.

 

In February 2003, the Company issued 11,000 and 50,000 shares ofits common stock for equipment installation and design services. The shareswere valued by the Board of Directors at $1.00 per share based uponcontemporaneous sales of stock for cash to unrelated third parties. Because theshares of common stock were not registered, the stock certificates bear certainlegends regarding transferability. The Company recorded an asset andcompensation expense in the amounts of $11,000 and $50,000, respectively.

 

In December 2004, the Company issued 200,000 shares of its commonstock for engineering services. The shares were valued by the Board ofDirectors at $1.00 per share based upon contemporaneous sales of stock for cashto unrelated third parties. Because the shares of common stock were notregistered, the stock certificate bears a certain legend regardingtransferability. The Company recorded compensation expense in the amount of$200,000.

 

***Stock OptionsOutstanding***

 

The Company established a Stock Option Plan (the “Plan”) in 2002 toattract and retain directors, officers, key employees and consultants. The planpermits the Board of Directors to grant (1) options to purchase commonstock; (2) restricted stock awards, and (3) cash, shares of commonstock or a combination of both.

 

The Company granted options to purchase a total of 2,000,000 shares ofcommon stock to two employees in 2002. The Company valued the option at $-0-using the intrinsic value method, which calculates compensation expense basedon the difference, if any, on the date of the grant, between the fair value ofthe stock and the option exercise price. Had the Company valued the optionsunder the fair-value method and recognized stock-based compensation expense,the net loss for the year ended 

 

F-16

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**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

December 31, 2002 would have been $(652,115) instead of$(537,615), as reported. Options for 500,000 shares were cancelled in 2004 whenreleased by the holder.

 

The Company granted an option to purchase 500,000 shares of commonstock to the president of ICOP in 2003. The Company valued the option using theintrinsic value method and recognized $90,000 in stock-based compensationexpense in 2003. These options were cancelled in 2004 when the holder of theoptions resigned.

 

The Company granted options to purchase a total of 800,000 shares ofcommon stock to three employees in 2004 and extended the term of options heldby another employee. The Company valued the option at $-0- using the intrinsicvalue method, which calculates compensation expense based on the difference, ifany, on the date of the grant, between the fair value of the stock and theoption exercise price. Had the Company valued the options under the fair-valuemethod and recognized stock-based compensation expense, the net loss for theyear ended December 31, 2004 would have been $(2,180,513) instead of$(1,992,513), as reported.

 

The Company also granted options to purchase 100,000 shares of commonstock to two contractors in 2004. The Company valued the options under thefair-value method and recognized stock-based compensation expense totaling$5,000 in 2004. Pro forma effect of fair value treatment of stock options wouldbe as follows:

 
| ** **               | ** ** | **Years ended December 31,** | ** ** | **May 24, 2004  (Inception)  through  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                          | ** ** | **2003**                                                       | ** ** | **2004** | ** ** |
| Net loss, as reported    |       | $                                 | (1,992,513 | )                                                              | $          | (4,343,042 | ) | $ | (6,873,170 | ) |
| Stock-based compensation |       | (188,000                          | )          | —                                                         |       | (302,500 | ) |
| Pro forma                |       | $                                 | (2,180,513 | )                                                              | $          | (4,343,042 | ) | $ | (7,175,670 | ) |

 
| ** **                        | ** ** | **Options Outstanding and   Exercisable** | ** ** | **Weighted Average**          | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **Number   of Shares**                    | ** ** | **Exercise Price  Per Share** | ** ** | **Exercise Price  Per Share** | ** ** |
| Balance at May 24, 2002      |       | —                                    |       | $                             | —     |   | $ | — |   |
| Options granted                   |       | 2,000,000                                 |       | $                             | 1.00       |   | $ | 1.00 |   |
| Options exercised                 |       | —                                    |       | $                             | —     |   | $ | — |   |
| Options canceled                  |       | —                                    |       | $                             | —     |   | $ | — |   |
| Balance at December 31, 2002 |       | 2,000,000                                 |       | $                             | 1.00       |   | $ | 1.00 |   |
| Options granted                   |       | 500,000                                   |       | $                             | 1.00       |   | $ | 1.00 |   |
| Options exercised                 |       | —                                    |       | $                             | —     |   | $ | — |   |
| Options canceled                  |       | —                                    |       | $                             | —     |   | $ | — |   |
| Balance at December 31, 2003 |       | 2,500,000                                 |       | $                             | 1.00       |   | $ | 1.00 |   |
| Options granted                   |       | 900,000                                   |       | $                             | 1.00       |   | $ | 1.00 |   |
| Options exercised                 |       | (100,000                                  | )          | $                             | 1.00       |   | $ | 1.00 |   |
| Options canceled                  |       | (1,000,000                                | )          | $                             | 1.00       |   | $ | 1.00 |   |
| Balance at December 31, 2004 |       | 2,300,000                                 |       | $                             | 1.00       |   | $ | 1.00 |   |

 

F-17

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**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

**Note 8: Commitments**

 

***Operating LeaseArrangements***

 

The Company leases office space in Overland Park, Kansas under anoperating lease expiring in 2006. Future minimum payments due under thenoncancelable lease are as follows:

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2005                              |       | $          | 55,962     |   |
| 2006                              |       | 55,962     |       |
|                              |       | $          | 111,924    |   |

 

Rent expense was $99,343, $79,128 and $194,677 for the years ended December 31,2004 and 2003 and the period from May 24, 2002 (inception) through December 31,2004, respectively.

 

***Royalty Payments***

 

The Company agreed to pay a royalty payment of $100 per unit for thefirst 1,000 in-car video units sold and has agreed to pay a royalty of $20 perunit for all video units sold using a specific portion of current software.

 

**Note 9: Gain on Restructure of TradeDebt**

 

In June 2004, the Company negotiated a reduction of $471,707 inthe amount it had been billed by a contractor in 2003 for research anddevelopment costs. Accounts payable have been reduced by this amount. A gain of$471,707 is reflected in the Statement of Operations for the year ended December 31,2004.

 

**Note 10: Subsequent Events**

 

Subsequent to December 31, 2004, the Company granted options topurchase a total of 1,350,000 shares of common stock to six employees andcancelled options for 50,000 shares when the holder resigned. The Companyvalued the option at $-0- using the intrinsic value method, which calculatescompensation expense based on the difference, if any, on the date of the grant,between the fair value of the stock and the option exercise price. Had theCompany valued the options under the fair-value method, the stock-basedcompensation expense to be recognized would be approximately $115,745.

 

There were options to purchase 3,600,000 shares of common stockoutstanding as of March 11, 2005.

 

On December 17, 2004, the Company entered into a letter of intentwith an investment company to manage a firmly underwritten secondary offeringof common stock of approximately $10 million at a price to be determined.Subsequent to December 31, 2004, the Company received bridge loans in theamount of $2.2 million, which are expected to be repaid from proceeds ofthe proposed offering.

 

At a special meeting held Feburary 28, 2005, shareholders approveda one-for-ten reverse split of the Company’s common and preferred stock. Theeffect of this change has not been reflected in the financial statements.

 

F-18

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