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

**Washington, D.C. 20549**

 

**Form 10-KSB/A-5**

 

**(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.) |

 

**16801 W. 116thStreet, Lenexa, KS 66219**

(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 effective March 10, 2005.

 

 

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**Explanatory Note**

 

ICOP Digital, Inc. is filing this Amendment No. 3 to its Annual Report on Form 10-KSB for the year ended December 31, 2004 (the “Annual Report”) to restate its financial statements for the year ended December 31, 2004 to correct errors identified during a regulatory review of the Company’s financial statements and reflect certain corresponding changes described below.  There was no net effect on cash provided by financing activities, cash used in operating or investing activities or net capital as a result of these errors.

 

Shareholders of the Company approved a one share for ten shares reverse split of the Company’s common and preferred stock effective March 10, 2005.  The effect of this reverse stock split should have been included in the financial statements that were originally dated March 11, 2005.  This restatement changes share totals, share and option prices and earnings per share amounts throughout these financial statements to a post-split basis, as if the reverse split had occurred at the beginning of the periods presented.

 

The Company received subscriptions for 25,000 post-split shares of convertible preferred stock during the first quarter of 2004 and received payments totaling $1,099,998 for 18,333 of those post-split shares.  In December 2004, the Company issued another 6,667 post-split shares for no additional consideration to one of the original subscribers to settle a dispute.  The Company recorded these transactions as the sale of 25,000 post-split shares of preferred stock for total proceeds of $1,099,998.  This restatement separates the two transactions, records a deemed dividend for the benefit provided by the conversion feature of the preferred stock and records an expense for the settlement of the dispute.

 

For the first component, the revised analysis of the beneficial conversion feature used as comparable fair value of common stock, the price received for most of the sales of common stock during 2003 and 2004, $10.00 per post-split share.  A share of the preferred stock can be converted into eight shares of common stock, so the $60.00 per post-split share price is equivalent to a common stock price of $7.50 per post-split share, a difference of $2.50 per post-split common share.  On an as converted basis, for the 200,000 post-split common shares, this calculation results in a value of the beneficial conversion feature of $500,000.  The preferred stock is immediately convertible to common stock, so this value was immediately recorded as a deemed dividend to increase the net loss available to common shareholders for the year ended December 31, 2004.

 

For the second component, the investor had subscribed for 13,334 post-split preferred shares during the first quarter of 2004.  The investor paid half of the subscription price or $400,000, at that time.  A dispute subsequently arose over the terms of payment for the remaining shares subscribed.  The Company issued an additional 6,667 post-split shares to the investor to settle this dispute during the fourth quarter of 2004.  The Company has re-stated its financial statements by recording an operating expense equal to the unpaid subscription price of $400,000 and increasing paid in capital by the same amount.  Originally, the Company had booked the sale of the entire 13,334 post-split shares of convertible preferred stock for $400,000, the total amount of cash received for the shares.

 

A discussion of the restatement is included in Note 11 to the financial statements included with this amendment. Changes have also been made to the following items in this amendment as a result of the restatement:

 

Part II                Item 5                Market for Common Equity and Related Stockholder Matters

 

Item 7                Financial Statements

 

Item 8a          Controls and Procedures

 

This Amendment does not reflect events that have occurred after the April 6, 2005 filing date of the Annual Report on Form 10-K that the Company originally filed with the Securities and Exchange Commission, or modify or update the disclosures presented in the original Form 10-K, except to reflect the corrections described above.  Accordingly, this Form 10-K/A should be read in conjunction with our filings with the Securities and Exchange Commission subsequent to the filing of the original Form 10-K.

 

 

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.

 

3

 

**Item 1**.  Description of Business.

** **

**CompanyHistory**

 

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 March 2005  wecompleted a ten shares for one share reverse split of our common and preferredstock.  The effect of this change inshare totals is reflected in this document, except for the financial statementsin Item 7 which include 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 offerswhat we 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 is characterized ingeneral by a continual evolution of technology that enhances both security andconvenience at increasingly lower costs.  Governments and private industry in the UnitedStates and worldwide are actively seeking to develop new products and servicesto 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 departments and emergency medicalpersonnel;

 

•                  *Operators of critical**assets and facilities*suchas banking and financial institutions, buildings, energy and chemical sites(gas, electric power, water and nuclear power plants), transportationfacilities (rail, road transportation, marine transportation and airports),telecommunications facilities, government facilities, bridges, dams, borderpatrol, seaports, federal monuments and national icons; and

 

•                  *Privateindustry.*

 

***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 the worldare applying video technology to many facets of police operations by equippingvehicles with video recorders, monitoring public areas and recording bookingand 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:

 

•                  poorvideo and audio quality that makes identification difficult;

•                  highfailure rates under normal circumstances and especially when used in extremetemperatures, resulting in lost data and high maintenance costs;

 

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•                  dangerto the officer in the event of an accident as the in-car unit and in some casesthe cameras may become projectiles because of their installation constraints;

•                  occupationof valuable space in the trunk and cab;

•                  excessivetime required to evaluate and catalog recorded material;

•                  significantphysical space for storage of the in-car unit and the data itself;

•                  lackof effective zoom capabilities; and

•                  limitedarea coverage when camera positioning is fixed.

 

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 than analogvideo, including, on every frame, the date and officer name, traffic radaroutput, GPS coordinates, incident identification and status of emergency lightsand 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 system addresses the deficiencies of analog videotechnology by providing all the advantages described above whiledifferentiating itself from competing digital systems by offering what webelieve to be a superior product, at a lower price and with superior customersupport.  We believe the ICOP Model 20/20offers the highest quality digital system on the market, with the followingcharacteristics:

 

•                  *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*:

•                  Continuousloop recording 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);

•                  Upto three cameras per vehicle, two of which can record simultaneously, withmultiple angles and zoom capabilities;

•                  Password-protectedfiles;

•                  Built-inGPS, with continuous latitude/longitude display, allowing exact “marking” ofevent locations on every frame of video;

•                  Radarequipment interface (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 *ICOPModel 20/20* also requires for operation an adapter (hardware used to download datafrom vehicle-grade hard drive) and The *B.O.S.S*. (BackOffice System Server), an industrial-grade computer that includes the preloaded,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:

 

•                  identifyand respond to emerging technological trends in related markets;

•                  developsolutions to customers’ changing needs; and

•                  improveour *ICOP Model 20/20*by adding features andfunctionality 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 and recognitionof possibly hostile intruders, large areas could be efficiently monitored withminimal human involvement.

 

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

 

•                  reducedsecurity costs;

•                  fewerimages to archive reducing storage requirements;

•                  high-compressionratio for storage of high-resolution images, resulting in high integrity ofdata, high speed data transmission and lower storage requirements;

•                  fastersearches through recorded information;

•                  lowerbandwidth to support networked cameras;

•                  advancedcapabilities such as motion detection and stabilization, with encryption;

•                  designflexibility for development of products for multiple applications sold atmultiple price points;

•                  reductionof human error and human oversight; and

•                  wired,fiber and wireless media, greatly enhancing expandability.

 

**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 alllevels of city, county, state and federal law enforcement agencies.  Our marketing efforts include advertising inpolice magazines, direct mailings to law enforcement agencies and participationin industry trade shows, 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-friendlywebsite to facilitate sharing of digital video files for training purposes,provide password-protected access to the site to obtain software updates andallow real time, 24/7 communication with technical support personnel.  We also plan to include our products in directmail industry catalogs and to secure endorsements from respected lawenforcement 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 important need.  To support sales efforts, we also producepromotional materials that include brochures, video presentations, data sheetsand 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 therequest for information, we assess the potential customer’s needs, makepresentations and product demonstrations at the customer’s place of business,present a formal proposal and negotiate a contract.  The decision to purchase is typically made bya group of people including the chief of police or sheriff but may also includepolitical decision-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;

•                  productquality and reliability; and

•                  customerservice and 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 newtechnology, 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 of semiconductorchips 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 thestylistic use 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 lastreported sale 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:

 

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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 of 18,333shares of Series A Preferred Stock and 146,664 Series A warrants for$1,099,998. In December 2004, we issued an additional 6,667 shares of Series APreferred Stock and 53,336 Series A warrants to settle a dispute.

 

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 

 

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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 after the effect of the one share for ten share reverse split that was approved by shareholders on February 28, 2005 and effective March 10, 2005.

 

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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**.

 

**Evaluation of DisclosureControls and Procedures**

 

ICOP Digital, Inc. (the “Company”)maintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms, and that such information isaccumulated and communicated to the Company’s management, including our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate,to allow timely decisions regarding required financial disclosure.

 

In connection with thepreparation of this Annual Report on Form 10-KSB, the Company carried outan evaluation under the supervision and with the participation of the Company’smanagement, including the CEO and CFO, as of December 31, 2004 of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures, as such term is defined under Rules 13a-15(e) and15d-15(e) under the Exchange Act. Based upon this evaluation, the CEO and CFOconcluded that, as of December 31, 2004, the Company’s disclosure controlsand procedures were not effective because of the material weaknesses describedbelow under “Identification ofMaterial Weaknesses.”

 

The Company has restatedits previously issued financial statements for the year ended December 31,2004 as described more fully below under “The Restatement.”

 

After giving effect tothe adjustments and other revisions described under “The Restatement,” theCompany’s management believes that the financial statements included in thisAnnual Report on Form 10-KSB fairly present in all material respects theCompany’s financial condition, results of operations and cash flows for theperiods presented and that this Annual Report on Form 10-KSB does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this report.

 

**Identification of MaterialWeaknesses**

 

In connection with theassessment by the Company’s management of the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2004, theCompany’s management identified the material weaknesses described below,certain of which contributed to the restatement of the Company’s financial statementsfor the year ended December 31, 2004, as more fully described under “TheRestatement.”

 

1.    *The Company did not maintain effectivecontrols over the financial reporting process due to an insufficient complementof personnel with a level of accounting knowledge, experience and training inthe application of generally accepted accounting principles commensurate withthe Company’s financial reporting requirements. *The Company’s controls over the completeness, accuracy andreview of its documentation of close processes relating to valuation andissuance of convertible preferred stock were ineffective in their design andexecution. In addition, the Company did not have effective controls over theprocess for identifying and accumulating all required supporting information toensure the completeness of its footnote disclosures, including the support forthe accounting positions taken on non-routine transactions, equity issuancetransactions, stock split and other equity change transactions. These controldeficiencies resulted in certain audit adjustments to and additionaldisclosures made in the 2004 financial statements, as more fully describedunder “The Restatement.” Additionally, the control deficiencies described abovecould individually or in the aggregate result in a material misstatement to theannual or interim financial statements that would not be prevented or detected.Accordingly, management has determined that these control deficienciesconstitute material weaknesses.

 

2.    *The Company did not maintain an effectivecontrol environment.*The financial reporting organizationalstructure was not adequate to support the complexity of the Company. Thiscontrol deficiency indicates that the Company did not maintain an effectivecontrol environment. This control deficiency could result in a materialmisstatement to annual or interim financial statements that would not

 

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be prevented or detected. Accordingly,management has determined that this control deficiency constitutes a materialweakness.

 

**The Restatement**

 

The Company has restated its financialstatements for the year ended December 31, 2004 to correct errors identified as a result of a regulatory review of theCompany’s financial statements and reflect the corresponding changesdescribed below.  There was no net effecton cash provided by financing activities, cash used in operating or investingactivities or net capital as a result of these errors.

 

Shareholders of the Company approveda one share for ten shares reverse split of the Company’s common and preferredstock effective March 10, 2005.  Theeffect of this reverse stock split should have been included in the financialstatements that were originally dated March 11, 2005.  This restatement changes share totals, shareand option prices and earnings per share amounts throughout these financialstatements to a post-split basis, as if the reverse split had occurred at thebeginning of the periods presented.

 

During the first quarter of 2004,the Company received subscriptions for 25,000 post-split shares of convertiblepreferred stock during the first quarter of 2004 and received payments totaling$1,099,998 for 18,333 of those post-split shares.  In December 2004, the Company issued another6,667 post-split shares for no additional consideration to one of the originalsubscribers to settle a dispute.  TheCompany originally recorded these transactions as the sale of 25,000 post-splitshares of preferred stock for proceeds of $1,099,998.  This restatement separates the sales ofpreferred stock completed early in 2004 and records a deemed dividend for thebenefit provided by the included conversion feature. The restatement nextreports the December issuance as a separate transaction and records an expensefor the settlement of the dispute

 

For the first component, we revised ouranalysis of the beneficial conversion feature using as comparable fair value ofour common stock the price received for most of the sales of common stock during2003 and 2004, $10.00 per post-split share. A share of the preferred stock can be converted into eight shares ofcommon stock, so the $60.00 per post-split share price is equivalent to acommon stock price of $7.50 per post-split share, a difference of $2.50 perpost-split common share.  On an asconverted basis, for the 200,000 post-split common shares, this calculationresults in a value of the beneficial conversion feature of $500,000.  The preferred stock is immediatelyconvertible to common stock, so this value was immediately recorded as a deemeddividend to increase the net loss available to common shareholders for the yearended December 31, 2004.

 

For the secondcomponent, the investor had subscribed for 13,334 post-split preferred sharesduring the first quarter of 2004.  Theinvestor paid half of the subscription price or $400,000, at that time.  A dispute subsequently arose over the termsof payment for the remaining shares subscribed. The Company issued an additional 6,667 post-split shares to the investorto settle this dispute during the fourth quarter of 2004.  The Company has re-stated its financialstatements by recording an operating expense equal to the unpaid subscriptionprice of $400,000 and increasing paid in capital by the same amount.  Originally, the Company had booked the saleof the entire 13,334 post-split shares of convertible preferred stock for$400,000, the total amount of cash received for the shares.

 

**Management’****s Remediation Initiatives**

 

In response to thematters discussed under “Identification of Material Weaknesses” above, theCompany plans to continue to review and make necessary changes to the overalldesign of its control environment, including the roles and responsibilities ofeach functional group within the organization and reporting structure, as wellas policies and procedures to improve the overall internal control overfinancial reporting. In particular, the Company has implemented and/or plans toimplement subsequent to December 31, 2004 the specific measures describedbelow to remediate the material weaknesses described above.

 

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The Company’s failure to have a sufficient complement of personnel with alevel of accounting knowledge, experience and training in the application ofgenerally accepted accounting principles commensurate with the Company’s financial reporting requirements contributed to the Company’s failure to maintain effective controls over the financialreporting process. To remediate the material weaknesses described in item 1 of “Identificationof Material Weaknesses,” the Company has implemented or plans to implement themeasures described below, and will continue to evaluate and may in the futureimplement additional measures.

 

1.            General plan for hiringand training of personnel—The Company’splanned remediation measures are intended to generally address this materialweakness by ensuring that the Company will have sufficient personnel withknowledge, experience and training in the application of generally acceptedaccounting principles commensurate with the Company’s financial reporting requirements. These measures includethe following:

 

(a)            The Company’schief financial officer, with assistance from outside consultants, other thanthe Company’s independent registeredpublic accounting firm, has reviewed and will continue to review and adapt theoverall design of the Company’sfinancial reporting structure, including the roles and responsibilities of eachfunctional group within the Company;

 

(b)           The Company retained and intends to continue to retain theservices of outside consultants, other than the Company’s independent registered public accounting firm, withrelevant accounting experience, skills and knowledge, working under the supervisionand direction of the Company’smanagement, to supplement the Company’sexisting accounting personnel;

 

(c)            The Company in July 2005 implemented an enhanced formaltraining process for the training of financial staff and plans to continue thisprocess to ensure that personnel have the necessary competency, training andsupervision for their assigned level of responsibility and the nature andcomplexity of the Company’s business.

 

2.            Accurate preparation andreview of financial statements—The Company’splanned remediation measures are intended to address material weaknessesrelated to the financial close and reporting process that have the potential ofpreventing the accurate preparation and review of the Company’s   financialstatements in future financial periods. The Company’s planned remediation measures include the following:

 

(a)          During the second quarter of 2005, the Company began toimplement, and plans to continue to improve, new and enhanced procedures toensure that non-routine transactions are identified and escalated to enhancedevaluation during the close process to help ensure proper accounting treatment.Specific steps include training and ongoing monitoring of financial staff, andactive review of contracts by knowledgeable financial and legal staff.

 

(b)         The Company plans to enhance in 2005 the communication anddistribution of its accounting policies and procedures and development of aprocess to more effectively accumulate and analyze information required forfinancial statement footnote disclosures.

 

3.               Expansion of board and creation of auditcommittee—In March 2005 weexpanded our board of directors to include additional independent members andcreated an audit committee that includes a financial expert.  We believe the addition of this oversightcommittee will add perspective and expertise to the review of our filings andavoid future errors.

 

**Changes in InternalControl over Financial Reporting**

 

There have not beenchanges in our internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during thefourth quarter of 2004 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting. Thediscussion above under “Management’sRemediation Initiatives” describes the material planned and actual changes tothe Company’s internal control overfinancial reporting subsequent to

 

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December 31, 2004 that have materiallyaffected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

 

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**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                                      |

 

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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 January 2001through 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 not involvingus, Mr. Owen stipulated to a consent decree enjoining him and his agents fromacting as a broker-dealer in Kansas unless registered under the KansasSecurities 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 Business Administration and Accounting fromKansas State University.

 

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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 of InternationalSecurity Management, Inc., a provider of security services to foreign anddomestic government agencies, corporations and individuals in high-riskenvironments.  Since August 1986, he alsohas served as the president and chief executive officer of Transecur, Inc., anon-line, interactive global security information service with offices in theU.S. and Europe.  Mr. Koch also is apartner 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 salesteams selling technology products to Fortune 500 companies and providingsurveillance systems to law enforcement. In particular, from September 2003 through February 2005, Mr. McDugleled the sales team at International Police Technologies, Inc., and from May1999 to September 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.

 

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**Board Classifications and Committees**

 

Our Board ofDirectors is divided into three classes as nearly equal in number aspossible.  Each year the stockholderselect the members of one of the three classes to three-year terms ofoffice.  Currently, Mr. Owen serves as a Class Adirector, whose term expires in 2008, Mr. Ross serves as a Class B director,whose term expires in 2007, and Mr. Mason serves as a Class C director, whose termexpires in 2006.  Messrs. Ashcroft andKoch have been elected to serve as directors until our 2005 annual meeting ofshareholders, at which time they may be nominated to fill a vacancy in one ormore 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;

•                  evaluatingthe qualifications, independence and performance of our independent auditors;

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

•                  reviewingthe design, implementation, adequacy and effectiveness of our internal controlsand critical accounting policies;

•                  overseeingand monitoring the integrity of our financial statements and our compliancewith legal and regulatory requirements as they relate to financial statementsor accounting matters;

•                  withmanagement and our independent auditors, reviewing any earnings announcementsand other public announcements regarding our results of operations; and

•                  preparingthe report that the Securities and Exchange Commission requires in our annualproxy statement.

 

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:

 

•                  approvingthe compensation and benefits of our executive officers;

•                  reviewingthe performance 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:

 

•                  evaluatingthe composition, size and governance of our Board of Directors and itscommittees and make recommendations regarding future planning and theappointment of directors to our committees;

•                  establishinga policy for considering stockholder nominees for election to our Board ofDirectors;

•                  evaluatingand recommending 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 stock ateach 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.

 

24

----

 
| ** **                                                                                |   | ** **      |   | **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 |   |

 

----

(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.

 

25

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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                                                                                                         |       |

 

26

----

 

**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 andChief Executive 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.  Annual compensationincreased 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. Owenvoluntarily reduced her annual salary to $125,000 until we reach accumulatedgross revenues of $8 million, at which time her salary will be restored to$150,000 and $85,561 in accrued but unpaid salary and othercompensation will be 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 stock instead.  As of March 1, 2005 a total of 514,192 shareswere 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

 

27

----

 

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 a non-qualifiedoption granted under the 2002 Plan must be equal to or greater than 85% of thefair market value of the shares of our common stock on the date the option isgranted.  An incentive stock optiongranted to an optionee owning more than 10% of our voting stock must have anexercise price equal to or greater than 110% of the fair market value of ourcommon stock on the date the option is granted.

 

As of March 31, 2005, there wereoutstanding options to purchase 390,000 shares of common stock under the 2002Plan, all of which 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 person derivedan improper personal benefit.  Undercertain circumstances, we may pay expenses (including attorneys’ fees) incurredin defending a civil or criminal action, suit or proceeding in advance to thefinal disposition of the matter. Furthermore, our Articles of Incorporation, asamended, provide for indemnification of our directors, officers, agents,fiduciaries and employees against any claim, liability or expense arisingagainst or incurred by such person because the person is or was a director,officer, fiduciary, or employee of the Company (or because the person served asa director, officer, employee, partner, trustee or agent of another entity atthe request of the Company) to the maximum extent permitted under Colorado law.  Colorado law generally permits a corporationto provide indemnification if the individual: (i) acted in good faith; and(ii) reasonably believed that, in the case of conduct in an officialcapacity, such conduct was in the corporation’s best interests and, in allother cases, that such conduct was at least not opposed to the corporation’sbest interests.  In a criminalproceeding, the person must have had no reasonable cause to believe the person’sconduct 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.

 

28

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**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.  Webelieve that, except as otherwise noted below, each named beneficial owner hassole voting 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 of commonstock to be received upon conversion of preferred stock, or subject to optionsor warrants currently exercisable or exercisable on or before May 30, 2005, aredeemed outstanding for computing the percentage ownership of the person holdingsuch options or warrants, but are not deemed outstanding for computing thepercentage 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 commonstock held by DBM, LP (of which Mr. and Ms. Owen are general partners); 5,000shares of common stock held by Emerson B. Wells, LP (of which Mr. and Ms. Owenare general partners); 25,000 shares of common stock held by MDN, LP (of whichMr. and Ms. Owen are general partners); 2,000 shares of common stock held byMs. 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.

 

29

----

 

**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.  We haverepaid $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-owned byMr. Owen for $50,066 pursuant to a note that accrues no interest and is due andpayable 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 January2004, we acquired ICOPNevada, by merging it with and into a wholly owned subsidiary we formed toeffect the merger (“ICOP Acquisition”).  Inconnection with the merger, we issued approximately 1,457,700 shares of ourcommon stock in exchange for the outstanding shares of ICOP Nevada.

 

ICOP Nevadahad been a privately owned company engaged primarily in the design, developmentand marketing of an in-car digital video recorder system for use in the lawenforcement industry.  At the time of the merger, Mr. Ross was ourprincipal shareholder and served as our sole director and officer.  He also was a director, officer andshareholder of ICOP Nevada.  Mr. Owenheld options to purchase shares of our common stock  He also was a director, officer andshareholder 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 respective stockholders.

 

30

----

 

**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. |

 

31

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**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.

32

 

**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                                      |       | July 7, 2005 |
| Charles A. Ross, Sr.     |       |                                          |       |              |
|                     |       |                                          |       |              |
| /s/ David C. Owen        |       | Director                                      |       | July 7, 2005 |
| David C. Owen            |       | (Principal Executive Officer)                 |       |              |
|                     |       |                                          |       |              |
| /s/ Roger L. Mason       |       | Director                                      |       | July 7, 2005 |
| Roger L. Mason           |       |                                          |       |              |
|                     |       |                                          |       |              |
| /s/ John C. Garrison     |       | Chief Financial Officer                       |       | July 7, 2005 |
| John C. Garrison         |       | (Principal Accounting and  Financial Officer) |       |              |
|                     |       |                                          |       |              |
| /s/ L. Derrick Ashcroft  |       | Director                                      |       | July 7, 2005 |
| L. Derrick Ashcroft      |       |                                          |       |              |
|                     |       |                                          |       |              |
| /s/ Noel Koch            |       | Director                                      |       | July 7, 2005 |
| Noel Koch                |       |                                          |       |              |

 

33

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**INDEX TO FINANCIAL STATEMENTS (RESTATED)**

 
| 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 PublicAccounting Firm**

 

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. Thesefinancial statements 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 includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial 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 financialstatements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 1 to the financial statements, the Company’ssignificant operating losses since inception raise substantial doubt about itsability to continue as a going concern. The financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

As discussed in Notes 1, 7, 10 and 11 to thefinancial statements, certain errors resulting in the understatement of netloss and net loss per share available to common shareholders were discoveredduring a regulatory review of the Company’s financial statements. Accordingly,the Company has re-stated its 2004 financial statements to correct the errors.

 

Cordovano and Honeck LLP

Denver, Colorado

March 11, 2005, except as to Notes 1, 7, 10 and 11, which are June 21,2005

 

F-2

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**BALANCE SHEET**

**DECEMBER 31, 2004**

 
| ** **                                                                                         |   | **Restated  *** |      |
|----------------------------------------------------------------------------------------------------|--------|-----------------|-----------|
| **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, 25,000 shares issued and outstanding  |   | 1,499,998       |      |
| Common stock, no par value; 50,000,000  shares authorized, 1,638,200 shares issued and outstanding |   | 3,221,268       |      |
| Accumulated other comprehensive loss, net  of tax                                                  |   | (117,595        | )         |
| Retained deficit                                                                                   |   | (7,273,170      | )         |
| Total shareholders’ deficit                                                                   |   | (2,669,499      | )         |
|                                                                                               |   | $               | 263,018   |   |

 

----

* See Note 11

 

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** | ** ** |
| ** **                                                                              | ** ** | **Restated ***                    | ** **  | ** **                                                | ** ** | **Restated *** | ** ** |
| ** **                                                                              | ** ** | ** **                        | ** **  | ** **                                                | ** ** | ** ** | ** ** |
| 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 |   |
| Settlement of dispute (Note 7)                                                          |       | 400,000                           |        | —                                                    |       | 400,000 |   |
| Total operating expenses                                                                |       | 2,869,675                         |        | 4,333,377                                                 |       | 7,739,486 |   |
| Loss from operations                                                                    |       | (2,850,773                        | )           | (4,333,377                                                | )          | (7,720,584 | ) |
|                                                                                    |       |                              |        |                                                      |       |   |   |
| 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                                                                |       | (2,392,513                        | )           | (4,343,042                                                | )          | (7,273,170 | ) |
| Income tax provision (Note 6)                                                           |       | —                            |        | —                                                    |       | — |   |
| Net loss                                                                                |       | $                                 | ( 2,392,513 | )                                                         | $          | (4,343,042 | ) | $ | ( 7,273,170 | ) |
| Net loss available to common shareholders  after beneficial conversion feature (Note 7) |       | $                                 | (2,892,513  | )                                                         | $          | (4,343,042 | ) | $ | (7,773,170 | ) |
| Loss per share available to common  shareholders*                                       |       | $                                 | (1.80       | )                                                         | $          | (3.23 | ) |   |   |
| Basic and diluted weighted average common  shares outstanding*                          |       | (1,608,445                        | )      | (1,343,583                                                | )          |   |   |

 

----

*  SeeNote 11

 

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** | ** ** |
| ** **                            | ** ** | **Restated ***                    | ** **  | ** **                                                     | ** ** | **Restated *** | ** ** |
| Net loss                              |       | $                                 | ( 2,392,513 | )                                                              | $          | (4,343,042 | ) | $ | (7,273,170 | ) |
| Other comprehensive loss, net of tax: |       |                              |        |                                                           |       |   |   |
| Foreign currency translation          |       | (42,014                           | )           | (75,581                                                        | )          | (117,595 | ) |
| Comprehensive loss                    |       | $                                 | ( 2,434,527 | )                                                              | $          | (4,418,623 | ) | $ | ( 7,390,765 | ) |

 

----

*  See Note 11

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** | ** ** |
| ** **                                                                                                      | ** ** | **Restated  ****    | ** ** | **Restated  **** | ** **      | **Restated  ****                      | ** ** | ** **   | ** ** | ** ** | ** ** | **Restated  **** | ** ** | **Restated  **** | ** ** |
| Balance at May 24, 2002 (inception)                                                                        |       | —              |       | $                | —          |                                  | —     |         | $          | —     |       | $ | — |   | $ | — |   | $ | — |   |
| June to August 2002, shares sold in  private placement offering ($.10/share) (Note 7)            |       | —              |       | —           | *               | 1,062,000                             |       | 106,200      | *          | —     |       | — |   | 106,200 |   |
| September 2002, shares sold in private  placement offering ($1.00/share) (Note 7)                     |       | —              |       | —           | *               | 100,000                               |       | 100,000      | *          | —     |       | — |   | 100,000 |   |
| October to November 2002, shares sold in  private placement offering ($10.00/share) (Note 7)     |       | —              |       | —           | *          | 15,000                                |       | 150,000      | *          | —     |       | — |   | 150,000 |   |
| December 2002, shares issued in exchange for  public relations services ($10.00/share) (Note 7)       |       | —              |       | —           | *               | 10,000                                |       | 100,000      | *          | —     |       | — |   | 100,000 |   |
| Net loss for the period ended December 31,  2002                                                           |       | —              |       | —           |            | —                                |       | —       |       | —     |       | (537,615 | ) | (537,615 | ) |
| Balance at December 31, 2002                                                                               |       | —              |       | —           |            | 1,187,000                             |       | 456,200      |       | —     |       | (537,615 | ) | (81,415 | ) |
| January to June 2003, shares sold in  private placement offering ($10.00/share) (Note 7)         |       | —              |       | —           | *               | 194,600                               |       | 1,923,500    | *          | —     |       | — |   | 1,923,500 |   |
| February 2003, shares issued in exchange for  equipment installation services ($10.00/share) (Note 7) |       | —              |       | —           | *               | 1,100                                 |       | 11,000       | *          | —     |       | — |   | 11,000 |   |
| February 2003, shares issued in exchange for  design services ($10.00/share) (Note 7)                 |       | —              |       | —           | *               | 5,000                                 |       | 50,000       | *          | —     |       | — |   | 50,000 |   |
| February 2003, shares issued to acquire McCoy’s  Lawline ($10.00/share) (Note 1)                 |       | —              |       | —           | *               | 70,000                                |       | 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                                                                |       | —              |       | —           |            | 1,457,700                             |       | 3,230,700    |       | (75,581    | )          | (4,880,657 | ) | (1,725,538 | ) |
| December 31, 2003, shares issued in conjunction  with merger with ICOP Digital, Inc.                       |       | —              |       | —           |            | 179,000                               |       | (9,432       | )          | —     |       | — |   | (9,432 | ) |
| Balance at December 31, 2003                                                                               |       | —              |       | —           |            | 1,636,700                             |       | 3,221,268    |       | (75,581    | )          | (4,880,657 | ) | (1,734,970 | ) |
| January to December 2004, shares sold in  private placement offering ($10.00/share) (Note 7)     |       | —              |       | —           |            | 41,500                                |       | 395,000      | *          | —     |       | — |   | 395,000 |   |
| February 2003, preferred shares sold in  private placement offering ($60.00/share) (Note 7)           |       | 18,333              |       | 1,099,998        |            | —                                |       | —       | *          | —     |       | — |   | 1,099,998 |   |
| Beneficial conversion feature included in sale of  preferred stock (Note 7)                                     |       | —              |       | —           |            | —                                |       | —       |       | —     |       | — |   | — |   |
| January and July 2004, stock issued in  exercise of stock options ($10.00/share) (Note 7)        |       | —              |       | —           |            | 10,000                                |       | 100,000      | *          | —     |       | — |   | 100,000 |   |
| March 2004, shares returned to divest McCoy’s  Lawline ($10.00/share) (Note 1)                   |       | —              |       | —           |            | (70,000                               | )          | (700,000     | )*         | —     |       | — |   | (700,000 | ) |
| December 2004, preferred stock issued in  settlement of dispute (Note 7)                                        |       | 6,667               |       | 400,000          |            | —                                |       | —       |       | —     |       | — |   | 400,000 |   |
| December 2004, stock issued in exchange for  engineering agreement (Note 7)                           |       | —              |       | —           |            | 20,000                                |       | 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                                                              |       | —              |       | —           |            | —                                |       | —       |       | —     |       | ( 2,392,513 | ) | (1,992,513 | ) |
| Balance at December 31, 2004                                                                               |       | 25,000              |       | $                |  1,499,998 |                                  | 1,638,200  |         | $          | 3,221,268  |       | $ | (117,595 | ) | $ | (7,273,170 | ) | $ | (2,669,499 | ) |

 

----

*    Restated, see Note 1

**   See Note 11

 

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** | ** ** |
| ** **                                                                   | ** ** | **Restated  ***                   | ** ** | ** **                                                | ** ** | **Restated  *** | ** ** |
| Cash flows from operating activities:                                        |       |                              |       |                                                      |       |   |   |
| Net loss                                                                     |       | $                                 | (2,392,513 | )                                                         | $          | (4,343,042 | ) | $ | (7,273,170 | ) |
| 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 |   |
| Preferred stock issued to settle dispute                                     |       | 400,000                           |       | —                                                    |       | 400,000 |   |
| 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 Note 11

 

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, including restatementof share amounts to reflect the one share for ten shares reverse spliteffective March 10, 2005.

 

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 70,000 post-split shares of ICOP commonstock valued at $10.00 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 70,000 post-split shares of ICOP common stock thatthe Company had paid for the original purchase. A loss of $450,000 was recordedfrom this investment in 2003. No gain or loss was recorded in 2004 from thisinvestment or 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 1,457,700 post-split shares of the common stock of VistaExploration Corporation, a Colorado corporation, (“Vista”.) On January 13,2004, the two companies completed the merger. For clarity of disclosure, theaccompanying financial statements have been prepared as if the transaction wascompleted December 31, 2003. The acquisition has been treated as arecapitalization of ICOP-Nevada, with Vista the legal surviving entity. SinceVista had, prior to the recapitalization of ICOP-Nevada, no assets and net liabilities(consisting principally of accounts payable) and no operations, therecapitalization has been accounted for as the sale of 179,000 post-splitshares of ICOP-Nevada common stock for the net liabilities of Vista. Thehistorical financial statements presented herein are those of ICOP-Nevada.Costs of the transaction have been charged to the period. In November 2004,shareholders approved the change of the Colorado corporation name from VistaExploration Corporation (Vista) to ICOP Digital, Inc. (ICOP).

 

***Basis ofPresentation***

 

The accompanying financial statements have been prepared on a goingconcern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. As shown in theaccompanying financial statements, the Company has suffered significant lossessince inception. This factor, among others, may indicate that the Company willbe unable 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 anddevelopment activities and other ongoing operations of the Company. However,the Company will be dependent upon the success of the planned registered commonstock offering to continue operations through the end of the year, and beyond.

 

***Error corrections (Restated, see Note 11)***

** **

Correction of the following errors had noimpact on the Company’s net capital or cash flows. The errors were discovered asa result of a regulatory review of the Company’s financial statements.

 

The accompanying financial statements havebeen re-stated for all periods presented to reflect the reverse stock splitdescribed in Note 10 as if the split had occurred at the beginning of theperiods presented. According to generally accepted accounting principles,per-share computations resulting from a reverse stock split occurring afteryear-end but before the issuance of the applicable financial statements, shouldbe based on the new number of shares. Accordingly, all references in theaccompanying financial statements to common stock or preferred stock are on apost-split basis.

 

The 2004 financial statements have also beenre-stated to reflect the benefit to the Company’s preferred shareholders of theirright to convert 25,000 post-split shares of preferred stock into common. (Seealso Note 7). This error, which did not affect the Company’s accounts, wascorrected by treating the amount of the benefit to the preferred shareholders,totalling $500,000, as a non-cash dividend that increased the net loss tocommon shareholders.

 

In December 2004, the Company issued 6,667post-split shares of convertible preferred stock, valued at $400,000, to settlea dispute. The 2004 financial statements have been re-stated to record thistransaction by increasing 2004 expenses by $400,000 with a corresponding creditto paid-in-capital.

 

***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 the reportingperiod. 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 during thatperiod the Company repaid $104,000. $200,000 was owed to one shareholder as of December 31,2003. The Company recorded interest expense of $13,447, $5,444 and $20,072 onthe notes for the years ended December 31, 2004 and 2003 and the periodfrom May 24, 2002 (inception) through December 31, 2004,respectively. Accrued interest payable to a related party was $816, and $2,762as of December 31, 2004 and 2003, respectively. During the year ended December 31,2004, the $200,000 shareholder note was repaid including accrued interest andother shareholders advanced $295,066 to the Company under primarilynon-interest bearing demand notes against which the Company repaid $165,000. Inaddition, another shareholder loaned the company $9,000 which remained outstandingat 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 70,000 post-split shares of ICOP common stock that theCompany had paid for the original purchase. No gain or loss was recorded in2004 from this investment 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: Debt**

 

Long-term debt at December 31, 2004consisted 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’ Deficit (Restated,see Note 11)**

 

***Preferred Stock***

 

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

 

From January through March 2004, the Company sold 18,333 post-splitshares of convertible preferred stock for total proceeds of $1,099,998. Eachshare can be converted into eight shares of common stock at any time by writtennotice from the shareholder and can be converted at the same rate by theCompany if it so elects, upon completion of an offering of common stock withgross proceeds of at least $10,000,000. Each share of preferred stock alsocarries a warrant that allows the purchase of an additional eight common sharesat a price of $18,00 per share. In December 2004, the Company issued anadditional 6,667 post-split shares of this convertible preferred stock insettlement of a dispute and recorded an operating expense of $400,000.

 

In accordance with Emerging Issues Task Force Issue 98-5, Accountingfor Convertible Securities with a Beneficial Conversion Features orContingently Adjustable Conversion Ratios (“EITF 98-5”), the Company recognizedan imbedded beneficial conversion feature present in the convertible preferred stock.The Company recognized a total of $500,000, which is equal to the intrinsicvalue of the imbedded beneficial conversion feature, to additional paid-incapital and a deemed dividend to the convertible preferred stock holders. Sincethe preferred shares were convertible at the date of issuance, the deemed dividendto the preferred shareholders attributed to the beneficial conversion featurehas been recognized in full at the date the convertible preferred stock wasissued, resulting in an increase in net loss to common shareholders of $500,000for the year ended December 31, 2004.

 

***Stock Issued forCash***

 

From June through August 2002, the Company sold an aggregateof 1,062,000 post-split shares of its common stock to founders for a total of$106,200, or $.10 per share. The shares of common stock were sold in theabsence of objectively determinable values.

 

In September 2002, the Company sold an aggregate of 100,000 post-splitshares of its common stock to founders for a total of $100,000, or $1.00 pershare. The shares of common stock were sold in the absence of objectivelydeterminable values.

 

During October and November 2002, the Company sold 15,000 post-splitshares of common stock for proceeds of $150,000.

 

 

 

F-15

----

 

**ICOP DIGITAL, INC.**

**(formerly Vista Exploration Corporation)**

**(a development stage company)**

**NOTES TOFINANCIAL STATEMENTS**

 

                In 2003, the Company sold 194,600 post-split sharesof common stock for net proceeds of $1,923,500, after deducting offering coststotaling $22,500.

 

In 2004, the Company sold 41,500 post-split shares of its common stockfor a total of $395,000. In January and July 2004, the Company also sold10,000 post-split shares of its common stock for a total of $100,000 throughthe exercise of stock options granted in 2002.

 

 

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

 

In December 2002, the Company issued 10,000 post-split shares ofits common stock for public relations services. The shares were valued by theBoard of Directors at $10.00 per share based upon contemporaneous sales ofstock for cash to unrelated third parties. The Company recorded compensationexpense in the amount of $100,000.

 

In February 2003, the Company issued 1,100 and 5,000 post-splitshares of its common stock for equipment installation and design services. Theshares were valued by the Board of Directors at $10.00 per share based uponcontemporaneous sales of stock for cash to unrelated third parties. The Companyrecorded an asset and compensation expense in the amounts of $11,000 and$50,000, respectively.

 

In December 2004, the Company issued 20,000 shares of its commonstock for engineering services. The shares were valued by the Board ofDirectors at $10.00 per share based upon contemporaneous sales of stock forcash to unrelated third parties. The Company recorded compensation expense inthe 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 200,000 post-split sharesof common 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

----

 

**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. An option for 50,000 post-split shares was cancelledin 2004 when released by the holder.

 

The Company granted an option to purchase 50,000 post-split shares ofcommon stock to the president of ICOP in 2003. The Company valued the optionusing the intrinsic value method and recognized $90,000 in stock-basedcompensation expense in 2003. This option was cancelled in 2004 when the holderof the option resigned.

 

The Company granted options to purchase a total of 80,000 post-splitshares of common stock to three employees in 2004 and extended the term of theoption held by another employee. The Company valued the options at $-0- usingthe intrinsic value method, which calculates compensation expense based on thedifference, if any, on the date of the grant, between the fair value of thestock and the option exercise price. Had the Company valued the options underthe fair-value method and recognized stock-based compensation expense, the netloss for the year ended December 31, 2004 would have been $(2,180,513)instead of $(1,992,513), as reported.

 

The Company also granted options to purchase 10,000 post-split sharesof common stock to two contractors in 2004. The Company valued the optionsunder the fair-value method and recognized stock-based compensation expensetotaling $5,000 in 2004. 

 

Pro forma effect of fair valuetreatment of stock options would be as follows:

 
| ** **               | ** ** | **Years ended December 31,** | ** ** | **May 24, 2004  (Inception)  through  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                          | ** ** | **2003**                                                       | ** ** | **2004** | ** ** |
| ** **               | ** ** | **Restated  ***                   | ** ** | ** **                                                     | ** ** | **Restated  *** | ** ** |
| Net loss, as reported    |       | $                                 | (2,392,513 | )                                                              | $          | (4,343,042 | ) | $ | (7,273,170 | ) |
| Stock-based compensation |       | (188,000                          | )          | —                                                         |       | (302,500 | ) |
| Pro forma                |       | $                                 | (2,580,513 | )                                                              | $          | (4,343,042 | ) | $ | (7,575,670 | ) |

 
| ** **                        | ** ** | **Options Outstanding and   Exercisable (post-split)** | ** ** | **Post-split  Weighted Average** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **Number   of Shares**                                 | ** ** | **Exercise Price  Per Share**    | ** ** | **Exercise Price  Per Share** | ** ** |
| ** **                        | ** ** | **Restated  ***                                        | ** ** | **Restated  ***                  | ** ** | **Restated  *** | ** ** |
| Balance at May 24, 2002      |       | —                                                 |       | $                                | —     |   | $ | — |   |
| Options granted                   |       | 200,000                                                |       | $                                | 10.00      |   | $ | 10.00 |   |
| Options exercised                 |       | —                                                 |       | $                                | —     |   | $ | — |   |
| Options canceled                  |       | —                                                 |       | $                                | —     |   | $ | — |   |
| Balance at December 31, 2002 |       | 200,000                                                |       | $                                | 10.00      |   | $ | 10.00 |   |
| Options granted                   |       | 50,000                                                 |       | $                                | 10.00      |   | $ | 10.00 |   |
| Options exercised                 |       | —                                                 |       | $                                | —     |   | $ | — |   |
| Options canceled                  |       | —                                                 |       | $                                | —     |   | $ | — |   |
| Balance at December 31, 2003 |       | 250,000                                                |       | $                                | 10.00      |   | $ | 10.00 |   |
| Options granted                   |       | 90,000                                                 |       | $                                | 10.00      |   | $ | 10.00 |   |
| Options exercised                 |       | (10,000                                                | )          | $                                | 10.00      |   | $ | 10.00 |   |
| Options canceled                  |       | (100,000                                               | )          | $                                | 10.00      |   | $ | 10.00 |   |
| Balance at December 31, 2004 |       | 230,000                                                |       | $                                | 10.00      |   | $ | 10.00 |   |

 

----

*  See Note 11

 

F-17

----

 

**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 (Restated, seeNote 11)**

 

Subsequent to December 31, 2004, the Company granted options topurchase a total of 165,000 post-split shares of common stock to six employeesand cancelled an option for 5,000 post-split shares when the holder resigned.The Company valued the options at $-0- using the intrinsic value method, whichcalculates compensation expense based on the difference, if any, on the date ofthe grant, between the fair value of the stock and the option exercise price.Had the Company valued the options under the fair-value method, the stock-basedcompensation expense to be recognized would be approximately $157,245.

 

There were options to purchase 390,000 post-split shares of commonstock outstanding as of June 21, 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 stockeffective March 10, 2005. The effect of this change has been reflected in thefinancial statements.

 

On April 7, 2005, a director loaned $300,000to the Company to accelerate manufacturing of inventory.  This note is due on closing of the proposedsecondary stock offering or in October 2005 and accrues interest atapproximately 8% per annum.

 

On April 12, 2005, the Company entered into alease for office and warehouse space. The term of the lease is five years, through June 30, 2010, with twofive-year option renewal terms.  Thebasic rent is $176,000 per year plus insurance, taxes, utilities andmaintenance.  In conjunction with thislease, the Company negotiated the termination of the lease on the previousfacilities.

 

F-18

----

 

**Note 11:  Restatement of Financial Statements**

 

The Company has restated itsfinancial statements for the year ended December 31, 2004 to correcterrors identified during a regulatoryreview of the Company’s financial statements and reflect certaincorresponding changes described below. There was no net effect on cash provided by financing activities, cashused in operating or investing activities or net capital as a result of theseerrors.

 

Asdescribed in Note 10, Subsequent Events, shareholders of the Company approved aone share for ten shares reverse split of the Company’s common and preferredstock effective March 10, 2005.  Theeffect of this reverse stock split should have been included in the financialstatements that were originally dated March 11, 2005.  This restatement changes share totals, shareand option prices and earnings per share amounts throughout these financialstatements to a post-split basis, as if the reverse split had occurred at thebeginning of the periods presented.

 

Asdescribed in Note 7, Shareholders’ Deficit, Preferred Stock, the Companyreceived subscriptions for 25,000 post-split shares of convertible preferredstock and received payments totaling $1,099,998 for 18,333 of those post-split shares.  In December 2004, the Company issuedanother 6,667 post-split shares for no additional consideration to one of theoriginal subscribers to settle a dispute. The Company originally recorded these transactions as the sale of 25,000post-split shares of preferred stock for proceeds of $1,099,998.  This restatement separates the sales ofpreferred stock completed early in 2004 and records a deemed dividend for thebenefit provided by the included conversion feature. The restatement nextreports the December issuance as a separate transaction and records anexpense for the settlement of the dispute.  

 

For the first component, werevised our analysis of the beneficial conversion feature using as comparablefair value of our common stock the price received for most of the sales ofcommon stock during 2003 and 2004, $10.00 per post-split share.  A share of the preferred stock can beconverted into eight shares of common stock, so the $60.00 per post-split shareprice is equivalent to a common stock price of $7.50 per post-split share, adifference of $2.50 per post-split common share.  On an as converted basis, for the 200,000post-split common shares, this calculation results in a value of the beneficialconversion feature of $500,000.  Thepreferred stock is immediately convertible to common stock, so this value wasimmediately recorded as a deemed dividend to increase the net loss available tocommon shareholders for the year ended December 31, 2004.

 

For the second component, theinvestor had subscribed for 13,334 post-split preferred shares during the firstquarter of 2004.  The investor paid halfof the subscription price or $400,000, at that time.  A dispute subsequently arose over the termsof payment for the remaining shares subscribed. The Company issued an additional 6,667 post-split shares to the investorto settle this dispute during the fourth quarter of 2004.  The Company has re-stated its financialstatements by recording an operating expense equal to the unpaid subscriptionprice of $400,000 and increasing paid in capital by the same amount.

 

F-19

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Originally, the Company hadbooked the sale of the entire 13,334 post-split shares of convertible preferredstock for $400,000, the total amount of cash received for the shares.

 

The following table shows theeffect of the restatement:

 
| ** **                                                                        | ** ** | **As Previously** | ** ** | ** **      | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                                                                        | ** ** | **Reported**      | ** ** | **As Restated** | ** ** |
| **As of December 31, 2004:**                                                 |       |              |       |            |       |
| Shareholders’ Deficit                                                        |       |              |       |            |       |
| Preferred stock                                                                   |       | $                 | 1,099,998  |            | $          | 1,499,998 |   |
| Common stock                                                                      |       | 3,221,268         |       | 3,221,268       |       |
| Retained deficit                                                                  |       | (6,873,170        | )          | (7,273,170      | )          |
| Total Shareholders’ deficit                                                  |       | (2,669,499        | )          | (2,669,499      | )          |
| Preferred shares issued and outstanding                                           |       | 250,000           |       | 25,000          |       |
| Common shares issued and outstanding                                              |       | 16,382,000        |       | 1,638,200       |       |
|                                                                              |       |              |       |            |       |
| **For the year ended December 31, 2004:**                                    |       |              |       |            |       |
| Operating expenses:                                                               |       |              |       |            |       |
| Settlement of dispute                                                             |       | $                 | —     |            | $          | (400,000 | ) |
| Loss from operations                                                              |       | (2,450,773        | )          | (2,850,733      | )          |
| Net Loss                                                                          |       | (1,992,513        | )          | (2,392,513      | )          |
| Deemed dividend - beneficial conversion  feature                                  |       | —            |       | (500,000        | )          |
| Net loss available to common shareholders after  beneficial conversion feature    |       | (1,992,513        | )          | (2,892,513      | )          |
| Loss per share available to common  shareholders                                  |       | (0.12             | )          | (1.80           | )          |
| Basic and diluted weighted average common Shares  outstanding                     |       | 16,084,450        |       | 1,608,445       |       |
| Comprehensive loss                                                                |       | $                 | (2,034,527 | )               | $          | (2,434,527 | ) |
| Cash flows from operating activities                                              |       |              |       |            |       |
| Net loss                                                                          |       | (1,992,513        | )          | (2,392,513      | )          |
| Preferred stock issued to settle dispute                                          |       | —            |       | 400,000         |       |
| Net cash used in operating activities                                             |       | (1,225,466        | )          | (1,225,466      | )          |
| Net cash used in investing activities                                             |       | (535,408          | )          | (535,408        | )          |
| Net cash provided by financing activities                                         |       | 1,646,336         |       | 1,646,336       |       |
|                                                                              |       |              |       |            |       |
| **For the period from May 24, 2002  (inception) through December 31, 2004:** |       |              |       |            |       |
| Operating expenses:                                                               |       |              |       |            |       |
| Settlement of dispute                                                             |       | $                 | —     |            | $          | 400,000 |   |
| Loss from operations                                                              |       | (7,320,584        | )          | (7,720,584      | )          |
| Net Loss                                                                          |       | (6,873,170        | )          | (7,273,170      | )          |
| Net loss available to common shareholders after  beneficial conversion            |       | (6,873,170        | )          | (7,773,170      | )          |
| Comprehensive loss                                                                |       | (6,990,765        | )          | (7,390,765      | )          |
| Cash flows from operating activities                                              |       |              |       |            |       |
| Net loss                                                                          |       | (6,873,170        | )          | (7,273,170      | )          |
| Preferred stock issued to settle dispute                                          |       | —            |       | 400,000         |       |
| Net cash used in operating activities                                             |       | (3,542,861        | )          | (3,542,861      | )          |
| Net cash used in investing activities                                             |       | (593,946          | )          | (593,946        | )          |
| Net cash provided by financing activities                                         |       | 4,141,049         |       | 4,141,049       |       |
|                                                                              |       |              |       |            |       |
| **Quarterly Results (Unaudited)**                                                 |       |              |       |            |       |
| For the quarter ended March 31, 2004  (Unaudited):                           |       |              |       |            |       |
| Net Loss                                                                          |       | $                 | (943,617   | )               | $          | (943,617 | ) |
| Deemed dividend - beneficial conversion  feature                                  |       | —            |       | (500,000        | )          |
| Net loss available to common shareholders                                         |       |              |       |            |       |
| after beneficial conversion                                                       |       | (943,617          | )          | (1,443,617      | )          |
| Loss per share available to common  shareholders                                  |       | (0.58             | )          | (0.88           | )          |
|                                                                              |       |              |       |            |       |
| For the quarter ended June 30, 2004  (Unaudited):                            |       |              |       |            |       |
| Net Loss                                                                          |       | (37,052           | )          | (37,052         | )          |
| Net loss available to common shareholders after  beneficial conversion            |       | (37,052           | )          | (37,052         | )          |
| Loss per share available to common  shareholders                                  |       | (0.02             | )          | (0.02           | )          |
|                                                                              |       |              |       |            |       |
| For the quarter ended September 30,  2004 (Unaudited):                       |       |              |       |            |       |
| Net Loss                                                                          |       | (770,039          | )          | (770,039        | )          |
| Net loss available to common shareholders after  beneficial conversion            |       | (770,039          | )          | (770,039        | )          |
| Loss per share available to common  shareholders                                  |       | (0.48             | )          | (0.48           | )          |

 

F-20

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