10-K 1 vpgi06q4.txt 10-K FOR FISCAL YEAR ENDED JUNE 30, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2006 Commission file number 000-13225 VPGI CORP. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Texas 75-1975147 (State of incorporation) (I.R.S. Employer Identification No.) 700 Gemini, Suite 100, Houston, TX 77056 (Address of principal executive offices) (Zip Code) (281) 488-3883 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.001 per share Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ____ NO X Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ____ NO X Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate by check mark, if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in rule 12b-2 of the Exchange Act. Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer X Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). YES ____ NO X As of December 31, 2005 the aggregate market value of the common stock held by non-affiliates of the Registrant (84,316 shares) was approximately $210,790, based on the closing sale price of the Common Stock as reported for such date on the OTC Bulletin Board[R] ($2.50). Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock, based on corporate records and Schedule 13D/G filings, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. (All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.) At September 21, 2006 there were 139,191 shares of Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: exhibits shown on the Exhibit Index. GENERAL INDEX Page Number ITEM l. BUSINESS............................................. 4 ITEM 1A. RISK FACTORS......................................... 6 ITEM 1B. UNRESOLVED STAFF COMMENTS........................... 11 ITEM 2. PROPERTIES.......................................... 11 ITEM 3. LEGAL PROCEEDINGS................................... 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 12 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.......................................... 12 ITEM 6. SELECTED FINANCIAL DATA............................. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.................. 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................... 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 20 ITEM 9A. CONTROLS AND PROCEDURES............................. 20 ITEM 9B. OTHER INFORMATION................................... 20 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 21 ITEM 11. EXECUTIVE COMPENSATION.............................. 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......... 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 25 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.............. 26 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES............. 26 SIGNATURES.................................................... 27 EXHIBIT INDEX................................................. 57 VPGI CORP. PART I ITEM l. BUSINESS (a) General Development of Business VPGI Corp. (the "Company") was incorporated in Texas on July 13, 1984. We filed an S-18 registration statement in November 1984 and completed the registered offering in January 1985. In 1996 we introduced a digital media device (set top box), which enabled the display of Internet content on a television. In 1998 we added design and cabling services for voice/data networks and in 1999 we added computer telephony integration (CTI) capabilities to our product offerings with customized call center solutions. In December 2002, due to our financial position and the business outlook for the foreseeable future, we discontinued normal operations. All of our directors resigned, except for the CEO who remained as the sole director, and we laid off all of our remaining officers and employees. We conducted no business operations until the second fiscal quarter ended December 31, 2004. In November 2004 we acquired Venture Pacific Group, Inc. ("VPG"). Since the acquisition, we have explored the licensing of radio frequency identification ("RFID") applications in specialty areas, such as anti- counterfeiting of drugs, medical devices, and logistical systems, concentrating on Asian deployment, primarily to China. We have also participated in other business ventures and opportunities as they have presented themselves. For example, our revenues during fiscal year 2005 were derived primarily from the telecommunications (cell phone) industry. We are actively seeking a merger candidate, an acquisition of a viable business or a buyer of the corporate entity. (b) Financial Information about Industry Segments No business segments have existed since we discontinued normal operations in December, 2002. (c) Narrative Description of Business We conducted no business operations from December 2002 until the second fiscal quarter ended December 31, 2004. We have conducted no significant business operations since the acquisition of VPG. The following information therefore relates primarily to normal business operations conducted prior to December 2002. Major Markets, Products and Services Our digital media technology was available for licensing by customers wishing to manufacture and market a digital media device that provided easy and affordable access to the Internet through the television medium. The units offered video on demand, Internet access, broadcast entertainment programming and content streams. The digital media devices allowed users to save and store programming, rewind, and pause television shows in mid- broadcast; provided electronic programming guides that allowed users to select channels based on television show, actor, or theme and could be used to collect demographic information. Our CTI technologies offered customized products for customer contact centers, which could be designed to support a diverse network of sites, and managed voice and data transactions from multiple sources while allowing for intelligent routing and queuing. Patents, Trademarks and Licenses We owned or held rights to all patents, trademarks and licenses that we considered to be necessary in the conduct of our business and we continue to do so. Manufacturing We did not own manufacturing facilities, but rather contracted all manufacturing to third parties. Environmental We were in compliance with all applicable environmental laws and continue to remain in compliance with such laws. Major Customers In Fiscal year 2006, we reported no revenues. In fiscal year 2005, one customer accounted for virtually all of our consolidated revenues. In fiscal year 2004, we reported no revenues. Employees As of June 30, 2006, the Company had one employee. Warranty The Company has no outstanding warranty obligations. ITEM 1A. RISK FACTORS We are a development stage company that currently has limited operations and no revenues. The focus of current management is concerned primarily with maintaining our public filings and in locating and completing a suitable business combination. Until we complete a business combination, we will have no operations and will generate no operating revenues. The following is a description of important risk factors affecting current and future results of our operations. Risks Related to our Business We are a development stage company with no current operations and, accordingly, there is no basis upon which to evaluate our ability to achieve our business objective. Our business objective is to acquire an operating business in the technology industry. Although we have conducted a preliminary review, we have no plans, arrangements or understandings with any prospective acquisition candidates nor have we engaged any agent or other representative to identify or locate suitable acquisition candidates. We have no present revenues and do not expect to generate any revenues until, at the earliest, after the consummation of a business combination. Since we do not know what the operating history, if any, of any potential acquisition will be, there is no basis upon which to evaluate our ability to achieve our business objective. Since we have not currently selected any target business with which to complete a business combination, we are unable to currently ascertain the merits or risks of the Company's operations. Since we have not yet identified a prospective target business, we are unable to present any basis to evaluate the possible merits or risks of the target business' operations. While we do not intend to target financially unstable companies or companies in the development stage, to the extent we complete a business combination with such a company, we may be affected by numerous risks inherent in the business operations of those entities. We would consider a company to be financially unstable if, for example, a substantial portion of its cash flow were dedicated to its debt service obligations or its expected capital expenditure requirements exceeded the ability of the target business to fund them. In addition, we would consider a business to be in its early stages of development or growth if it is newly formed and is in the process of developing its initial technologies, processes, services, or products. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. Since we have limited cash resources, we expect that any acquisition will require the issuance of a substantial number of shares of our capital stock or debt obligations (see sections below); otherwise, we will have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. As we will favor underperforming companies as business combination opportunities, we may be subject to the additional risks associated with the financial and operational condition of underperforming companies. As we evaluate business combination opportunities, we intend to favor underperforming companies that we believe have the potential to increase their performance substantially through changes in operations or strategy. As a result, following the consummation of any such business combination, we may be subject to additional risks that would not exist if we were to consummate a business combination with companies that are not underperforming. These risks may relate to, among other things, the following: * the potentially weak financial, operational and/or strategic position of the underperforming company; * identification and retention of individuals with the requisite skills and experience to replace the existing management of the acquired company; * dedication of substantial resources to restructuring the operations and finances of the acquired company; * development of strategic business initiatives, including, without limitation, sales and marketing plans and research and development plans, as well the identification of individuals or third parties capable of executing those initiatives; and * restructuring the acquired company's operations to improve its business model, financial condition, and results of operations. To address each of the foregoing risks, we will be required to dedicate substantial financial and human resources which would otherwise be used by us to expand a business following the business combination, which may have a material adverse effect on our business, prospects, financial condition, and results of operations. We may issue shares of our capital stock to complete a business combination, which would dilute the equity interest of our stockholders and could cause a change in control of our ownership. Our certificate of incorporation authorizes the issuance of up to 80,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $1.00 per share. After the recent implementation of a reverse stock split, there were 139,191 shares of our common stock outstanding. Although we have no current commitments to issue our securities in any acquisition, we will, in all likelihood, issue a substantial number of additional shares of our common stock or preferred stock, or a combination of common and preferred stock, to complete a business combination. We additionally expect to issue a substantial number of shares of our common stock in conversion of currently outstanding convertible preferred stock and convertible debt obligations. Additional shares could be issued in exercise of currently outstanding warrants. The issuance of additional shares of our common stock or any number of shares of our preferred stock: * may significantly dilute the equity interest of our public shareholders; * may adversely affect prevailing market prices for our securities; and * may subordinate the rights of holders of our common stock if preferred stock is issued with rights senior to those afforded to our common stock. The issuance of a substantial number of our shares of common stock will also likely cause a change in control, which may affect, among other things, our ability to use our net operating loss carry forwards. At June 30, 2006, we had net operating loss carry forwards for Federal income tax purposes of approximately $64,602,766, which will expire in various amounts in the years 2008 through 2022 if not utilized. These net operating loss carry forwards are available to us to offset future taxable income, subject to significant limitations and provisions of the Internal Revenue Code. One such limitation provides that if there is a change in control, these net operating loss carry forwards can be severely curtailed or lost entirely. A change in control would most likely also result in the resignation or removal of our present management. We may issue debt securities or otherwise incur substantial debt to complete a business combination, which may adversely affect our leverage and financial condition. Although we have no commitments as of the date of this report to issue any debt securities, or to otherwise incur additional debt, we may choose to incur substantial debt to complete a business combination or to fund operations until such time as a business combination can be completed. If we issue debt securities, it could result in: * default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; * acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contains covenants that require the maintenance of certain financial ratios or reserves and any such covenant is breached without a waiver or renegotiation of that covenant; * our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and * our inability to obtain additional financing, if necessary, if the debt security contains covenants restricting our ability to obtain additional financing while such security is outstanding. Our ability to effect a business combination and to execute any potential business plan afterwards will be totally dependent upon the efforts of key personnel, some of whom may join us following a business combination and whom we may have only a limited ability to evaluate. Our ability to effect a business combination will be totally dependent upon the efforts of our current management and its advisors. Our current management does not intend to assume the day-to-day operational management of our target business, and the precise role of any key personnel will be the subject of negotiation in any business combination. Part of the analysis of a particular acquisition will include an evaluation of the experience and skill set of the target business' management and negotiate as part of the business combination that certain members of that management remain if it is believed that it is in the best interests of the company. The future role of specific key personnel following a business combination, however, cannot presently be fully ascertained. Our current management will allocate its time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This could impact on our ability to consummate a business combination. Our current management is not required to commit its full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. We do not intend to have any full time employees prior to the consummation of a business combination. All of our executive officers are engaged in other business endeavors and are not obligated to contribute any specific number of hours to our affairs. If our executive officers' other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could impact our ability to consummate a business combination. We may for a period of time only be able to complete one business combination, which would cause us to be solely dependent on a single business and a limited number of products or services. We may have the ability to complete only a single business combination. Accordingly, the prospects for our ability to effect our acquisition strategy may be: * solely dependent upon the performance of a single business, or * dependent upon the development or market acceptance of a single or limited number of products, processes or services. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities that may have the resources to complete several business combinations in different industries or different areas of a single industry. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. We currently pay our ongoing administrative expenses through borrowings from Trident Growth Fund, LP ("Trident"). Because we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If our current financial resources prove to be insufficient, either because of the size of the business combination or the depletion of the available resources in search of a target business, we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing is unavailable when needed to consummate a particular business combination, we will be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing may stall the development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination. CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS The statements contained in this report that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words "anticipates," "believe," "continue," "could," "estimate," "expect," "intends," "may," "might," "plan," "possible," "potential," "predicts," "project," "should," "would" and similar expressions may identify forward- looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about our: * ability to complete a combination with one or more target businesses; * success in retaining or recruiting, or changes required in, our officers, key employees or directors following a business combination; * officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving a business combination, as a result of which they would then receive expense reimbursements; * potential inability to obtain additional financing to complete a business combination; * potential change in control if we acquire one or more target businesses for stock; * public securities' limited liquidity and trading; * our financial performance following any business combination. The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading "Risk Factors." Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws and/or if and when management knows or has a reasonable basis on which to conclude that previously disclosed projections are no longer reasonably attainable. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Until December 2002, we operated from the following locations, all of which were closed at June 30, 2005. Location Purpose/Use Owned/Leased Square Footage -------- ----------- ------------ -------------- Dallas, TX Corporate Headquarters Leased 16,617 Dallas, TX Storage facility Leased 5,120 Tulsa, OK Subsidiary office Leased 7,500 In May 2005, we leased approximately 2,300 square feet of office space in Dallas, Texas for our corporate headquarters, which location at the time was deemed suitable for our operations. Shortly after fiscal 2006 year end, this location was also closed. The Company has no current business operations and the current CEO, Mr. Rozelle, utilizes his business office located in Houston, Texas for limited administrative functions performed on behalf of the Company. ITEM 3. LEGAL PROCEEDINGS Prior to closing the business in December 2002, we were routinely a party to ordinary litigation incidental to our business, as well as to other litigation of a nonmaterial nature. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS We held a Special Shareholders' Meeting on September 5, 2006 to vote on a directors' proposal to authorize the Board of Directors, in its discretion, to amend the Company's Articles of Incorporation to effect a reverse split of the outstanding shares of the Company's Common Stock by a ratio not in excess of one (1) for fifty (50), without further approval or authorization of the Company's shareholders. Of 6,895,454 common shares issued and outstanding as of July 31, 2006, the Record Date, 5,429,971 were represented in person or by proxy at the meeting, which constituted a quorum for the transaction of all business to come before the meeting. The proposal was duly approved by the required number of shares represented at the meeting, as follows: FOR [5,208,256] AGAINST [216,855] ABSTAIN [4,860] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock, $.001 par value (the "Common Stock") trades on the OTC Bulletin Board under the symbol "VPGC." Until September 18, 2006, the effective date of a reverse stock split, our Common Stock traded on the OTC Bulletin Board under the symbol "VPGI." High and low trade price information for our Common Stock is presented below for each quarter in the last two fiscal years. (All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.) Quarter Ending Date High Trade Low Trade ------------------- ---------- --------- Fiscal 2006 ----------- June 30, 2006 $ 4.00 $ 2.50 March 31, 2006 $ 4.50 $ 2.50 December 31, 2005 $ 4.50 $ 2.50 September 30, 2005 $ 7.50 $ 4.50 Fiscal 2005 ----------- June 30, 2005 $ 10.50 $ 5.50 March 31, 2005 $ 20.00 $ 7.50 December 31, 2004 $ 12.00 $ 2.00 September 30, 2004 $ 5.00 $ 2.00 Holders As of June 30, 2006 there were approximately 15,000 holders of record of our common stock. Dividends We have never paid cash dividends on common shares and do not anticipate doing so in the foreseeable future. In addition, our Series 2002-G Convertible Preferred Stock contains preferential covenants that materially limit the discretion of our Board of Directors with respect to payment of dividends or making any other distribution to our common shareholders so long as Series 2002-G is outstanding or unconverted. Securities Authorized for Issuance under Equity Compensation Plans The following table summarizes our equity compensation plans as of June 30, 2006: Number of Securities Number of Securities Remaining Available For To Be Issued Upon Weighted-average Future Issuance Under Exercise of Outstanding Exercise Price of Equity Compensation Plans Options, Warrants Outstanding Options, (Excluding Securities Plan Category and Rights Warrants and Rights Reflected in Column (a)) -------------------------------------------------------------------------------------------- (a) (b) (c) Equity Compensation Plans Approved by Security Holders 35,948 $ 26.60 54,052 Equity Compensation Plans Not Approved by Security Holders 34,245 $ 3.23 -0- --------- ------- --------- Total 70,193 $ 15.20 54,052 ========= ======= =========

Options issued and available for future issuance under stockholder- approved plans consist of those authorized pursuant to our 1999 Equity Incentive Plan. (All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.) ITEM 6. SELECTED FINANCIAL DATA All financial data for the years referenced below were derived from our Consolidated Financial Statements for those years and the comparability of the information is affected by acquisitions, dispositions, and other transactions which are described in the footnotes which accompany those Consolidated Financial Statements, and which should be read in conjunction with this five-year financial summary. Other factors which may affect the comparability of the information for the more recent fiscal years are discussed further in Item 7 below. Year Ended June 30, ------------------------------------------------------------- 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- Consolidated Statement of Operations Data ---------------------- Revenues $ -- $ 12,243 $ -- $ 625,785 $5,369,311 Operating loss (317,615) (558,032) (37,018) (3,516,230) (3,894,502) Net loss (500,941) (717,477) (20,355) (3,435,735) (2,733,434) Net loss attributable to common stockholders (750,241) (873,818) (24,655) (2,123,935) (1,019,077) Loss per Common Share (1) (5.46) (7.55) (0.24) (25.69) (14.97) Consolidated Balance Sheet Data -------------------- Total assets 87,694 141,777 49,972 62,700 4,842,203 Long term debt -- -- -- -- 14,938 Redeemable preferred stock -- -- -- -- 1,456,000 Stockholders' equity (1,043,554) (557,358) 49,972 50,708 2,018,192 Number of employees 1 4 -- -- 25 (1) Basic and diluted loss per share, which was computed based upon the weighted average number of common shares outstanding during each fiscal year. All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information to assist in the understanding of our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes appearing elsewhere herein. Forward Looking Statements This report may contain "Forward Looking Statements," which are our expectations, plans, and projections which may or may not materialize, and which are subject to various risks and uncertainties, including statements concerning expected expenses and the adequacy of our sources of cash to finance our current and future operations. When used in this report, the words "plans," "believes," "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Factors which could cause actual results to materially differ from our expectations include the following: general economic conditions and growth in the high tech industry; competitive factors and pricing pressures; changes in product mix; the timely development and acceptance of new products; and the risks described from time to time in our SEC filings. These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or change in our expectations or any change in events, conditions or circumstances on which any such statement may be based, except as may be otherwise required by the securities laws. Results of Operations FISCAL YEAR ENDED JUNE 30, 2006 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2005 --------------------------------------------------------------------------- Revenues We had no revenues for fiscal year 2006. Revenues of $12,243 for fiscal year 2005 were derived primarily from the resale of refurbished cell phones in the telecommunications industry. Gross Margin We had no gross margin for fiscal year 2006. Gross margin for fiscal year 2005 was $12,243, which represented 100% of all revenue in fiscal year 2005. Operating Expenses Total operating expenses for fiscal year 2006 decreased to approximately $317,615, compared to approximately $570,275 for the same period last year. Significant components of operating expenses for the fiscal years ended June 30, 2006 and 2005 consisted of the following: Year ended June 30, ------------------------------- 2006 2005 ----------- ----------- Compensation $ 85,658 $ 133,821 Facilities 23,183 2,162 Legal expense and professional fees 96,556 160,818 Write-off of acquired in-process research and development -- 146,819 Other 112,218 126,655 ----------- ----------- Total $ 317,615 $ 570,275 =========== =========== "Other" expenses include public company cost, property taxes, telephone, travel, office, insurance, and other general and administrative expenses. The decrease in operating expenses for fiscal year 2006 is attributable to decreasing Company operations during fiscal year 2006. Interest Expense We had total interest expense of $185,748 in fiscal year 2006 as compared to $164,582 in fiscal year 2005. The increase in interest expense is attributable to additional financing from Trident received during fiscal year 2006. FISCAL YEAR ENDED JUNE 30, 2005 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2004 --------------------------------------------------------------------------- Revenues Revenues of $12,243 for fiscal year 2005 were derived primarily from the resale of refurbished cell phones in the telecommunications industry. We discontinued all operations in December 2002 and had no revenues for fiscal year 2004. Gross Margin Gross margin for fiscal year 2005 was $12,243, which represented 100% of all revenue in fiscal year 2005. We had no gross margin for fiscal year 2004. Operating Expenses Total operating expenses for fiscal year 2005 increased to approximately $570,275, compared to approximately $37,000 for the same period last year. Significant components of operating expenses for the fiscal years ended June 30, 2005 and 2004 consisted of the following: Year ended June 30, ------------------------------- 2005 2004 ----------- ----------- Compensation $ 133,821 $ 5,760 Facilities 2,162 - Legal expense and professional fees 160,818 17,860 Write-off of acquired in-process research and development 146,819 -- Other 126,655 13,398 ----------- ----------- Total $ 570,275 $ 37,018 =========== =========== "Other" expenses include public company cost, property taxes, telephone, travel, office, insurance, and other general and administrative expenses. The increase in operating expenses for fiscal year 2005 is attributable to resuming Company operations during fiscal year 2005. Interest Expense We had total interest expense of $164,582 in fiscal year 2005 as compared to no interest expense for the previous year. The increase in interest expense is attributable to the financing from Trident received during the second fiscal quarter. Liquidity and Capital Resources Cash and cash equivalents at June 30, 2006 were $11,032 compared to $53,337 at June 30, 2005. In the past we have relied on available borrowing arrangements and sales of our common and preferred stock to supplement operations. However, during 2003 outside financial resources became unavailable to us and it was necessary to discontinue operations and close the Company. Cash Flows from Operations Cash used in operations for the fiscal year ended June 30, 2006 was $338,305 compared to $532,296 used in operations in 2005. The major components of cash used in operations during 2006 were comprised of a $500,941 loss from operations, amortization of the discount on debt of $64,623, and changes in operating assets and liabilities of $98,013. Cash used in operations for the fiscal year ended June 30, 2005 was $532,296 compared to $9,883 used in operations in 2004. The major components of cash used in operations during 2005 were comprised of a $717,477 loss from operations, non-cash charges for the write-off of acquired in-process research and development of $146,819, amortization of the discount on debt of $98,409, issuance of warrants for services of $10,000 offset by changes in operating assets and liabilities of $70,047. Cash Flows from Investing Activities During fiscal years 2006, 2005 and 2004, no cash was used in investing activities. Cash Flows from Financing Activities During fiscal year 2006, cash of $296,000 was borrowed. During fiscal year 2005, cash payments of $20,067 were used for dividends declared. Cash of $605,700 was borrowed during the fiscal year 2005. During fiscal year 2004, we had no financing activities. Other Matters Going Concern We incurred net losses of $500,941, $717,477 and $20,355 for the years ended June 30, 2006, 2005 and 2004, respectively. In December 2002 we laid off all of our employees and discontinued normal operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Before we discontinued normal operations in 2002, we offered enhanced digital media solutions and call center computer telephony integration software products and services. With the acquisition of Venture Pacific Group, Inc. ("VPG") in November 2004 we expected to become active in licensing RFID technologies to integrate with our own technologies to develop RFID applications in specialty areas, such as anti-counterfeiting of drugs, medical devices, and logistical systems. We are continuing to evaluate all of our options and we are actively seeking a buyer, a merger candidate or acquisition of a viable business. Consequently, the outlook for generating sufficient cash to support our operations for the next twelve months under present circumstances is extremely guarded. Critical Accounting Policies The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The following critical accounting policies are utilized by management in the preparation of the consolidated financial statements. Revenue Recognition. During 2005 we recognized a significant portion of our revenue while acting as a sales agent or in a similar capacity. As such, we reported revenue based upon the fee earned as acting as an agent. Product sales were recognized at the time of delivery and customer acceptance. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Prior to December 2002, we were exposed to market risk from changes in interest rates which could adversely affect our financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, we managed exposures through our regular operating and financing activities. We did not use financial instruments for trading or other speculative purposes and we were not a party to any leveraged financial instruments. We were exposed to interest rate risk primarily through our borrowing activities, which are described in the "Notes Payable" Note to the Consolidated Financial Statements, which are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements and related Financial Statement Schedules are included immediately following the signature page of this Form 10-K. Selected Quarterly Financial Data (unaudited) The following tables set forth certain unaudited financial data for the quarters indicated: Fiscal 2006 Quarter Ended Fiscal 2005 Quarter Ended -------------------------------------------------- ---------------------------------------------------- Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, 2005 2005 2006 2006 2004 2004 2005 2005 ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- Net Sales $0.00 $0.00 $0.00 $0.00 $0.00 $500 $5,323 $6,720 Gross Margin $0.00 $0.00 $0.00 $0.00 $0.00 $500 $5,323 $6,720 % of net sales 0% 0% 0% 0% 0% 100% 100% 100% Operating income (loss) $(158,252) $(88,802) $(26,723) $(43,838) $0.00 $(210,678) $(192,459) $(154,895) % of net sales 0% 0% 0% 0% 0% 0% 0% 0% Net income (loss) $(221,134) $(138,076) $(63,689) $(78,042) $0.00 $(244,500) $(259,973) $(213,004) % of net sales 0% 0% 0% 0% 0% 0% 0% 0% Net income (loss) attributable to common shareholders $(283,459) $(200,401) $(126,014) $(140,367) $(1,075) $(277,275) $(322,298) $(273,170) % of net sales 0% 0% 0% 0% 0% 0% 0% 0% Net income (loss) attributable to common shareholders per share - basic and diluted* $(2.08) $(1.46) $(0.91) $(1.02) $(0.01) $(2.46) $(2.68) $(2.18) * Difference in per share amounts between quarterly financial data and year-end results are attributable to rounding. The above information differs from that previously reported for the quarters ended December 31, 2004 and March 31, 2005 due to impact of stock warrants granted to Trident Growth Fund, LP ("Trident") in connection with our issuance of a note payable to Trident on November 10, 2004. The fair value of the stock warrants was recorded as a discount to debt and amortized over the term of the note payable. The impact of this adjustment increased the loss for the quarters ended December 31, 2004 and March 31, 2005 by $8,389 and $14,804, respectively. The loss for the quarter ended December 31, 2004 was also increased by $10,000 to reflect the fair value of stock warrants issued on November 4, 2004 in settlement of litigation. In addition, revenue for the quarter ended March 31, 2005 was decreased by $90,902 with a corresponding reduction to the cost of product and services to reflect revenue recognition at net as an agent. All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) or 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer has concluded that our current disclosure controls and procedures provide him with reasonable assurance that they are effective to provide him with timely material information relating to us required to be disclosed in the reports we file or submit under the Exchange Act. Annual report on internal control over financial reporting. Based upon the most recent pronouncements of the Securities and Exchange Commission, our first annual report on internal control over financial reporting is due for inclusion in our annual report on Form 10-K for the twelve month period ending June 30, 2008. We expect to begin the process during next fiscal year of identifying a framework to use to evaluate the effectiveness of our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act.) Changes in Internal Control over Financial Reporting. Our management has evaluated whether any change in our internal control over financial reporting occurred during the fourth fiscal quarter. Based on that evaluation, management concluded that there has been no change in our internal control over financial reporting during the relevant period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION Subsequent Events On July 14, 2006, Patrick A. Custer, the sole director of the Company, appointed Joseph R. Rozelle as a member to the board of directors of the Company. Concurrently with Mr. Rozelle's appointment as a director, Mr. Custer resigned as an officer and director of the Company and Mr. Rozelle was elected to the offices of President, Secretary, Treasurer and Chief Executive Officer of the Company. On September 5, 2006, our stockholders approved and on September 18, 2006, we implemented a one for fifty (1:50) reverse split of our outstanding shares of common stock. With the completion of the reverse stock split, we had approximately 139,191 common shares outstanding. All share and per share data give effect to the reverse stock split, applied retroactively as if it occurred on July 1, 2003. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Board of Directors The following sets forth, with respect to each member of our Board of Directors as of June 30, 2006, his name, age, period served as director, present position, if any, with the Company and other business experience. All directors in the past have served one-year terms between annual meetings of shareholders. Patrick A. Custer, 57, was the sole member of the Board and Chief Executive Officer at June 30, 2006. Mr. Custer served as a director from 1984 to 1985, and from 1987 until the present. He served as President and Chief Executive Officer from 1984 to 1985 and from September 1992 until July 14, 2006. From 1986 until 1990, Mr. Custer was an international business consultant for Park Central Funding (Guernsey), Ltd. From 1978 until 1982, Mr. Custer was a general securities principal and worked for a major brokerage firm as a corporate finance specialist and was owner of his own brokerage firm. He was responsible for structuring and funding IPO's, real estate, energy companies, and numerous high-tech start-up companies. Mr. Custer's technical experience includes engineering and management positions with Texas Instruments and Honeywell. Mr. Custer is a graduate of Texas Tech University in Finance and Management, with additional studies in Electrical Engineering and master studies in Finance. Joseph R. Rozelle, 32, succeeded Mr. Custer as the sole member of the Board and Chief Executive Officer, effective July 14, 2006. Mr. Rozelle is currently also the President of Nautilus Global Partners, a Limited Liability Company dedicated to facilitation of "going public" transactions for foreign and domestic operating companies on the public United States Exchanges. From 2004 through January 2006, Mr. Rozelle was a consultant with Accretive Solutions, providing Sarbanes-Oxley Compliance consulting and other accounting related consulting services. Prior thereto, Mr. Rozelle worked with Momentum Equity Group, LLC and Momentum Bio Ventures as a Principal Analyst beginning in the spring of 2002 and winter of 2003, respectively through 2004. Prior to joining Momentum, Mr. Rozelle was an associate with Barclays Capital in the Capital Markets Group, specializing in asset securitization in the summer of 2001. Prior thereto, he was the Assistant Vice President of Planning and Financial Analysis for a regional commercial bank and was responsible for all of the corporate financial modeling, risk analysis, mergers and acquisition evaluation, and corporate budgeting. Mr. Rozelle also served as a senior auditor with Arthur Andersen, where he was involved in a variety of filings with the SEC involving corporate mergers, spin-offs, public debt offerings, and annual reports. Mr. Rozelle holds a Bachelors of Business Administration degree from the University of Houston and earned a Masters of Business Administration degree from the Jesse H. Jones School of Management at Rice University in 2002. In addition, he is a Certified Public Accountant in the State of Texas. As of the date of this report, the Company does not have any contractual arrangements with Mr. Rozelle. Executive Officers The following table lists the names and positions held by all executive officers as of June 30, 2006. Name Position ---- -------- Patrick A. Custer Sole Board member, President, Chief Executive Officer and Principal Financial Officer Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the 1934 Act ("Section 16(a)"), requires our directors, executive officers and persons who beneficially own more than 10% of a registered class of our equity securities ("10% Owners") to file reports of beneficial ownership of our securities and changes in such beneficial ownership with the Securities and Exchange Commission ("Commission"). Directors, executive officers and 10% Owners are also required by rules promulgated by the Commission to furnish us with copies of all forms they file pursuant to Section 16(a). Based solely upon a review of the copies of the forms filed pursuant to Section 16(a) furnished to us, or written representations that no year-end Form 5 filings were required for transactions occurring during fiscal year ended June 30, 2006, we believe that during the fiscal year ended June 30, 2006, all Section 16(a) filing requirements applicable to our directors, executive officers and 10% Owners were complied with. Audit Committee We have no active Audit Committee, however, Mr. Custer and Mr. Rozelle both meet the definition of an audit committee financial expert, as set forth in Item 401(h)(2) of Regulation S-K. Code of Ethics We have adopted a code of ethics that applies to our principal executive officer, our principal financial officer, and our principal accounting officer or controller, or persons performing similar functions. A copy of our code of ethics will be provided to any person without charge, upon request, by sending such request to us at our principal office. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table summarizes the compensation paid over the last three completed fiscal years to our Chief Executive Officer and any other executive officer who received compensation exceeding $100,000 during the fiscal year ended June 30, 2006. Long Term Compensation ------------------------------------ Annual Compensation Awards Payouts --------------------------------- ------------------------------------ (a) (b) (c) (d) (e) (f) (g) (h) (i) All Other Name and Year Other Restricted Securities LTIP Compen- Principal Ended Annual Stock Underlying Payouts sation Position June 30 Salary($) Bonus($) Compensation($) Awards($) Options(#) ($) ($) ---------- ------- -------- ------- -------------- ---------- -------------- ------- ------ Patrick A. Custer 2006 48,061 -0- -0- -0- -0- -0- -0- Sole member of the 2005 130,520 -0- 20,000 (1)(2) -0- -0- -0- -0- Board and CEO 2004 -0- -0- 52,000 (1)(3) 116 -0- -0- -0- (1) Other annual compensation to this executive officer, including payment of a car allowance and other personal benefits, did not exceed the lesser of $50,000 or 10% of such executive officer's total annual salary and bonus for such fiscal year. (2) Amounts paid to Custer Consulting, an entity owned 100% by Pat Custer. (3) Amounts paid by Venture Pacific Group, Inc. (acquired in merger on November 10, 2004) to Pat Custer as an independent contractor.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table shows aggregate exercises of options (or tandem stock appreciation rights) and freestanding stock appreciation rights during the fiscal year ended June 30, 2006 by each of the named executive officers. (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at FY-End (#) FY-End ($)(1) Shares Acquired Value Exercisable (E)/ Exercisable (E)/ Name on Exercise(#) Realized($) Unexercisable (U) Unexercisable (U) ------ -------------- ----------- ----------------- ----------------- Patrick A. Custer -0- -0- 13,760 (E) $ 7,750 (E) -0- (U) -0- (U) (1) At June 30, 2006, 6,200 of the options were considered "in-the-money," as the fair market value of the underlying securities on that date ($2.25) exceeded the exercise price of the options ($1.00). None of the remaining options were considered "in-the-money," as the fair market value of the underlying securities did not exceed the exercise price of the options. (All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.)

Compensation of Directors Directors are not paid compensation as such, except for services performed in another capacity, such as an executive officer. Employment Contracts and Termination and Change-in-Control Arrangements At June 30, 2006, we had no employment agreement with any named executive officer. Compensation Committee Interlocks and Insider Participation Mr. Custer participated in advising the Board of Directors concerning certain aspects of executive officer compensation during the last completed fiscal year. Mr. Custer is Chairman of the Board, President and Chief Executive Officer. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information as of September 28, 2006 with respect to the beneficial ownership of Common Stock by (i) persons known to us to be the beneficial owners of more than 5% of the outstanding shares of Common Stock, (ii) all directors of the Company, (iii) each of the executive officers and (iv) all directors and executive officers of the Company as a group. The number of shares of Common Stock beneficially owned by each individual set forth below is determined under the rules of the Commission and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which an individual has sole or shared voting power or investment power and any shares which an individual presently, or within 60 days of September 28, 2006 (the date on which this Form 10-K is due at the Commission), has the right to acquire through the exercise of any stock option or other right. Unless otherwise indicated, each individual has sole voting and investment power (or shares such powers with his spouse) with respect to the shares of Common Stock set forth in the following table. The information is based upon corporate records, information furnished by each shareholder, or information contained in filings made with the Securities and Exchange Commission. Number of Shares Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Ownership of Class ------------------- ----------------------- -------- Patrick A. Custer 46,597 (1) 30.46% 5% Beneficial Owner, P.O. Box 802808 Dallas, Texas 75380 Peak Decision International Limited 7,000 (2) 5.00% 5% Beneficial Owner Unit 1603, 16F Dina House, 11 Duddell Street, Central Hong Kong (1) Includes 5,804 shares owned outright by Mr. Custer; 13,760 shares issuable to Mr. Custer upon exercise of vested nonstatutory Employee Stock Options; 26,968 shares held of record by Custer Company, Inc., a family trust, over which Mr. Custer exercises voting control; 60 shares owned by his wife; 3 shares held by his wife for the benefit of his minor daughter; and 1 share each held by Mr. Custer for the benefit of his two sons. (2) Common shares owned. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In November 2004 the Company acquired Venture Pacific Group, Inc. ("VPG"). The acquisition resulted in the issuance to VPG shareholders of approximately 15,400 new shares of common stock of the Company, which were valued at approximately $60,000, according to the stock price at the time. (All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.) The Company also issued to Trident Growth Fund, LP ("Trident") a new series of preferred stock, Series 2004-L Preferred Stock (the "Preferred Stock"), to retire an outstanding series of preferred stock of VPG. The Preferred Stock has a liquidation value of $1.75 million and is convertible at the option of the holder into a total of 1.75 million shares of Common Stock at any time after six months from the issue date. These preferred shares were valued at $175. (These shares are not affected by the one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, as the terms of Series 2004-L Preferred Stock contain no reset feature in the event of a reverse split.) At the time of the merger, our Chief Executive Officer also served as the Chief Executive Officer and as a director of VPG and was the beneficial owner of approximately 39% of VPG. Trident Growth Fund, L.P. ("Trident"), reported as a beneficial owner of 7.6% of the Company as of June 30, 2004, was also a beneficial owner of approximately 35% of VPG. All other related party transactions, which require disclosure, are included in the Management's Discussion and Analysis or the Notes to Consolidated Financial Statements. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Audit Fees Audit fees include fees paid by the Company to its auditors in connection with the annual audit of the Company's financial statements and the auditor's review of the Company's interim financial statements. The aggregate fees billed to the Company by CF & Co., L.L.P. for audit services for the fiscal years ended June 30, 2006 and 2005 were $43,718 and $36,074, respectively. Audit Related Fees Audit related fees include fees paid by the Company to its auditors for services related to accounting consultations and internal control review. There were no audit-related fees paid by the Company for either of the fiscal years ended June 30, 2006 or 2005. Tax Fees Tax fees include fees paid by the Company to its auditors for corporate tax compliance and tax advisory services. There were no tax-related fees billed to the Company for either of the fiscal years ended June 30, 2006 or 2005. All Other Fees All other fees include fees paid by the Company to its auditors for all other services rendered by the auditor to the Company. Fees for other services paid by the Company for fiscal years ended June 30, 2006 or 2005 were -0- and $23,712, respectively. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements Reference is made to the financial statements filed as part of this report. (2) Financial Statement Schedules Reference is made to the financial statement schedules filed as part of this report. All other schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. (3) Exhibits Reference is made to the Exhibit Index at the end of this Form 10-K for a list of all exhibits filed with and incorporated by reference in this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VPGI CORP. By: /s/ JOSEPH R. ROZELLE --------------------- Joseph R. Rozelle Chief Executive Officer and Principal Financial Officer October 13, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer and ------------------------------- Principal Financial and Accounting Officer ------------------------------------------ /s/ JOSEPH R. ROZELLE Chairman of the Board, October 13, 2006 Joseph R. Rozelle Chief Executive Officer and Director Report of Independent Registered Public Accounting Firm ------------------------------------------------------- Board of Directors VPGI Corp. and Subsidiaries We have audited the accompanying consolidated balance sheets of VPGI Corp. and Subsidiaries (A Development Stage Company) as of June 30, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended June 30, 2006, 2005 and 2004. These consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of VPGI Corp. and Subsidiaries as of June 30, 2006 and 2005, and the consolidated results of their operations and their consolidated cash flows for the years ended June 30, 2006, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II for the years ended June 30, 2006, 2005 and 2004. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. As shown in the consolidated financial statements, the Company incurred net losses of $500,941, $717,477 and $20,355 for the years ended June 30, 2006, 2005 and 2004, respectively. These factors, among others, as discussed in Note B to the consolidated financial statements raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note B. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. CF & Co., L.L.P. Dallas, Texas October 13, 2006 VPGI Corp. and Subsidiaries (A Development Stage Company) CONSOLIDATED BALANCE SHEETS June 30, ASSETS 2006 2005 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 11,032 $ 53,337 Trade accounts receivable - 21,000 Prepaid expenses 21,132 7,705 Other current assets - 4,627 ----------- ----------- Total current assets 32,164 86,669 OTHER ASSETS Pension surplus 55,530 55,108 ----------- ----------- Total other assets 55,530 55,108 ----------- ----------- Total assets $ 87,694 $ 141,777 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. VPGI Corp. and Subsidiaries (A Development Stage Company) CONSOLIDATED BALANCE SHEETS - CONTINUED June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005 ----------- ----------- CURRENT LIABILITIES Note payable, net of deferred loan costs of $6,049 and $55,931, respectively, for 2006 and 2005, respectively $ 989,951 $ 644,069 Trade accounts payable 19,145 16,020 Accrued expenses 122,152 39,046 ----------- ----------- Total liabilities 1,131,248 699,135 COMMITMENTS AND CONTINGENCIES (NOTE G) - - ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, cumulative, $1.00 par value; 1,000,000 shares authorized: Series A, 30,000 shares issued and outstanding at June 30, 2006 and 2005 30,000 30,000 Series H, 2 shares issued and outstanding at June 30, 2006 and 2005 (liquidation preference of $50,000) 2 2 Series 2002-K, 20 shares issued and outstanding at June 30, 2006 and June 30, 2005 (liquidation preference of $500,000) 20 20 Series 2002-G, 152 and 156 shares issued and outstanding at June 30, 2006 and 2005, respectively (liquidation preference of $3.8 million and $3.9 million at June 30, 2006 and 2005, respectively) 152 156 Series 2004-L, 175 shares issued and outstanding at June 30, 2006 and 2005 (liquidation preference of $1.75 million) 175 175 Common stock, $.001 par value; 80,000,000 shares authorized; 137,909 and 136,576 shares issued and outstanding at June 30, 2006 and 2005, respectively 138 137 Additional paid in capital 60,506,462 60,491,714 Accumulated deficit (60,362,085) (60,362,085) Deficit accumulated during development stage (1,218,418) (717,477) ----------- ----------- Total stockholders' equity (deficit) (1,043,554) (557,358) ----------- ----------- Total liabilities and stockholders' equity $ 87,694 $ 141,777 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. VPGI Corp. and Subsidiaries (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS Years ended June 30, Cumulative During Development Stage 2006 2005 2004 -------- -------- -------- -------- Revenues Product sales $ 5,548 $ - $ 5,548 $ - Consulting and support services 6,695 - 6,695 - -------- -------- -------- -------- Total revenues 12,243 - 12,243 - Cost of products and services Cost of product sales - - - - Cost of consulting and support services - - - - -------- -------- -------- -------- Total cost of products and services - - - - -------- -------- -------- -------- Gross margin 12,243 - 12,243 - Operating expenses General and administrative 887,890 317,615 570,275 31,258 Fees paid to related party - - - 5,760 -------- -------- -------- -------- 887,890 317,615 570,275 37,018 -------- -------- -------- -------- Operating loss (875,647) (317,615) (558,032) (37,018) Other (income) expense Interest expense 350,330 185,748 164,582 - Other income, net (7,559) (2,422) (5,137) (16,663) -------- -------- -------- -------- Total other (income) expense 342,771 183,326 159,445 (16,663) --------- -------- -------- -------- Net loss $(1,218,418) $(500,941) $(717,477) $ (20,355) ========= ======== ======== ======== Dividend requirements on preferred stock (249,300) (156,341) (4,300) -------- -------- -------- Net loss attributable to common stockholders $(750,241) $(873,818) $ (24,655) ======== ======== ======== Per share amounts allocable to common stockholders - Basic and diluted Net loss $(5.46) $(7.55) $(0.24) Weighted average common shares outstanding - Basic and diluted 137,409 115,749 102,818 The accompanying notes are an integral part of these consolidated financial statements. VPGI Corp. and Subsidiaries (A Development Stage Company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended June 30, 2006, 2005 and 2004 Deficit Accumulated Common Stock Preferred Stock Additional During -------------------- ------------------ paid-in Accumulated Development Shares Amount Shares Amount capital deficit Stage Total --------- -------- -------- -------- ----------- ------------ ----------- ---------- Balances - June 30, 2003 89,722 $ 90 30,218 $ 30,218 $ 60,342,062 $ (60,321,662) $ - $ 50,708 Issuance of common stock in exchange for services 15,120 15 - - 15,104 - - 15,119 Issuance of warrants for services - - - - 4,500 - - 4,500 Net loss - - - - - (20,355) - (20,355) --------- -------- -------- -------- ----------- ------------ ----------- ---------- Balances - June 30, 2004 104,842 $ 105 30,218 $ 30,218 $ 60,361,666 $ (60,342,017) $ - $ 49,972 Conversion of Series 2002-G preferred to common stock 13,334 14 (40) (40) 26 - - - Issuance of common stock in acquisition 15,400 15 - - 59,985 - - 60,000 Exercise of warrants into common stock 3,000 3 - - (3) - - - Issuance of warrants in connection with debt - - - - 60,040 - - 60,040 Issuance of warrants in litigation - - - - 10,000 - - 10,000 Issuance of Series 2004-L preferred - - 175 175 - - - 175 Dividends on issuance of Series 2004-L preferred - - - - - (20,068) - (20,068) Net loss - - - - - - (717,477) (717,477) --------- -------- -------- -------- ----------- ------------ ----------- ---------- Balances - June 30, 2005 136,576 $ 137 30,353 $ 30,353 $ 60,491,714 $ (60,362,085) $ (717,477) $ (557,358) Conversion of Series 2002-G preferred to common stock 1,333 1 (4) (4) 3 - - - Issuance of warrants in connection with debt - - - - 14,745 - - 14,745 Net loss - - - - - - (500,941) (500,941) --------- -------- -------- -------- ----------- ------------ ----------- ---------- Balances - June 30, 2006 137,909 $ 138 30,349 $ 30,349 $ 60,506,462 $ (60,362,085) $ (1,218,418) $(1,043,554) ========= ======== ======== ======== =========== ============ =========== ========== The accompanying notes are an integral part of these consolidated financial statements.

VPGI Corp. and Subsidiaries (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, Cumulative During Development Stage 2006 2005 2004 ----------- -------- -------- --------- Cash flows from operating activities Net loss $(1,218,418) $(500,941) $(717,477) $ (20,355) ---------- -------- -------- --------- Adjustments to reconcile net loss to cash used in operating activities: Stock compensation expense - - - 15,119 Issuance of warrants for services 10,000 - 10,000 4,500 Write-off of acquired in-process research and development 146,819 - 146,819 - Amortization of debt discount 163,032 64,623 98,409 - Changes in assets and liabilities, net of effects from acquisitions and dispositions: Trade accounts receivable - 21,000 (21,000) - Prepaid expenses (25,759) (13,427) (12,332) - Other assets (931) 4,205 (5,136) 2,845 Accounts payable and accrued liabilities 54,656 86,235 (31,579) (11,992) ---------- -------- -------- --------- Cash and cash equivalents used in operating activities (870,601) (338,305) (532,296) (9,883) ---------- -------- -------- --------- Cash flows from investing activities Cash and cash equivalents provided by (used in) investing activities - - - - ---------- -------- -------- --------- The accompanying notes are an integral part of these consolidated financial statements. VPGI Corp. and Subsidiaries (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years ended June 30, Cumulative During Development Stage 2006 2005 2004 ----------- -------- -------- --------- Cash flows from financing activities Preferred stock dividend paid (20,067) - (20,067) - Net proceeds from issuance of notes payable 901,700 296,000 605,700 - ---------- -------- -------- --------- Cash and cash equivalents provided by financing activities 881,633 296,000 585,633 - ---------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents 11,032 (42,305) 53,337 (9,883) ---------- -------- -------- --------- Cash and cash equivalents, beginning of year - 53,337 - 9,883 ---------- -------- -------- --------- Cash and cash equivalents, end of year $ 11,032 $ 11,032 $ 53,337 $ - ========== ======== ======== ========= Supplemental information Cash paid for interest $ 66,173 $ - $ 66,173 $ - ========== ======== ======== ========= See Note J for supplemental schedule of non-cash investing and financing activities. The accompanying notes are an integral part of these consolidated financial statements. VPGI Corp. and Subsidiaries (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business ----------------------- Until it discontinued normal operations in December 2002, VPGI Corp. and Subsidiaries (the Company), offered enhanced digital media solutions to customers worldwide. It also offered contact center customer service solutions through CIMphony[TM], a suite of computer telephony integration (CTI) software products and services. Effective July 1, 2004, the Company's management has devoted substantially all of its time to the planning and acquisition of new operations. Accordingly, the Company's financial statements for 2006 are presented as a development stage enterprise, as prescribed by Statement of Financial Accounting Standards No. 7, "Accounting for Development Stage Enterprises". Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the accompanying notes. Actual results could differ from those estimates. Cash Equivalents ---------------- All highly liquid debt investments with an original maturity of three months or less are considered to be cash equivalents. Fair Value of Financial Instruments ----------------------------------- The Company's financial instruments consist of cash and cash equivalents, accounts receivable, redeemable preferred stock and debt. The fair value of cash and accounts receivable approximate the recorded amounts because of the liquidity and short term nature of these items. The fair value of debt approximates the recorded amounts. The fair value of redeemable preferred stock is reflected by the recorded amount as it represents fair value based on the market price of the Company's common stock. Stock-Based Compensation ------------------------ Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"), which requires employee and qualifying director share-based payments to be accounted for using the fair value method. Share-based compensation costs related to equity instruments are charged against income ratably over the fixed vesting period for the related equity instruments, with the initial charge generally recorded in the first full month following the grant. The adoption of this standard did not have a material effect on the Company's financial statements. Under the modified prospective method transition of SFAS 123R, compensation costs related to any non-vested portion of stock option awards outstanding at the adoption date are based on the grant date fair value of those awards. Since all stock options previously granted under the Company's 2005 stock option plan were fully vested prior to June 30, 2005, there are no deferred compensation costs resulting from stock options to be accounted for on a prospective basis. There were no further stock options issued for all years presented. Revenue Recognition ------------------- During 2006, the Company recognized no revenue. During 2005 the Company recognized a significant portion of its revenue while acting as a sales agent or in a similar capacity. As such, the Company reported revenue based upon the fee earned as acting as an agent. Product sales were recognized at the time of delivery and customer acceptance. Loss Per Share -------------- Basic loss per common share is based on the weighted average number of common shares outstanding. Diluted loss per share is computed based on the weighted average number of shares outstanding, plus the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. In all years presented, all potential common shares were anti-dilutive. Income taxes ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that deferred tax assets and liabilities arising from temporary differences between book and tax basis will be recognized using enacted rates at the time such temporary differences reverse. In the case of deferred tax assets, SFAS 109 requires a reduction in deferred tax assets if it is more likely than not that some portion or all of the deferred tax will not be realized. There are accumulated deferred tax assets of $21 million, which are offset by a valuation allowance pursuant to SFAS 109. Such losses are limited by certain Internal Revenue Service regulations. Recently issued accounting standards ------------------------------------ On September 29, 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS 158"). SFAS 158 requires employers to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. SFAS 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position (with limited exceptions). The Company is required to recognize the funded status of its defined benefit postretirement plan and to provide the required disclosures as of the end of the year ending June 30, 2007. The requirement to measure plan assets and benefit obligations as of the date of the Company's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. As discussed in Note I, the Company is in the process of terminating its defined benefit postretirement plan and settling its benefit obligations. Based upon information as the measurement date of June 1, 2006, the impact of SFAS 158 would be to increase intangible assets by $14,470 and increase equity by $14,470. The actual impact of adoption of SFAS 158 could differ significantly from these estimates due to potential changes in underlying economic conditions which influence the assumptions used in the actuarial valuation of plan assets and obligations, including returns on pension assets, pension contributions and changes in interest rates. NOTE B - GOING CONCERN MATTERS The Company incurred net losses of $500,941, $717,477 and $20,355 for the years ended June 30, 2006, 2005 and 2004, respectively. In addition, at June 30, 2006, the Company had negative working capital of $1,099,084 and negative stockholders equity of $1,043,554. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company is continuing to evaluate all of its options and actively seeking a buyer, a merger candidate or an acquisition of a viable business. The financial statements do not include any adjustment to reflect the possible effects on the recoverability and classification of assets or liabilities which may result from the inability of the Company to continue as a going concern. NOTE C - BUSINESS COMBINATIONS AND DIVESTITURES On November 10, 2004 the Company signed an Agreement and Plan of Merger (the "Agreement") to acquire another company, Venture Pacific Group, Inc. ("VPG"). The merger was effected by merging a new subsidiary of the Company into VPG, resulting in VPG being the surviving entity and a wholly-owned subsidiary of the Company. The merger was effective upon issuance of the Certificate of Merger by the Texas Secretary of State on November 16, 2004. The acquisition resulted in the issuance to VPG shareholders of approximately 15,400 new shares of common stock of the Company, which were valued at approximately $60,000, according to the stock price on November 10, 2004. The exchange ratio consisted of one share of common stock of the Company ("Common Stock") for each five hundred shares of VPG common stock held by VPG shareholders. (All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2004.) The Company also issued to Trident Growth Fund, LP ("Trident") a new series of preferred stock, Series 2004-L Preferred Stock (the "Preferred Stock"), to retire an outstanding series of preferred stock of VPG. The Preferred Stock has a liquidation value of $1.75 million and is convertible at the option of the holder into a total of 1.75 million shares of Common Stock at any time after six months from the issue date. 14% cumulative dividends accrue on the Preferred Stock, which are payable as follows: 4% dividends are payable quarterly and 10% dividends shall accumulate and be payable upon (a) the conversion of the Preferred Stock to Common Stock, (b) the redemption of the Preferred Stock, or (c) such time as the Company generates positive cash flow sufficient to pay such dividends. These preferred shares were valued at $175. Shares accumulate dividends at $245,000 per year. Dividends in arrears at June 30, 2006 and 2005 on Preferred Stock totaled $381,274 and $136,274, respectively. These shares are unaffected by the reverse split, as the terms of Series 2004-L Preferred Stock contain no reset feature in the event of a reverse split. Concurrently with the acquisition of VPG, the Company borrowed $700,000 from Trident and executed a Convertible Note (the "Note") payable at the earlier of: (i) November 10, 2005; (ii) the closing date of the Company's next public offering; or (iii) the date of any change of control of the Company, as defined therein. Interest is payable monthly on the Note at the rate of 14% per annum. The Note is convertible into Common Stock at any time on or after the six month anniversary of the date of issue of the Note, at a per share conversion price equal to the average of the closing prices of the Common Stock for the three business days ending on any conversion date. In connection with the issuance of debt discussed above, the Company issued to Trident warrants to purchase 15,200 shares of Common Stock, exercisable for five years at an exercise price of $5.00 per share. The warrants were valued at $60,040 and are included as a discount to notes payable. In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations", the Company has accounted for the merger transaction using the purchase method of accounting. The results of VPG's operations have been included in the financial statements since the date of acquisition. The following table summarizes the estimated value of the assets acquired and liabilities assumed at the date of acquisition. Intangible assets $ 146,819 Current liabilities assumed 86,644 ---------- Net assets acquired $ 60,175 ========== The $146,819 intangible asset was assigned to in-process research and development assets that were written off at the date of acquisition. Those write-offs are included in general and administrative expenses. The following table summarizes the unaudited pro forma condensed financial information as if the acquisition of VPG was completed July 1, 2003. The unaudited combined pro forma condensed financial statements are derived from the historical financial statements of the Company and VPG and reflect adjustments to present the write-off of in-process research and development as of July 1, 2003. The pro forma information is presented for informational purposes only. You should not rely on the pro forma information as an indication of the results of operations of future periods or the results that actually would have been realized had the companies been a single company during the periods presented. Year Ended June 30, ------------------------- 2005 2004 ---------- ---------- Revenues $ 17,243 $ 24,961 Operating expenses 538,633 914,216 Other income (expense) (205,301) (46,524) Net Loss (726,691) (935,779) Net Loss attributable to common stockholders (942,532) (1,178,079) Net Loss per share $ (8.14) $ (11.46) All acquisitions have been accounted for as purchases and the operations of the purchased companies have been included in the Company's statement of operations since their date of acquisition. Upon consolidation, all intercompany accounts and transactions have been eliminated. NOTE D - NOTES PAYABLE In connection with an acquisition (See Note C), on November 10, 2004 the Company entered into a note payable with Trident Growth Fund, L.P. for $700,000, at an annual interest rate of 14%, maturing on November 10, 2005. The loan is collateralized by a security interest in Company assets. Interest is payable monthly in cash. On August 10, 2005 the loan agreement was modified to change the loan amount from $700,000 to $750,000 and the Company entered into an additional note payable with Trident Growth Fund, L.P., for $50,000 at an annual interest rate of 14%, maturing on August 10, 2006. In connection with the $50,000 loan, the Company issued warrants to purchase 720 shares of its Common Stock, exercisable for five years at an exercise price of $5.00 per share. The warrants were valued at approximately $3,500. On September 19, 2005 the loan agreement was again modified to change the loan amount from $750,000 to $850,000 and the Company entered into an additional note payable with Trident Growth Fund, L.P., for $100,000 at an annual interest rate of 14%, maturing on September 19, 2006. In connection with the $100,000 loan, the Company issued warrants to purchase 1,440 shares of its Common Stock, exercisable for five years at an exercise price of $5.00 per share. The warrants were valued at approximately $6,000. On February 7, 2006 the loan agreement was again modified to change the loan amount from $850,000 to $950,000 and the Company entered into an additional note payable with Trident Growth Fund, L.P., for $100,000 at an annual interest rate of 14%, maturing on February 7, 2007. In connection with the $100,000 loan, the Company issued warrants to purchase 1,440 shares of its Common Stock, exercisable for five years at an exercise price of $5.00 per share. The warrants were valued at approximately $1,900. On June 27, 2006 the loan agreement was again modified to change the loan amount from $950,000 to $996,000 and the Company entered into an additional note payable with Trident Growth Fund, L.P., for $46,000 at an annual interest rate of 14%, maturing on February 7, 2007. In connection with the $46,000 loan, the Company issued warrants to purchase 1,520 shares of its Common Stock, exercisable for five years at an exercise price of $5.00 per share. The warrants were valued at approximately $3,345. The above notes are convertible into Common Stock at any time on or after the six month anniversary of the date of issue of the notes, at a per share conversion price equal to the average of the closing prices of the common stock for the three business days ending on any conversion date. In addition, the notes may be redeemed at the earlier of: (i) the maturity dates stated above; (ii) the closing date of the Company's next public offering; or (iii) the date of any change of control of the Company, as defined therein. Negotiations with Trident to extend the maturity date of the notes are ongoing. As of the date of this filing, extension of the notes is still pending. NOTE E - COMMITMENTS AND CONTINGENCIES Rentals ------- Total rentals under cancelable and non-cancelable leases are included in general and administrative expenses and were $23,183, $2,162 and $0 for the years ended June 30, 2006, 2005 and 2004. Commitments for rental payments under non-cancelable operating leases for the years ending June 30 are: 2007 - $43,377; 2008 - $44,519. Litigation ---------- The Company is routinely a party to ordinary litigation incidental to its business, as well as to other litigation of a nonmaterial nature, the outcome of which management does not expect, individually or in the aggregate, to have a material adverse effect on the financial condition or results of operations of the Company. NOTE F - CONCENTRATIONS OF CREDIT RISK There were no sales during 2006. During 2005 one customer represented 100% of sales. There were no sales during 2004. NOTE G - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK Preferred Stock --------------- The Company has 1,000,000 shares authorized of $1.00 par value cumulative preferred stock. The Company's articles of incorporation allow the board of directors to determine the number of shares and determine the relative rights and preferences of any series of preferred stock to be issued. In December 1992, the Company issued 140,000 shares of Series A redeemable preferred stock (stated value $1 per share). In fiscal 2000, 100,000 shares were redeemed for cash, and 10,000 shares were converted to common stock, with the remaining 30,000 outstanding at June 30, 2006. Shares accumulate dividends at 6%, or $1,800 per year. Dividends in arrears at June 30, 2006, 2005 and 2004 on Series A shares totaled $17,550, $15,750 and $13,950, respectively. In fiscal 1996, the Company issued 55 shares of Series H convertible preferred stock (stated value $25,000 per share). 52 shares were converted into common stock in fiscal 1997, and one share was converted in fiscal 2000, with the remaining two shares outstanding at June 30, 2006. Shares accumulate dividends at 5%, or $2,500 per year and are paid in May and November of each year. Shares are convertible based on 80% of the five day average closing bid price of the Company's common stock, with minimum and maximum conversion limits of $12 and $32 per share, respectively. Dividends of $10,000, $7,500 and $5,000 were in arrears on Series H shares at June 30, 2006, 2005 and 2004, respectively. In June 1999, the Company issued 720 shares of Series D-1 convertible preferred stock (stated value $25,000 per share). The shares accumulated dividends at 5%, or $900,000 per year and were convertible into common stock at $32 per share. In fiscal 2002, the Company exchanged these shares for 240 shares of Series 2002-G preferred stock (stated valued $25,000 per share). In conjunction with the exchange of shares, all accumulated dividends associated with the D-1 preferred stock were released by mutual agreement. The new series of preferred stock had no provision for dividends and was convertible into shares of common stock. Forty-four shares were converted into common stock in fiscal 2003, forty shares were converted into common stock in fiscal 2005, and four shares were converted in fiscal 2006. As of June 30, 2006, the outstanding unconverted 152 shares of Series 2002-G Preferred stock had a liquidation preference of $3.8 million, convertible into 50,667 shares of common stock of the Company. In June 2002, the Company issued 20 shares of Series 2002-K convertible preferred stock (stated value $25,000 per share). The shares have no provision for dividends and are convertible into common shares at $.80 per share. At any time, at the Company's sole discretion, the Company may redeem all or part of the outstanding preferred shares at a price per share of 120% of their face value. Refer to Note C for preferred stock issued in connection with acquisition. Dividends of $-0-, $20,067 and $-0- were paid on preferred stock during the years ended June 30, 2006, 2005 and 2004, respectively. Cumulative dividends in arrears as of June 30, 2006, 2005 and 2004 amounted to $408,824, $136,274 and $18,950, respectively. Stock Options ------------- The Company has periodically granted stock options for employment and outside services received during the years reported. These options are treated as fixed, compensatory awards. The Company has granted compensatory stock options to key employees and directors at market value at the date of grant. No options were granted during 2006 and 2004. During 2005, options covering 8,000 shares were granted that vested immediately. During 2005, no intrinsic value was assigned to options issued to employees and directors and, accordingly, no compensation expense was recognized in that year. Had compensation cost been determined on the basis of fair value, net loss and net loss per share for 2006, 2005 and 2004 would have been increased as follows: 2006 2005 2004 ---------- ---------- ---------- Net loss As reported $ (500,941) $ (717,477) $ (20,355) Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of income tax effect - (78,960) - ---------- ---------- ---------- Pro forma net loss $ (500,941) $ (796,437) $ (20,355) ========== ========== ========== Loss per share As reported (5.46) (7.55) (0.24) Pro forma (5.46) (8.23) (0.24) The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 2006 2005 2004 ---------- ---------- ---------- Expected volatility N/A 219% N/A Risk-free interest rate N/A 4.24% N/A Expected lives N/A 5 years N/A Dividend yield N/A - N/A Additional information with respect to all options outstanding at June 30, 2006, and changes for the three years then ended was as follows: When Issued When Issued When Issued Exercise Price Exercise Price Exercise Price Above Equal to Below market price market price market price ------------------ --------------- -------------- Weighted Weighted Weighted average average average exercise exercise exercise Total Options price Options price Options price Options ------- ----- ------- ----- ------- ----- ------- Outstanding at June 30, 2003 32,220 $206.50 6,576 $42.50 2,096 $ 720 40,892 Granted - - - - - - - Forfeited (2,809) 70.50 (188) 621.50 (1,583) 619 (4,580) ------- ------ ------ ------ ------ ------ ------- Outstanding at June 30, 2004 29,411 $219.50 6,388 $ 25.50 513 $1,031 36,312 Granted - - 8,000 10.00 - - 8,000 Forfeited (2,813) 739.50 (63) 1076.00 (513) 1,031 (3,389) ------- ------ ------ ------- ------ ------ ------- Outstanding at June 30, 2005 26,598 $164.50 14,325 $12.50 - - 40,923 Granted - - - - - - - Forfeited (4,850) 724.00 (125) 724.00 - - (4,975) ------- ------ ------ ------ ------ ------ ------- Outstanding at June 30, 2006 21,748 $ 40.00 14,200 $ 6.07 - - 35,948 ======= ====== ======= ====== ====== ====== ======= Number Weighted of shares average underlying exercise options price ---------- ------- Options exercisable at June 30, 2004 35,051 $ 202.50 ====== ======= Options exercisable at June 30, 2005 40,923 $ 111.50 ====== ======= Options exercisable at June 30, 2006 35,948 $ 26.60 ====== ======= No options were granted during 2006. For 2005, options granted equal to market value had a weighted average fair value per share of $10.00. No options were granted during 2004. Information about stock options outstanding at June 30, 2006 is summarized as follows: Options outstanding Exercisable -------------------------------- ---------------------- Weighted average Weighted Weighted remaining average average contractual exercise Number exercise Exercise prices Number life price exercisable price ---------------- --------- ----- ------- ----------- -------- $ 1.00 6,200 1.93 $ 1.00 6,200 $ 1.00 $ 10.00 8,000 3.75 $ 10.00 8,000 $ 10.00 $ 40.00 21,748 0.66 $ 40.00 21,748 $ 40.00 --------- --------- 35,948 35,948 ========= ========= Warrants -------- Common stock warrants issued and outstanding at June 30, 2006 are summarized as follows: Weighted Weighted average average Range of exercise price Number remaining life exercise price ---------------------- ------- -------------- -------------- $0.05 to $4.50 13,925 2.89 $ 0.64 $5.00 20,320 3.66 $ 5.00 All outstanding warrants are exercisable at June 30, 2006. During the year ended June 30, 2006, warrants to purchase an aggregate of 5,120 shares of the Company's common stock were granted in connection with additional borrowings from Trident. The warrants have an exercise price of $5.00, expire in November 2009 through June 2011, and were valued at a total of approximately $14,745 upon issuance. During the year ended June 30, 2005, warrants to purchase 2,000 shares of the Company's common stock were granted in connection with a litigation settlement. The warrants have an exercise price of $.05, expire in November 2009, and were valued at $10,000 upon issuance. Additionally, warrants to purchase 15,200 shares of the Company's common stock were granted in connection with the issuance of long-term debt. These warrants have an exercise price of $5.00 and expire in November 2009. The value of the warrants, $60,040, is included as a discount on the debt. Additionally, in connection with the same transaction concerning the issuance of long-term debt in November 2004, the exercise dates of outstanding warrants to purchase an aggregate of 6,625 shares of the Company's common stock were extended until November 2009, from a weighted average remaining life of 0.89 years to a weighted average remaining life of 5.95 years; and the exercise prices of the warrants were repriced to $.05 per share from a weighted average exercise price of $104.50 per share. During the year ended June 30, 2004, warrants to purchase 1,000 shares of the Company's common stock were granted in connection with services provided. The warrants have an exercise price of $4.50, expire in July 2008, and were valued at $4,500. NOTE H - INCOME TAXES A reconciliation of income tax benefit computed by applying the U.S. Federal tax rates to the net loss and recorded income tax expense (benefit) is as follows: 2006 2005 2004 ---------- ---------- ---------- Tax benefit at statutory rate $ (192,092) $ (272,093) $ (7,836) Change in valuation allowance $ 192,092 $ 272,093 $ 7,836 ---------- ---------- ---------- $ - $ - $ - ========== ========== ========== The components of the Company's deferred income taxes at June 30, 2005 and 2004 are as follows: 2006 2005 ---------- ---------- Deferred tax assets Net operating loss carryforwards $21,498,544 $21,306,452 ---------- ---------- Deferred tax asset 21,498,544 21,306,452 Valuation allowance (21,498,544) (21,306,452) ---------- ---------- $ - $ - ========== ========== At June 30, 2006, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $64,602,766 which may be used to offset future taxable income, subject to significant limitations and provisions of the Internal Revenue Code, and will expire in various amounts in the years 2008 through 2022 if not utilized. NOTE I - PENSION AND OTHER BENEFIT PROGRAMS Prior to a subsidiary's bankruptcy filing in 1992, the subsidiary had a defined benefit plan, which covered substantially all full-time employees. Benefit accruals were frozen in accordance with Section 204(h) of ERISA as of January 1, 1997 and no employees have been added to the plan since that date. Settlement and Plan Termination All plan benefits were settled with the purchase of annuities totaling $583,730 on August 7, 2006. The Company expects to terminate the plan and distribute remaining assets during the upcoming year. A final periodic benefit cost will be determined at that time. The following table sets forth the funded status of the Company's defined pension plan at June 30 (measurement dates of June 1, 2006 and 2005): Pension Benefits ----------------- 2006 2005 ------- ------- Change in benefit obligation Benefit obligation at beginning of year $613,280 $576,675 Interest cost 25,914 26,586 Actuarial (gain)/loss (30,525) 51,430 Benefits paid (44,475) (41,411) ------- ------- Benefit obligation at end of year $564,194 $613,280 Change in plan assets Fair value of plan assets at beginning of year $621,711 $621,608 Actual return on plan assets 56,958 41,514 Benefits paid (44,475) (41,411) ------- ------- Fair value of plan assets at end of year $634,194 $621,711 ------- ------- Reconciliation of Funded status Funded Status (Underfunded)/Overfunded $ 70,000 $ 8,431 Unrecognized net actuarial loss (gain) (14,470) 46,677 ------- ------- Net amount recognized $ 55,530 $ 55,108 ======= ======= Amounts recognized in the statement of financial position consist of: Pension Benefits ----------------- 2006 2005 ------- ------- Prepaid benefit cost $ 55,530 $ 55,108 ------- ------- Net amount recognized $ 55,530 $ 55,108 ------- ------- The accumulated benefit obligation for the defined benefit pension plan was $564,194 and $613,280 at June 30, 2006 and 2005, respectively. Components of Net Periodic Benefit Cost Pension Benefits ----------------- 2006 2005 ------- ------- Interest cost $ 25,914 $ 26,586 Expected return on plan assets (26,336) (31,722) Effect of Special Events -- -- ------- ------- Net periodic benefit cost $ (422) $ (5,136) ======= ======= Assumptions Weighted-average assumptions used to determine benefit obligations at June 30: Pension Benefits ----------------- 2006 2005 ------- ------- Discount rate 6.00% 5.00% Rate of compensation increase -- -- Weighted-average assumptions used to determine net periodic benefit cost for years ended June 30: Pension Benefits ----------------- 2006 2005 ------- ------- Discount rate 5.00% 6.00% Expected long-term return on plan assets 5.00% 6.50% Rate of compensation increase N/A N/A Historical and future expected returns of multiple asset classes were analyzed to develop a risk free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plan. Plan Assets The Company's pension plan weighted-average asset allocations at June 30, 2006 and 2005 by asset category are as follows: Plan Assets at June 30: 2006 2005 ------- ------- Asset Category -------------- Equity securities 33% 24% Debt securities 67% 76% ------- ------- Total 100% 100% ======= ======= Equity securities include Principal Financial Group, Inc. Common Stock in the amount of $207,775 (33 percent of total plan assets) and $150,967 (24 percent of total plan assets) at June 30, 2006 and 2005, respectively. Cash Flows Contributions ------------- Due to the settlement of all plan obligations, the Company will not be required to contribute to the pension plan in the future. Estimated Future Benefit Payments --------------------------------- The following benefit payments are expected to be paid over the next 10 fiscal years ending: 2007 607,000 2008 -- 2009 -- 2010 -- 2011 -- Years 2012 - 2016 -- These amounts are based on actual benefit payments made to settle the plan's benefit obligations. Components of Net Periodic Benefit Cost for the fiscal year ending June 30, 2006 Interest cost 25,914 Expected return on plan assets (26,336) ------- Net periodic benefit cost $ (422) ======= The interest cost shown above is based on a Benefit Obligation of $564,194. The expected Return on Plan Assets is based on $634,194, the market value of assets at June 30, 2006. NOTE J - NON-CASH INVESTING AND FINANCING ACTIVITIES 2006 2005 2004 ---------- ---------- ---------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock in acquisition $ - $ 60,000 $ - ========== ========= ========== Issuance of preferred stock in acquisition $ - $ 175 $ - ========== ========= ========== Issuance of common stock for services $ - $ - $ 15,119 ========== ========= ========== Issuance of common stock warrants for services $ - $ - $ 4,500 ========== ========= ========== Exercise of warrants into common stock $ - $ (3) $ - ========== ========= ========== Issuance of warrants in connection with debt $ 14,745 $ 60,040 $ - ========== ========= ========== Conversion of preferred stock to common stock $ (4) $ (40) $ - ========== ========= ========== In-process research and development costs acquired through assumption of debt $ - $ 86,644 $ - ========== ========= ========== NOTE K - BUSINESS SEGMENT INFORMATION No business segments have existed since the Company discontinued normal operations in December 2002. Prior to that, the Company was primarily engaged in high technology product sales and consulting and support services. NOTE L - RELATED PARTIES The Company's CEO held approximately 39% of the common stock of VPG at the time of the merger discussed in Note C. He also served as a director and the CEO of VPG at that time. Trident, reported as a beneficial owner of 7.6% of the Company as of June 30, 2004, was also a beneficial owner of approximately 35% of VPG. The CEO previously paid various miscellaneous expenses of the Company during the fiscal year ended June 30, 2004. The CEO holds the Company harmless from these expenses and does not intend to seek reimbursement. These expenses are less than $30,000. During the year ended June 30, 2004, 5,760 shares of common stock with a market value of $5,760 were issued to the CEO for services. During the year ended June 30, 2005, the Company paid approximately $20,000 to a company, 100% owned by the CEO, for management and consulting services. During the year ended June 30, 2006, the Company's CEO advanced approximately $63,378 to the Company for operating expenses. At June 30, 2006, amounts outstanding under this advance totaled approximately $9,246 and are included in accrued expenses. NOTE M - SUBSEQUENT EVENT On July 14, 2006, Patrick A. Custer, the sole director of the Company, appointed Joseph R. Rozelle as a member to the board of directors of the Company effective as of July 14, 2006. Concurrently with Mr. Rozelle's appointment as a director, Mr. Custer resigned as an officer and director of the Company and Mr. Rozelle was elected to the offices of President, Secretary, Treasurer and Chief Executive Officer of the Company. On September 5, 2006, stockholders approved a one for fifty (1:50) reverse split of all outstanding shares of the Company's common stock and the reverse split was implemented on September 18, 2006. The par value remained at $.001 per share and the authorized number of common shares was maintained at 80,000,000. All share and per share data give effect to the reverse stock split, applied retroactively as if it occurred on July 1, 2003. NOTE N - SELECTED QUARTERLY FINANCIAL DATA (unaudited) The following tables set forth certain unaudited financial data for the quarters indicated: Fiscal 2006 Quarter Ended Fiscal 2005 Quarter Ended -------------------------------------------------- ---------------------------------------------------- Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, 2005 2005 2006 2006 2004 2004 2005 2005 ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- Net Sales $0.00 $0.00 $0.00 $0.00 $0.00 $500 $5,323 $6,720 Gross Margin $0.00 $0.00 $0.00 $0.00 $0.00 $500 $5,323 $6,720 % of net sales 0% 0% 0% 0% 0% 100% 100% 100% Operating income (loss) $(158,252) $(88,802) $(26,723) $(43,838) $0.00 $(210,678) $(192,459) $(154,895) % of net sales 0% 0% 0% 0% 0% 0% 0% 0% Net income (loss) $(221,134) $(138,076) $(63,689) $(78,042) $0.00 $(244,500) $(259,973) $(213,004) % of net sales 0% 0% 0% 0% 0% 0% 0% 0% Net income (loss) attributable to common shareholders $(283,459) $(200,401) $(126,014) $(140,367) $(1,075) $(277,275) $(322,298) $(273,170) % of net sales 0% 0% 0% 0% 0% 0% 0% 0% Net income (loss) attributable to common shareholders per share - basic and diluted* $(2.08) $(1.46) $(0.91) $(1.02) $(0.01) $(2.46) $(2.68) $(2.18) * Difference in per share amounts between quarterly financial data and year-end results are attributable to rounding. The above information differs from that previously reported for the quarters ended December 31, 2004 and March 31, 2005 due to impact of stock warrants granted to Trident Growth Fund, LP ("Trident") in connection with our issuance of a note payable to Trident on November 10, 2004. The fair value of the stock warrants was recorded as a discount to debt and amortized over the term of the note payable. The impact of this adjustment increased the loss for the quarters ended December 31, 2004 and March 31, 2005 by $8,389 and $14,804, respectively. The loss for the quarter ended December 31, 2004 was also increased by $10,000 to reflect the fair value of stock warrants issued on November 4, 2004 in settlement of litigation. In addition, revenue for the quarter ended March 31, 2005 was decreased by $90,902 with a corresponding reduction to the cost of product and services to reflect revenue recognition at net as an agent. All share and per share data give effect to a one for fifty (1:50) reverse stock split that was implemented on September 18, 2006, applied retroactively as if it occurred on July 1, 2003.

VPGI Corp. and Subsidiaries (A Development Stage Company) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended June 30, 2006, 2005 and 2004 Balance at Charged to Charged Balance beginning costs and to other at end Description of year expenses accounts Deductions of year ----------- --------- --------- -------- ---------- --------- Year ended June 30, 2004 Allowance for doubtful accounts - - - - - Year ended June 30, 2005 Allowance for doubtful accounts - - - - - Year ended June 30, 2006 Allowance for doubtful accounts - - - - - VPGI CORP. and Subsidiaries EXHIBIT INDEX Exhibit Number Description of Exhibits Sequential Page Number ---------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger dated November 10, 2004 between the Company and Venture Pacific Group, Inc. (filed as Exhibit "2.1" to the Company's Current Report on Form 8-K dated as of November 10, 2004, filed on November 17, 2004.) N/A 3(i) Articles of Incorporation of the Company, as amended and restated (filed as Exhibit "3(i)" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.) N/A 3(ii) Bylaws of the Company, as amended (filed as Exhibit "3(ii)" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999 and incorporated herein by reference.) N/A 4.1 Form of common stock Certificate of the Company (filed as Exhibit "4.2" to the Company's annual report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference.) N/A 4.2 1999 Equity Incentive Plan (filed as Exhibit "4.4" to the Company's Registration Statement on Form S-8 filed with the Commission on July 12, 2000 and incorporated herein by reference.) N/A 4.3 Series A Preferred Stock terms and conditions (filed as Exhibit "4.3" to the Company's annual report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference.) N/A 4.4 Series H Preferred Stock terms and conditions (filed as Exhibit "4.4" to the Company's Registration Statement on Form S-3 originally filed with the Commission on June 20, 1996 and incorporated herein by reference.) N/A 4.5 Series 2002-G Preferred Stock terms and conditions (filed as Exhibit "4.1" to the Company's Current Report on Form 8-K dated as of March 5, 2002 and incorporated herein by reference.) N/A 4.6 Form of warrant issued in connection with private placement to Bonanza Partners, Ltd. (filed as Exhibit "4.11" to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1999 and incorporated herein by reference.) N/A 4.7 Form of warrant issued in connection with private placement to LBI Group, Inc. (filed as Exhibit "4.5" to the Company's Registration Statement on Form S-3 filed with the Commission on May 19, 2000 and incorporated herein by reference.) N/A 4.8 Form of warrant issued to Sagemark Capital, L.P. in connection with a loan to the Company (filed as Exhibit "4.11" to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2000 and incorporated herein by reference.) N/A 4.9 Securities Purchase Agreement dated March 5, 2002 between registrant and Brown Simpson Partners I, Ltd. relating to the redemption of registrant's Series 1999-D1 Convertible Preferred Stock with Series 2002-G Convertible Preferred Stock (filed as Exhibit "99.2" to the Company's Current Report on Form 8-K dated as of March 5, 2002 and incorporated herein by reference.) N/A 4.10 Registration Rights Agreement dated March 5, 2002 between registrant and Brown Simpson Partners I, Ltd. relating to the registration of the shares of common stock underlying registrant's Series 2002-G Convertible Preferred Stock (filed as Exhibit "99.3" to the Company's Current Report on Form 8-K dated as of March 5, 2002 and incorporated herein by reference.) N/A 4.11 Settlement and Mutual Release Agreement dated March 5, 2002 between registrant and Brown Simpson Partners I, Ltd. relating to the redemption of registrant's Series 1999-D1 Convertible Preferred Stock with Series 2002-G Convertible Preferred Stock (filed as Exhibit "99.4" to the Company's Current Report on Form 8-K dated as of March 5, 2002 and incorporated herein by reference.) N/A 4.12 Form of warrant issued to Setfield Limited for services rendered (filed as Exhibit "4.18" to the Company's annual report on Form 10-K for the fiscal year ended June 30, 2002 and incorporated herein by reference.) N/A 4.13 Form of warrant issued to Gemini Growth Fund, L.P. in connection with a loan to the Company (filed as Exhibit "4.19" to the Company's annual report on Form 10-K for the fiscal year ended June 30, 2002 and incorporated herein by reference.) N/A 4.14 Series 2002-K Preferred Stock terms and conditions (filed as Exhibit "4.20" to the Company's annual report on Form 10-K for the fiscal year ended June 30, 2002 and incorporated herein by reference.) N/A 4.15 Form of warrant issued to Associates Funding Group, Inc. in connection with sale of nine subsidiaries (filed as Exhibit "4.18" to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2003, filed on May 20, 2003 and incorporated herein by reference.) N/A 4.16 Form of warrant issued to Akin, Gump, Strauss, Hauer & Feld, LLP. in connection with legal services rendered to the Company (filed as Exhibit "4.19" to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2003, filed on May 20, 2003 and incorporated herein by reference.) N/A 4.17 First Amendment to Series 2002-G Preferred Stock terms and conditions (filed as Exhibit "4.21" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.) N/A 4.18 Form of 190,000 warrants issued to consultants during year ended June 30, 2003 in connection with services rendered to the Company (filed as Exhibit "4.22" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.) N/A 4.19 Series 2004-L Preferred Stock terms and conditions (filed as Exhibit "4.1" to the Company's Current Report on Form 8-K dated as of November 10, 2004, filed on November 17, 2004.) N/A 4.20 Form of warrant issued to Trident Growth Fund, L.P. in connection with the Loan Agreement dated November 10, 2004 between the Company and Trident Growth Fund, L.P. (filed as Exhibit "4.2" to the Company's Current Report on Form 8-K dated as of November 10, 2004, filed on November 17, 2004.) N/A 4.21 Amended Form of warrants issued to Trident Growth Fund, L.P. in connection with the amended Loan Agreement dated November 10, 2004 between the Company and Trident Growth Fund, L.P. (filed as Exhibit "4.21" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and incorporated herein by reference.) N/A 10.1 Loan Agreement dated November 10, 2004 between the Company and Trident Growth Fund, LP. (filed as Exhibit "10.1" to the Company's Current Report on Form 8-K dated as of November 10, 2004, filed on November 17, 2004.) N/A 10.2 First Amendment to Loan Agreement dated November 10, 2004 between the Company and Trident Growth Fund, LP. (filed as Exhibit "10.2" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and incorporated herein by reference.) N/A 10.3 Second Amendment to Loan Agreement dated November 10, 2004 between the Company and Trident Growth Fund, LP. (filed as Exhibit "10.3" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and incorporated herein by reference.) N/A 10.4 Lease Agreement between the Company and Memshalah Realty dated May 5, 2005 pertaining to the property utilized as the corporate headquarters (filed as Exhibit "10.4" to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and incorporated herein by reference.) N/A 10.5* Third Amendment to Loan Agreement dated November 10, 2004 between the Company and Trident Growth Fund, LP. 61 10.6* Fourth Amendment to Loan Agreement dated November 10, 2004 between the Company and Trident Growth Fund, LP. 64 21 * Subsidiaries of the Company. 67 23 * Consent of Independent Certified Public Accountants. 68 31 * Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 69 32 * Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 71 _______________ * Filed herewith.

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