SB-2

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 2002.

REGISTRATION NO. 333-_______

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

VIRTRA SYSTEMS, INC.

(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

TEXAS	334310	93-1207631
(State or other jurisdiction of incorporation or organization)	(Primary standard industrial classification code number)	(IRS employer identification number)

440 North Center

Arlington, Texas 76011

(817) 261-4269
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING

AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

440 North Center

Arlington, Texas 76011

(817) 261-4269

(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)

L. Kelly Jones, chief executive officer
440 North Center
Arlington, Texas 76011
(817) 261-4269
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING

AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:

DAVID C. THOMAS, ESQ.
185 Madison Avenue
10th Floor
New York, NY 10016
(212) 725-4423
(212) 684-9022 Fax
COUNSEL TO ISSUER

_________________

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.

_________________

IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434, CHECK THE FOLLOWING BOX.

CALCULATION OF REGISTRATION FEE

TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED	AMOUNT TO BE REGISTERED	PROPOSED MAXIMUM OFFERING PRICE PER SECURITY (1)	PROPOSED MAXIMUM AGGREGATE OFFERING PRICE	AMOUNT OF REGISTRATION FEE
Common Stock, $.005 Par Value (2)	12,500,000	$ ..25	$3,125,000	$ 287.50
Common Stock, $.005 Par Value (3)	6,000,000	$ ..25	1,500,000	138.00
Common Stock, $.005 Par Value (4)	500,000	$.71	355,000	32.66
Common Stock, $.005 Par Value (5)	496,703	(5)	401,727	36.96
Common Stock, $.005 Par Value (6)	495,000	$ ..25	123,750	11.39
Total	19,991,703		$5,505,477	$ 506.51

(1) All shares are to be offered by selling shareholders from time to time at fluctuating market prices. The registration fee for these shares is calculated in accordance with Rule 457(c). Except as otherwise noted, the maximum offering price is based upon $0.245 per share, which was the average of the bid and asked prices of VirTra Systems, Inc. common stock as reported on the OTC Bulletin Board on July 31, 2002, rounded to two decimal places.

(2) Consists of up to 12,500,000 shares which may be issued to Dutchess Private Equities Fund, L.P. under the investment agreement relating to our equity line.

(3) Consists of up to 6,000,000 shares which may be issued to holders of our convertible subordinated debentures issued on July 11, 2002 and to be issued after the effective date of this registration statement.

(4) Issuable upon the exercise of common stock purchase warrants issued to Dutchess Private Equities Fund, L.P., and other debenture holders on July 11, 2002. The exercise price of the warrants is $0.7094 (200% of market price as of July 11, 2002), but is subject to adjustment under some circumstances.

(5) Consists of 245,000 shares which may be issued upon exercise of warrants held by Swartz Private Equity LLC and having an exercise price of $0.625 per share, 245,000 shares which may be issued upon exercise of warrants held by Swartz and having an exercise price of $1.00 per share, 3,933 shares which may be issued upon exercise of warrants having an exercise price of $.42 per share, 1,694 shares which may be issued upon exercise of warrants held by Swartz and having an exercise price of $0.17 per share, 1,076 shares which may be issued upon exercise of warrants held by Swartz and having an exercise price of $0.275 per share. Shares having an exercise price of less than the market value of our common stock on July 31, 2002 are valued for purposes of this computation as described in note 6.

(6) Consists of 495,000 shares to be sold by shareholders who acquired the shares in earlier private placement transactions.

In accordance with Rule 416 promulgated under the Securities Act of 1933, this registration statement also covers such indeterminate number of additional shares of common stock as may become issuable upon stock splits, stock dividends or similar transactions.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

PROSPECTUS

VirTra Systems, Inc.

440 North Center, Arlington, Texas 76011 (817) 261-4269

The Resale of 19,991,703Shares of Common Stock

The selling price of the shares will be determined by market factors at the time of their resale.

This prospectus relates to the resale by the selling shareholders of up to 19,991,703shares of common stock. The selling shareholders may sell the stock from time to time in the over-the-counter market at the prevailing market price or in negotiated transactions. Of the shares offered,

• No shares are presently outstanding,
• up to 12,500,000 shares are issuable to Dutchess Private Equities Fund, L.P. based an Investment Agreement dated as of July 11, 2002,
• up to 6,000,000 shares are issuable to holders of our convertible subordinated debentures issued on July 11, 2002 and August___, 2002,
• up to 500,000 shares are issuable upon the exercise of warrants issued to the debenture investors,
• 496,703 shares are issuable upon exercise of warrants acquired by Swartz Private Equity LLC in connection with an earlier equity line, and

• 495,000 shares may be sold by holders who acquired those shares in earlier private placement transactions

We will receive no proceeds from the sale of the shares by the selling shareholders. However, we may receive up to $5 million of proceeds from the sale of shares to Dutchess, and we may receive additional proceeds from the sale to Dutchess and Swartz of shares issuable upon the exercise of any warrants that they may exercise.

Our common stock is quoted on the over-the-counter Electronic Bulletin Board under the symbol VTSI. On July 31, 2002, the average of the bid and asked prices of the common stock on the Bulletin Board was $0.25 per share.

Investing in the common stock involves a high degree of risk. You should not invest in the common stock unless you can afford to lose your entire investment. See "Risk Factors".

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is August 12, 2002

Please read this prospectus carefully. It describes our company, finances, products and services. Federal and state securities laws require us to include in this prospectus all the important information that you will need to make an investment decision.

You should rely only on the information contained or incorporated by reference in this prospectus to make your investment decision. We have not authorized anyone to provide you with different information. The selling shareholders are not offering these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front page of this prospectus.

Some of the statements contained in this prospectus, including statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," are forward-looking and may involve a number of risks and uncertainties. Actual results and future events may differ significantly based upon a number of factors, including:

• that we have had significant losses ever since starting business and we expect to continue losing money for some time;
• that we expect competition from companies that are much larger and better financed than we are;
• that we cannot be sure our product will be accepted; and
• that we are in default on loans from several of our shareholders, and a bank, and we are also in default under some of our equipment lease financing agreements.

In this prospectus, we refer to VirTra Systems, Inc. as "we" or "VirTra Systems," and Dutchess Private Equities Fund, L.P. as "Dutchess."

Prospectus Summary

This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in the common stock. You should read the entire prospectus carefully, including the "Risk Factors" section.

Our Business

We were organized in 1996 to operate theme concept microbrewery restaurants. In 1997, we acquired all rights to 'Net GameLink™, an interactive entertainment system designed to allow a number of players to compete with one another in a game via an intranet or the Internet. From 1999 when we closed our microbrewery operations until we acquired Ferris Productions, Inc. as described below, we had been devoting substantially all of our efforts to implementing the 'Net GameLink™ product and our operations were limited to development, construction and beta-testing of the initial 'Net GameLink™ prototype system at J. Gilligan's Bar and Grill in Arlington, Texas.

In September, 2001, we acquired Ferris Productions, Inc., a leading developer and operator of virtual reality devices. Ferris designs, develops, distributes, and operates technically-advanced products for the entertainment, simulation, promotion, and education markets. The acquisition provided us with a wider array of products within our industry, an experienced management team, an existing revenue stream, and established distribution channels. Post-merger, we believe we are a leading virtual reality developer and manufacturer.

Our principal office is at 440 North Center, Arlington, Texas 76011, and our telephone number is (817) 261-4269.

The Offering

The selling shareholders are:

Shareholder	Number of Shares
Dutchess Private Equities Fund, L.P. (1)	17,333,333
Peter and Melody Zatir (1)	666,667
Andrew Smith (1)	200,000
Delaware Charter trustees for Michael Dix IRA (1)	320,000
Delaware Charter trustees for Laurence Wexler IRA (1)	466,667
Delaware Charter trustees for Craig Wexler IRA (1)	13,333
Swartz Private Equity LLC	496,703
Galactic Ltd.	325,000
Institutional Capital Finance	100,000
Gary Cella	50,000
FilmXero	20,000
Total	19,991,703

(1) The number of shares beneficially owned by holders of our convertible subordinated debentures is indeterminate as the conversion price of those debentures is based upon market price of the shares. In computing the numbers of shares held by these holders, the 6 million shares covered by this registration statement for resale following conversion have been divided proportionately to the principal amount of debentures held by each holder.

We have signed an Investment Agreement with Dutchess to raise up to $5 million through a series of sales of our common stock to Dutchess. The dollar amount of each sale is limited by our common stock's trading volume. A minimum period of time must occur between sales. In turn, Dutchess will either sell our stock in the open market, sell our stock to other investors through negotiated transactions or hold our stock in its own portfolio. This prospectus covers the resale of our stock by Dutchess either in the open market or to other investors.

Under our equity line, we may, at our discretion, periodically sell to Dutchess shares of our common stock for a total purchase price of up to $5 million. They will pay us 92 percent (97 percent less 5 percent of the proceeds which we must pay to them) of the average of the lowest four closing bid prices of our common stock during the 5 trading days after we give notice to them of our demand - called a "put notice" - that they purchase a certain amount of our stock. They intend to resell any shares purchased under the equity line at the then-prevailing market price.

This prospectus also relates to 6,000,000 shares of our common stock that we have reserved for possible issuance to the holders of 3-year 5% Convertible Debentures in the principal amount of $450,000. The holders of these convertible debentures have the right to convert the debentures, with accrued interest, into shares of our common stock at the lesser of 125 percent of the weighted volume average price of our common stock on the date the debentures were issued or 85 percent of the average of the four lowest closing bid prices for our common stock during the 5 trading days prior to the dates the holders give us their notices of conversion.

It also covers the resale of shares acquired or to be acquired by other investors as a result of earlier private placement transactions. These other shareholders have "piggyback" writes as to the registration statement that includes this prospectus.

Key Facts

Common Stock Offered	Up to 19,991,703 shares by selling shareholders.
Offering Price	Prevailing market prices.
Common Stock Outstanding Before This Offering	35,771,931.
Use of Proceeds	None; however, we may receive up to $5 million from the sale of the shares to Dutchess, and we may receive additional amounts from the sale of shares to Dutchess if Dutchess exercises any of the warrants issued to it when it bought its convertible debentures, in which case such proceeds will be used for general corporate and working capital purposes.
Risk Factors	The securities offered involve a high decree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution."
OTC Bulletin Board Common Stock Symbol	VTSI

(1) Includes

• up to 12,500,000 shares that we may issue to Dutchess under the Investment Agreement,
• up to 6,000,000 shares that we may issue to holders of our convertible subordinated debentures upon conversion of those debentures,
• up to 500,000 shares underlying warrants issued to the debenture investors,
• 496,703 shares we may issue to Swartz Private Equity LLC if it exercises warrants it acquired in connection with an earlier line of credit, and
• 425,000 shares we have issued earlier private placement transactions

Summary Financial Data

The information below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes to financial statement included elsewhere in this prospectus.

	Year Ended December 31,		Six Months ended June 30
	2001	2000	2002	2001
Revenue	$ 2,463,064	$ 3,359,126	$ 502,064	$ 1,372,118
Loss from operations	(1,555,027)	(658,148)	(880,432)	(836,482)
Net Loss	(2,954,576)	(1,351,871)	(1,560,015)	(1,362,314)
Income (loss) per common share	(0.09)	(0.05)	(0.05)	(0.04)
Weighted average number of common shares outstanding	31,758,516	30,400,649	34,356,598	34,400,100

Balance Sheet Data:
	June 30, 2002
Working capital (deficit)	($5,703,818)
Total assets	693,292
Total liabilities	8,507,272
Shareholders' equity (deficit)	(7,817,871)

Risk Factors

An investment in the common stock the selling shareholders are offering to resell is risky. You should be able to bear a complete loss of your investment. Before purchasing any of the common stock, you should carefully consider the following risk factors, among others.

Risks Related to Our Business

The demand for our virtual reality entertainment products may be less than we expect, and may be affected to a greater degree than other sources of entertainment by an economic downturn.

Based on experience to date, we believe there is a substantial demand for our virtual reality entertainment products. However, this conclusion is based on installations at a limited number of very popular destination entertainment centers, and a few high-profile promotional projects, and the results may not necessarily be representative of other locations where our products may be installed, or with other promotional projects. In addition, an economic downturn may have a greater impact on our installations, because they are located in major destination tourist entertainment centers, as compared with locations not requiring lengthy travel. The current summer has seen attendance drop an average of 22 percent at the theme parks where our products are located, which is consistent with other nationally-recognized parks. In addition, theme parks around the country have this summer experienced an increase in season passholder percentages, indicating local patrons, who typically spend less money than destination travelers, frequenting local theme parks more often.

We expect sales of our advertising and promotion virtual reality products to be strongly affected by general business trends.

Sales of our applications of virtual reality in the advertising and promotion fields are likely to be closely tied to the general level of business activity in the country, and particularly on the overall willingness of businesses to increase the amount they spend on advertising. Historically, in times of economic slowdown businesses have reduced their spending on advertising. Since custom applications for advertising generally carry a higher profit margin for us than our entertainment-related products and services, an overall decline in business activity could seriously reduce our margins and our prospects of becoming profitable.

Other companies with more resources and greater name recognition may make competition so intense that the business will not be profitable.

Although we have received a patent, and have another patent pending, covering some of our virtual reality technology, that patent, and the other patent if it is issued, will provide only limited protection. They will not prevent other companies from developing virtual reality products similar to ours using other methods. If we are successful a number of other companies with far more money and greater name recognition may compete with us. This competition could both reduce the number of entertainment centers which select our reality products and create downward pressure on the amount we could charge for the product. As a result we might not have enough revenue to generate a profit.

Our operating results may fluctuate significantly and may be difficult to predict.

Our operating results will likely fluctuate in the future due to a number of factors, many of which will be outside our control. These factors include:

• pricing competition;
• seasonal fluctuations affecting the overall volume of visitors to entertainment centers where our virtual reality entertainment products are located;
• the announcement or introduction of new virtual reality products and games by us or our competitors; and
• the amount and timing of costs relating to expansion of our operations.

Due to these factors, factors discussed elsewhere in this document, or unforeseen factors in some future quarter, our operating results may not meet the expectations of securities analysts and investors, and if this happens, the trading price of the common stock of our company may decline.

The success of our new line of virtual reality training simulators will be affected by political considerations such as the willingness of governmental agencies to spend additional amounts on our product to train law-enforcement officers.

One of the major applications of our new line of training simulators is the training of law-enforcement officers. While we believe that the terrorist attacks of September 11, 2001 have led to an increased interest in this type of training, we cannot give any assurance that the interest will be long-lived, that funds will be made available to acquire or our products for that purpose, or that we will be selected to supply the training simulators.

We cannot predict our future capital needs and we may not be able to secure additional financing.

To fully implement our current business plan, we will likely need to raise additional funds within the next 12 months in order to fund the operations of the combined companies. We expect that a substantial part of these funds will come from the sale of additional shares under our equity line arrangement with Dutchess. However, for this to happen there must be a sustained volume of trading in our shares, since the amount we can draw under that line is directly related to our share price and volume. If we are unable to draw a sufficient amount under our arrangement with Dutchess, we will need to seek financing from other sources. Whether we raise funds through our line of credit or other sources, you may experience significant dilution of your ownership interest, and these securities may have rights senior to the rights of common shareholders. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund continuing operations, develop our products, or take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

We expect our stock price to be volatile.

The market price of our common shares has been subject to wide fluctuations in response to several factors, such as:

• actual or anticipated variations in our results of operations;
• announcements of technological innovations;
• new services or product introductions by us or our competitors;
• changes in financial estimates by securities analysts; and
• conditions and trends in the Internet and electronic commerce industries.

The stock markets generally, and the Electronic Bulletin Board in particular, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies, and that often have been unrelated or disproportionate to the operating performance of those companies. These market fluctuations, as well as general economic, political, and market conditions such as recessions, interest rates or international currency fluctuations, may adversely affect the market price of the common stock of the combined company.

We have had significant losses ever since starting business and we expect to continue losing money for some time.

To date, we have incurred significant losses. At June 30, 2002, our accumulated deficit was $10,597,045 and our working capital deficit was $5,703,818.

For the six months ended June 30, 2002, we lost $1,560,015 and for the year ended December 31, 2001, we lost $2,954,576. These losses were caused primarily by the fact that our level of sales has been low compared to our general and administrative expenses. In order to become profitable, we will have to increase our revenues substantially. Based on our current projections, we do not expect to become profitable until promotional/advertising and training simulation sales reach at least $6,000,000.

We cannot be sure our internet-enabled gaming kiosks will be accepted.

We have not carried out any marketing studies to determine how well our internet-enabled gaming kiosks will be accepted. Our product may not be accepted on a sufficiently wide basis to allow production in the quantities needed to make this product line profitable. Although arcade and computer games are an established form of entertainment, and although third-party research indicates that interactive Internet gaming is a soon-to-be burgeoning form of entertainment, at present ‘Net GameLink™ is a new and unique concept that has been subject to limited beta-testing. We have used only one beta site, and that site was also used for eliminating technical bugs. This limited test marketing is too small to reach firm conclusions about acceptance of the product in a wider geographic market.

We are in default on loans from several of our shareholders.

Several of our shareholders have made loans to us and hold notes for these loans which we have been unable to repay. The shareholders are legally entitled to sue us at any time for the amounts we owe them. We do not believe they will sue us, since that would probably cause the value of the stock they hold to go down. However, if one or more of the shareholders were to sue us we might be forced to go out of business.

We are in default on equipment leases that are important for our virtual reality entertainment centers.

We operate virtual reality entertainment centers in a number of theme parks. To date, these entertainment centers have been our main source of revenue. We have leased some of the equipment needed to operate these entertainment centers from approximately 140 lessors. In October of 2001 we told all of the leaseholders that we were suspending payments on their leases. Unless we are able to cure these defaults, there is some possibility that some or all of the leaseholders could take possession of this equipment and partially shut down our operations at these theme parks. If this were to happen, we might not have enough revenue to continue operations.

One of our shareholders holds a note that could require us to issue him a large number of shares of common stock.

We have issued $103,500 in principal amount of promissory notes providing for a per diem issuance of common stock as a penalty for late payment. We are in default under that note. As of December 31, 1999, the per diem issuance would be in excess of 2,800,000 shares of our common stock. Should the holder of the note prevail in any litigation to enforce this penalty, the shares issuable under the penalty provisions could result in the holder's becoming our largest single shareholder. Further, depending upon how long it took to resolve the issue, an adverse decision could result in that holder's becoming a controlling shareholder.

We depend on others to provide our computer games.

We do not develop our own computer games; we license these games from others. Although we have been well-received in preliminary discussions with computer game manufacturers and distributors about the availability of games at a reasonable or no license fee for use on ‘Net GameLink™ entertainment systems, we cannot give any assurance that we will be able to license the most desirable games at commercially reasonable terms and prices. If we are unable to get the games at reasonable prices, our costs of operation will go up.

We may have difficulty expanding our operation for production in volume.

If we are to become profitable, we will have to move from limited operations at a single beta site to volume production. We cannot give any assurance that we will be able to successfully implement our expansion plans, including the `Net GameLink™ entertainment concept. We will have all of the risks, expenses, and difficulties frequently encountered in connection with the expansion and development of a new business. These include

• difficulties in maintaining delivery schedules if and when volume increases,
• the need to develop support arrangements for systems at widely dispersed physical locations,
• the need to control operating and general and administrative expenses and
• the need to spend substantial amounts on initial advertising to develop an awareness of our company and its products.

In addition, our chief executive officer is a practicing attorney with no training or prior experience in managing or overseeing a public company. We will need to hire a qualified chief operating officer, and there is no assurance that we will be able to obtain one.

The technology and our industry is changing rapidly and we may not have money or expertise to remain current.

While we believe we have acquired the latest technology for our 'Net GameLink™ entertainment concept, the technology is changing rapidly. So far we have relied on outside sources to develop our technology and we cannot give any assurance that new technology and software can be developed in the future to compete in the marketplace. Companies with which we will compete could have greater resources -- both money and expertise -- for internal development and we may not be able to acquire the new technology as it is developed in the future.

The entertainment industry carries some risks that are not shared by other businesses.

Consumer spending in the entertainment industry is largely discretionary. As a result, companies in that industry are subject to risks that are not present where the product or service being produced is more of a necessity. These risks include:

• competition for customers both within a category and between categories of alternative forms of entertainment,
• substantial media advertising costs needed to enhance or create a demand for the product or service,
• disproportionate impact of deflation or inflation, employment and wage levels, changes in local markets or economic conditions, and
• changes in customer tastes.

As a result, our revenue may vary more as a result of factors beyond our control than would be the case in other industries.

It is difficult to predict the impact of our proposed marketing efforts.

Our success will depend on adequate marketing resources. Our marketing plan includes advertising and promotional materials, advertising campaigns in both print and broadcast media, and cooperative marketing arrangements with the hospitality industry, and other complimentary entertainment and attraction related operations. We cannot give any assurance that these marketing efforts will be successful.

We depend heavily on the continued service of our chief executive officer.

We place substantial reliance upon the efforts and abilities of L. Kelly Jones, our chief executive officer. The loss of Mr. Jones's services could have a serious adverse effect on our business, operations, revenues or prospects. Mr. Jones is a practicing attorney and his services as chief executive officer are performed on a part-time basis. We cannot give any assurance that he will continue to devote the necessary time to our business to bring our plans to completion. We do not have an employment agreement with Mr. Jones or maintain any key man insurance on his life, and we do not intend to maintain any key man insurance for some time.

Our management will have broad discretion in the use of proceeds we receive from the sale of shares to Dutchess.

We will not receive any of the proceeds of this offering, but we may receive proceeds of the sale of shares to Dutchess under our financing agreement with them. Management has broad discretion to adjust the application and allocation of the net proceeds of shares sold to Dutchess in order to address changed circumstances and opportunities. As a result, our success will be substantially dependent upon the discretion and judgment of our management in determining how to apply and allocate those proceeds.

We do not expect to pay dividends for some time, if at all.

No dividends have been paid on the common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors.

A majority of our shareholders can elect all of our directors.

There is no cumulative voting for the election of our directors. As a result, the holders of a majority of our outstanding voting stock may elect all of our directors if they choose to do so, and the holders of the remaining shares will not be able to elect any directors. Currently, our officers and a consultant own a substantial percentage of the shares of common stock outstanding and are in a position to control our affairs, including the election of the board of directors.

Our business is subject to economic downturns to a greater extent than other companies' businesses might be.

Since we offer products and services that are generally considered discretionary, an economic downturn could have adverse consequences for us.

There is only a limited market for our shares.

While there is common stock that is "free trading," there is only a limited and relatively "thin" market for that common stock. We cannot give any assurance that an active public market will develop or be sustained. This means you might have difficulty liquidating your investment if that becomes necessary.

We may not have enough funding to complete our business plan.

We expect a major source of our investment funding over the next 24 months will be our financing arrangement with Dutchess. We also intend to require substantial up-front payments in our contract for development of training simulation and custom virtual reality applications. But we may need additional financing to fully implement our business plan. We believe the private equity line will be sufficient to maintain our operations for at least the next 24 months, but the amount available under that line is based upon trading volume, which is beyond our control. If trading volume were to decline significantly, or not to increase as expected, we might not be able to draw down enough funds under that line to finance demand for our product. As a result, we may need to seek financing above that provided by Dutchess's private equity line. We cannot give any assurance that this additional financing could be obtained on attractive terms or at all. In addition, our ability to raise additional funds through a private placement may be restricted by SEC rules which limit a company's ability to sell securities similar to those being sold in a registered offering (such as that contemplated by Dutchess's equity line) before that offering is completed or otherwise terminated. Lack of funding could force us to curtail substantially or cease our operations.

The market in which we compete is subject to rapid technological change.

Both virtual reality technology and technology in the electronic gaming industry change rapidly, and our products and services, as well as the skills of our employees, could become obsolete quickly. Our success will depend, in part, on our ability to improve our existing products and develop new products that address the increasingly sophisticated and varied needs of our current and prospective customers, and respond to technological advances, emerging industry standards and practices, and competitive service offerings.

Our stock price is volatile.

The market price of our common stock has been and is likely to continue to be volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates by securities analysts, overall equity market conditions or other factors that are mostly beyond our control. Because our stock is more volatile than the market as a whole, our stock is likely to be disproportionately harmed by factors that harm the general securities markets, such as economic turmoil and military or political conflict, even if those factors do not relate to our business. In the past, securities class action litigation has often been brought against companies after periods of volatility in the market price of their securities. If securities class action litigation is brought against us it could result in substantial costs and a diversion of management's attention and resources, which would hurt our business.

Trading in our common stock on the OTC Bulletin Board may be limited.

Our common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is not an exchange and, because trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on an exchange or Nasdaq. We intend to try to list our shares on the proposed BBX trading system when that system becomes available, but we cannot give any assurance that are application for listing on that system will be accepted. As a result, you may have difficulty reselling any of the shares that you purchase from the selling shareholders.

Our common stock is subject to penny stock regulation.

Our common stock is subject to regulations of the Securities and Exchange Commission relating to the market for penny stocks. These regulations generally require broker-dealers who sell penny stocks to persons other than established customers and accredited investors to deliver a disclosure schedule explaining the penny stock market and the risks associated with that market. These regulations also impose various sales practice requirements on broker-dealers. The regulations that apply to penny stocks may severely affect the market liquidity for our securities and that could limit your ability to sell your securities in the secondary market.

A significant percentage of our common stock is held by our directors and executive officers, who can significantly influence all actions that require a vote of our shareholders.

Our directors and executive officers currently own approximately 52.7 % of our outstanding common stock and have options on an additional 2,990,000 shares. As a result, management is in a position to influence significantly the election of our directors and all other matters that are put to a vote of our shareholders.

The exercise of options and warrants could depress our stock price and reduce your percentage of ownership.

In addition to the 500,000 warrants held by Dutchess and the 496,703 warrants held by Swartz, our officers and employees hold options to buy our shares. In the future, we may grant more warrants or options under stock option plans or otherwise. The exercise or conversion of stock options, warrants or other convertible securities that are presently outstanding, or that may be granted in the future, will dilute the percentage ownership of our other shareholders. The "Description of Securities" section of this prospectus provides you with more information about options and warrants to purchase our common stock that will be outstanding after this offering.

Risks Related to This Offering

Future sales by our shareholders may reduce our stock price and make it more difficult for us to raise funds in new stock offerings.

Sales of our common stock in the public market following this offering could lower the market price of our common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or even to sell these securities at all. Of the 35,771,931 shares of common stock outstanding as of July 31, 2002, 9,695,319 shares are, or will be, freely tradable without restriction, unless held by our affiliates. The remaining 26,076,612 shares of common stock held by existing shareholders are restricted securities and may be resold in the public market only if registered or pursuant to an exemption from registration. Some of these shares may be resold under Rule 144. Immediately following the effective date of this prospectus, and not including the shares to be issued under the equity line or the shares to be issued upon conversion of the convertible debentures, 9,765,319 shares of common stock would be freely tradable without restriction, unless held by our affiliates.

If all shares registered in this offering are resold in the public market, there will be an additional 19,991,703 shares of common stock outstanding. The holders of our convertible debentures will be able to convert and sell at any time after the accompanying registration statement becomes effective. When the registration statement becomes effective investors under our equity line will be able to resell the shares they buy from us as soon as they buy them.

Existing shareholders will experience significant dilution from our sale of shares under the equity line and the conversion of the convertible debentures to stock.

The sale of shares under our equity line and the conversion of the convertible debentures to shares of common stock will dilute our shareholders. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline. In addition, the lower our stock price is, the more shares of common stock we will have to issue through conversion of our convertible debentures to common stock and under the equity line to draw down the full amount. The lower our stock price, the greater the dilution will be for our existing shareholders. The higher our stock price, the greater the dilution will be for new shareholders.

The holders of the convertible debentures will be able to convert their debentures to shares of common stock at conversion values less than the then-prevailing market price of our common stock. And investors under the equity line will pay less than the then-prevailing market price of our common stock.

The common stock we issue upon conversion of our convertible debentures will be issued at values at least 15 percent lower than the average closing bid price for our common stock during the five trading days before the date we get notice of a conversion. The common stock to be issued under the equity line will be issued at a 3-percent discount to the average of the lowest four closing bid prices of our common stock during the 5 trading days after we give notice to them of our "put." These discounted conversion prices and sales could cause the price of our common stock to decline.

The selling shareholders intend to sell their shares of common stock in the market, and those sales may cause our stock price to decline.

The selling shareholders intend to sell in the public market the shares of common stock being registered in this offering. That means that up to 19,991,703 of common stock, the number of shares being registered in this offering, may be sold. Those sales may cause our stock price to decline.

Our common stock has been relatively thinly traded and we cannot predict the extent to which a trading market will develop.

Before this offering, our common stock has traded on the OTC Bulletin Board. Our common stock is thinly traded compared to larger, more widely known companies in our industry. Thinly traded common stock can be more volatile than common stock trading in an active public market. We cannot predict the extent to which an active public market for the common stock will develop or be sustained after this offering.

The price you pay in this offering will fluctuate.

The price in this offering will fluctuate based on the prevailing market price of the common stock on the OTC Bulletin Board. Accordingly, the price you pay in this offering may be higher or lower than the prices paid by other people participating in this offering.

We may not be able to draw down enough money under the equity line when needed.

We depend on external financing to fund our operations. Our financing needs are expected to be provided from the equity line, in large part. As the market price and volume decline, the amount of financing available under the equity line will decline. As a result, we may not be able to draw down enough money under the equity line, or to draw it down quickly enough, to meet our financing needs.

Selling Shareholders

The following table presents information regarding the selling shareholders. Under the equity line, Dutchess Private Equities Fund, L.P. has agreed to purchase up to $5 million of common stock from us. All Dutchess's investment decisions are made by Dutchess Capital Management, LLC of which Michael A. Novielli and Douglas H. Leighton are the managing members. Neither Dutchess Private Equities Fund, L.P. nor its agents has a short position or has had a short position at any time since the investment agreement for the equity line was executed on July 11,2002. None of the selling shareholders has held a position or office, or had any other material relationship, with us.

Selling Security Holder	Shares Beneficially Owned Before Offering	Percentage of Outstanding Shares Beneficially Owned Before Offering	Shares to be Acquired Under Equity Line of Credit	Percentage of Outstanding Shares to be Acquired Under Equity Line of Credit	Shares to be Acquired through Conversion of Convertible Debentures	Percentage of Outstanding Shares to be Acquired through Conversion of Convertible Debentures	Shares to be Sold in Offering	Percentage of Outstanding Shares Beneficially Owned After Offering
Dutchess Private Equities Fund, L.P. (1)(2)	2,029,412	5.4%	12500000	25.9%			14,529,412	0
Peter and Melody Zatir (2)	235,294	0.7%			235,294	0.7%	235,294	0
Andrew Smith (2)	70,588	0.2%			70,588	0.2%	70,588	0
Delaware Charter trustees for Michael Dix IRA(2)	112,941	0.3%			112,941	0.3%	112,941	0
Delaware Charter trustees for Laurence Wexler IRA (2)	70,588	0.2%			70,588	0.2%	70,588	0
Delaware Charter trustees for Craig Wexler IRA (2)	164,706	0.5%			164,706	0.5%	164,706	0
Swartz Private Equity LLC	496,703	1.4%					496,703	0
Galactic Ltd.	325,000	0.9%					325,000	0
Institutional Capital Finance	100,000	0.3%					100,000	0
Gary Cella	100,000	0.3%					50,000	50,000
FilmXero	20,000	0.1%					20,000	0

(1) Includes 500,000 shares issuable on exercise of warrants and 600,240 shares issuable upon conversion of convertible subordinated debentures

(2) The number of shares beneficially owned by holders of our convertible subordinated debentures is indeterminate as the conversion price of those debentures is based upon market price of the shares. In computing the numbers of shares held prior to the offering by holders of convertible subordinated debentures, we have assumed that the applicable conversion price will be 85% of $0.25. We are registering additional shares for this offering because the conversion price may be lower than that assumed price. As a result, the numbers of shares shown in this table do not correspond to those shown under the caption "The Offering."

Use of Proceeds

We will not receive any proceeds from the sale of the shares by the selling securityholders. However, we may receive additional proceeds from the sale to Dutchess of shares issuable upon the exercise of warrants issued or to be issued to Dutchess under the Investment Agreement. We intend to use the proceeds from the sale of the shares to Dutchess and the exercise of warrants by Dutchess for working capital and general corporate purposes.

Dilution

The net tangible book value of VirTra Systems as of June 30, 2002 was ($0.22) a share of common stock. Net tangible book value is determined by dividing the tangible book value - total tangible assets less total liabilities, or ($7,859,305) - by the number of outstanding shares of our common stock. This offering is being made solely by the selling shareholders, and none of the proceeds will be paid to us. Our net tangible book value, however, will be increased by the funds we will receive in the private placement that precedes each issuance of stock by us to the two investors in the equity line and negatively by the amount of common stock issued under the equity line and through the conversion of the convertible debentures. The following example shows the dilution to new investors at an offering price of $0.25 per share, the average of the bid and ask prices for our common stock in the OTC Bulletin Board on July 31, 2002.

If we assume that VirTra Systems issues 12,500,000 shares under the equity line and that the shares are sold at 97 percent of a $0.25 price of our common stock (the average of the bid and asked prices on July 31, 2002), we will receive $ 3,031,250 gross from the Dutchess, less 5 percent aggregate commissions and less $56,000 offering expenses, or a net of $ 2,823,688. If we also assume that the holders of the $450,000 in convertible debentures convert their debentures when the effective bid price of our common stock is the same $0.25 a share, they will convert them at 85 percent of this bid price, or $ .21 per share, for a total of 2,117,647 shares. We will also assume that Dutchess exercises its 500,000 cashless warrants at their assumed exercise prices. These assumed transactions would increase our tangible book value by $3,628,388 from ($7,859,305) to ($4,230,918) and our outstanding number of shares of common stock from 35,771,931 shares immediately before these transactions to approximately 50,889,578 shares. The following table shows the dilution per share of our common stock to persons buying our common stock in the open market at the assumed price of $0.25 a share:

Assumed offering price on the OTC Bulletin Board	$0.25
Net tangible book value a share before this offering	(0.22)
Increase attributable to new investors	0.24
Net tangible book value a share after this offering	(0.08)
Dilution per share to new shareholders	0.33

The offering price of our common stock on the OTC Bulletin Board is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share they may experience, the following table shows the dilution a share at various assumed offering prices:

Assumed Offering Price	Number of Shares To Be Issued	Dilution per Share to New Investors
$0.40	12,500,000	$0.45
0.60	8,333,333	$0.65
0.80	6,250,000	$0.86

Capitalization

The following table shows our total capitalization as of June 30, 2002.

Shareholders' deficit: Common stock, $0.005 par value; 100,000,000 shares authorized, 35,671,931 issued and outstanding	$     178,361
Additional paid-in capital	2,600,813
Total shareholders' deficit	(10,597,045)
Total capitalization	($7,817,871)

Equity line

Under our equity line, we may, at our discretion, periodically issue and sell shares of our common stock to Dutchess for a possible maximum purchase price of $5.0 million. If we issue a "put notice" under the equity line, the put number may be for a definable number of shares of our common stock at a per-share purchase price equal to 97 percent of the average of the four lowest closing bid prices on the OTC Bulletin Board, or other principal market on which our common stock is traded, for the 5 trading days immediately following the notice date. But Dutches is not required to purchase more than 20$ of the total trading volume during the 5 trading days after the put notice. Dutchess intends to sell any shares they purchase under the equity line at the market price. This prospectus primarily relates to the shares of common stock to be issued to Dutchess under the equity line. Dutchess cannot transfer their interest in the equity line to anyone else.

In order to draw on the equity line we must register the shares of common stock with the Securities and Exchange Commission and keep the registration statement effective.

Mechanics.

We may, at our discretion, issue written put notices to Dutchess specifying the dollar amount up to the maximum put amount. A closing will be held 7 trading days after each written put notice. At each closing we will deliver shares of common stock and Dutchess will pay the put notice amount. We determine when and if we want to issue a put notice.

Open Period.

We may issue a put notice at any time during the open period but not more frequently than every 7 trading days. The open period begins on the date the Securities and Exchange Commission first declares the accompanying registration statement effective. It expires on the earlier of (i) the date on which Dutchess has made advances totaling $5.0 million or (ii) 24 months after the registration statement becomes effective.

Purchase Price.

For each 5-day purchase period starting with our issuance of a put notice, Dutchess will purchase shares of common stock from us at a price equal to 97 percent of the average of the four lowest closing bid prices for our common stock during the 5-day period. We are required to remit to Dutchess through escrow 5 percent of the proceeds from each put, so that the effective price is 92 percent of the average of the four lowest closing bid prices.

Maximum Put Notice Amount.

We may not issue put notices in excess of a total of $5.0 million. In addition, each individual put notice is subject to a maximum amount based on an average daily volume of our common stock. The maximum amount of each put notice is equal to 175 percent of the average daily volume of our common stock for the 40 trading days before the date of a put notice multiplied by the average of the closing bid prices of our common stock for the 3 trading days immediately preceding the put notice date. The maximum amount of any individual put cannot exceed $1 million.

Maximum Amount Subject to Each Put Notice.

Regardless of the amount stated in a put notice, the maximum amount of our common stock that Dutchess is required to purchase is determined by a different formula. It is required to purchase the lesser of the amount stated in the put notice or an amount equal to 20 percent of the aggregate trading volume of our stock during the 5 days commencing with the date of delivery of the put notice times 97% of the average of the four lowest closing bid prices for our common stock during the 5-day period.

By way of illustration only, let us assume that the 40-day average trading volume in our common stock is 50,000 shares during the 40 trading days prior to our issuing a put notice, and that the average closing bid price for our common stock is $0.40 during the three trading days prior to our issuing this put notice. Let us also assume that the aggregate (not average) trading volume is 200,000 shares during the 5 trading days after we issue the put notice, and that the four lowest closing bid prices for our common stock average $0.30 during this 5-day period. The result would be that our maximum allowable put notice would be in the amount of $35,000 (1.75 x 50,000 x $.40 = $35,000 but the maximum amount of stock Dutchess would have to buy at $ ..29 per share (.97 x $.30) is 40,000 shares (.20 x 200,000) and the dollar amount we would receive for that stock (before deducting the 5%) would be $11,600 (40,000 x $.29).

Using our trading volume and stock price information from the preceding 60 days, we would be able to give put notices for approximately $ 52,475 every 7 trading days from the effective date of the accompanying registration statement during the next 24 months. And if trading volume and price remained the same during the 5 days after the put notice, Dutches would be reqquired to buy $ 29,049 of common stock after each put. This would result in our receiving an aggregate of approximately $2,230,963 under the equity line.

Cancellation of Puts

We will have the option of canceling any put notice if the closing bid price during the pricing period for that put is less than 75% of the volume weighted average price for our common stock for the 15 trading days before the date we gave the put notice. If we cancel a put notice, we will still be required to sell Dutchess the number of shares Dutchess sold during the time from the day it received the put notice until it received the notice of cancellation.

Number of Shares To Be Issued.

We cannot determine the actual number of shares of common stock that we will issue under the equity line. In part this is because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount we intend to draw. Nonetheless, we can estimate the number of shares of common stock that would be issued using certain assumptions. Assuming we drew down the entire $5.0 million available under the equity line and the purchase price was equal to $0.40 per share (which would be 97 percent of the average of the lowest 4 closing bid prices during the 5 days commencing with our issuance of a put notice), then we would issue 12,500,000 shares of common stock to Dutchess. These shares would represent 25.89 percent of our outstanding capital stock upon issuance. To help investors evaluate the number of shares of common stock we might issue to Dutchess at various prices, we have prepared the following table. This table shows the number of shares of our common stock that we would issue at various prices.

Purchase Price:	$0.30	$0.60	$0.90	$1.10	$1.30
Number of Shares(1):	16,666,667	8,333,333	5,555,556	4,545,455	3,846,154
Total Outstanding(2):	52,438,598	44,105,264	41,327,487	40,317,386	39,618,085
Percent Outstanding(3):	31.8%	18.9%	13.4%	11.3%	9.7%

(1) Represents the number of shares of common stock to be issued to Dutchess at the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after the issuance of the shares to Dutchess .

(3) Represents the shares of common stock to be issued as a percentage of the total number of shares outstanding.

Shareholder approval.

Under the Investment Agreement, we may sell Dutchess a number of shares that is more than 20% of our shares outstanding on the date of this prospectus. If we become listed on The Nasdaq Small Cap Market or Nasdaq National Market, or if we are listed on the proposed BBX we may be required to get shareholder approval to issue some or all of the shares to Dutchess. As we are currently a Bulletin Board company, we do not need shareholder approval.

Registration Rights.

We granted registration rights to Dutchess for their shares and to the holders of our convertible subordinated debentures for the shares they may receive if they convert the debentures. We had previously granted piggyback registration rights

• to Swartz Private Equity LLC for shares it may receive if it exercises warrants issued under an earlier equity line, and
• to two other investors who previously purchased our common stock in private offerings.

The registration statement that includes this prospectus will register all of those shares when it becomes effective. We will bear the cost of the registration.

Dutchess's right to indemnification.

We have agreed to indemnify Dutchess (including its shareholders, officers, directors, employees, investors and agents) from all liability and losses resulting from any misrepresentations or breaches we make in connection with the investment agreement, our registration rights agreement, other related agreements, or the registration statement.

Right of first refusal.

Dutchess has a right of first refusal to participate in any below-market private capital raising transaction of equity securities that closes from the date of the Investment Agreement (July 11, 2002) through one year after this registration statement becomes effective.

Net Proceeds.

We cannot predict the total amount of proceeds we will raise in this transaction. This is partly because we have not determined the total amount of put notices we intend to issue. However, we expect to incur expenses of approximately $56,000 consisting primarily of professional fees incurred in connection with registering 19,991,703 shares in this offering. In addition, we are obligated to pay a cash fee equal to 5 percent of each put amount we receive.

Plan of Distribution

The selling shareholders have each told us they intend to sell the common stock covered by this prospectus from time to time on the over-the-counter market, or in any other market where our shares of common stock are quoted. The selling shareholders and any brokers, dealers or agents that participate in the distribution of the common stock may be deemed to be underwriters, and any profit on the sale of common stock by them and any discounts, concessions or commissions they receive may be deemed to be underwriting discounts and commissions under the Securities Act.

Dutchess is an underwriter within the meaning of the Securities Act of 1933 in connection with the sale of common stock under the equity line agreement. Dutchess will buy stock from us at a purchase price of 97 percent of the average of the four lowest closing bid prices of our common stock on the OTC Bulletin Board or other principal trading market on which our common stock is traded for the 5 trading days immediately following each put notice date. The 3-percent discount Dutchess receives on the purchase of the common stock will be an underwriting discount.

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. We will inform the selling shareholders that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling shareholders must be registered to sell securities in all 50 states. In addition, in some states the shares of common stock may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

We will pay all the expenses of the registration, offering and sale of the shares of common stock to the public under this prospectus other than commissions, fees and discounts of underwriters, brokers, dealers and agents. We have agreed to indemnify the selling shareholders and their controlling persons against certain liabilities, including liabilities under the Securities Act. We estimate that the expenses of the offering to be borne by us will be approximately $56,000 as well as the 5.0 percent of the gross proceeds payable to Dutchess under the equity line. We will not receive any proceeds from the sale of any of the shares of common stock by the selling shareholders. We will, however, receive proceeds from the sale of common stock under the equity line.

The selling shareholders should be aware that the anti-manipulation provisions of Regulation M under the Exchange Act will apply to purchases and sales of shares of common stock by the selling shareholders and that there are restrictions on market-making activities by persons engaged in the distribution of the shares. Under Regulation M, the selling shareholders or their agents may not bid for, purchase, or attempt to induce any person to bid for or purchase, shares of our common stock while they are distributing shares covered by this prospectus. Accordingly, except as noted below, the selling shareholders are not permitted to cover short sales by purchasing shares while the distribution is taking place. Dutchess can cover any short positions only with shares received from us under the equity line. We will advise the selling shareholders that if a particular offer of common stock is to be made on terms materially different from the information set forth in the above Plan of Distribution, then a post-effective amendment to the accompanying registration statement must be filed with the Securities and Exchange Commission.

Price Range of Common Stock

Our common stock is traded on the OTC Electronic Bulletin Board. The following table sets forth the high and low bid prices of our common stock for each quarter for the years 2000 and 2001, and the first, second, and third quarter of 2002 through July 31, 2002. As of July 31, 2002, there were 119 holders of record of our common stock.

The quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Common stock:
Year	High Bid	Low Bid
2000
First Quarter	1.38	0.27
Second Quarter	1.13	0.31
Third Quarter	0.63	0.31
Fourth Quarter	0.47	0.15
2001
First Quarter	0.76	0.20
Second Quarter	0.55	0.14
Third Quarter	0.51	0.19
Fourth Quarter	0.33	0.13
2002
First Quarter	0.34	0.17
Second Quarter	0.48	0.21
Third Quarter (through July 31, 2002)	0.46	0.20

Penny Stock Regulations

Our common stock has always traded at a price less than $5 a share and is subject to the rules governing "penny stocks."

A "penny stock" is any stock that:

• sells for less than $5 a share,
• is not listed on an exchange or authorized for quotation on The Nasdaq Stock Market, and
• is not a stock of a "substantial issuer." VirTra Systems, Inc. is not now a "substantial issuer" and cannot become one until it has net tangible assets of at least $5 million, which it does not now have.

There are statutes and regulations of the Securities and Exchange Commission that impose strict requirements on brokers that recommend penny stocks.

The Penny Stock Suitability Rule

Before a broker-dealer can recommend and sell a penny stock to a new customer who is not an institutional accredited investor, the broker-dealer must obtain from the customer information concerning the person's financial situation, investment experience and investment objectives. Then, the broker-dealer must "reasonably determine"

• that transactions in penny stocks are suitable for the person and
• that the person, or his advisor, is capable of evaluating the risks in penny stocks.

After making this determination, the broker-dealer must furnish the customer with a written statement describing the basis for this suitability determination. The customer must sign and date a copy of the written statement and return it to the broker-dealer.

Finally the broker-dealer must also obtain from the customer a written agreement to purchase the penny stock, identifying the stock and the number of shares to be purchased.

The above exercise often delays a proposed transaction. It causes many broker-dealer firms to adopt a policy of not allowing their representatives to recommend penny stocks to their customers.

The Penny Stock Suitability Rule, described above, and the Penny Stock Disclosure Rule, described below, do not apply to the following:

• transactions not recommended by the broker-dealer,
• sales to institutional accredited investors,
• sales to "established customers" of the broker-dealer - persons who either have had an account with the broker-dealer for at least a year or who have effected 3 purchases of penny stocks with the broker-dealer on 3 different days involving 3 different issuers, and
• transactions in penny stocks by broker-dealers whose income from penny stock activities does not exceed 5 percent of their total income during certain defined periods.

The Penny Stock Disclosure Rule

Another Commission rule - the Penny Stock Disclosure Rule - requires a broker-dealer, who recommends the sale of a penny stock to a customer to furnish the customer with a "risk disclosure document." This document includes a description of the penny stock market and how it functions, its inadequacies and shortcomings, and the risks associated with investments in the penny stock market. The broker-dealer must also disclose the stock's bid and ask price information and the dealer's and salesperson's compensation for the proposed transaction. Finally, the the broker-dealer must furnish the customer with a monthly statement including specific information relating to market and price information about the penny stocks held in the customer's account.

Effects of the Rule

The above penny stock regulatory scheme is a response by the Congress and the Commission to abuses in the telemarketing of low-priced securities by "boiler shop" operators. The scheme imposes market impediments on the sale and trading of penny stocks. It limits a shareholder's ability to resell a penny stock.

Our common stock likely will continue to trade below $5 a share and be, for some time at least, a "penny stock" subject to the trading market impediments described above.

Dividend Policy

We have never paid any dividends on our common stock. We expect to continue to retain all earnings generated by our operations for the development and growth of our business, and do not expect to pay any cash dividends to our shareholders in the foreseeable future. The board of directors will determine whether or not to pay dividends in the future in light of our earnings, financial condition, capital requirements and other factors.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains certain forward-looking statements that are subject to business and economic risks and uncertainties, and our actual results could differ materially from those forward-looking statements. The following discussion regarding our financial statements should be read in conjunction with the financial statements and notes to the financial statements.

Overview.

We were capitalized in 1996 to develop, own, and operate theme brewpub/microbrewery restaurants. Until March of 1997 when we acquired and began operating, the former Hubcap Brewery & Kitchen in Dallas, Texas, we had no operations or revenues and our activities were devoted solely to development. In January, 1999, we terminated our brewpub/microbrewery restaurant operations.

In December of 1997, we acquired all rights to 'Net GameLink™, an interactive entertainment system designed to allow a number of players to compete with one another in a game via an intranet or the Internet. From 1999 when we closed our microbrewery operations until we acquired Ferris Productions, Inc. as described below, we had been devoting substantially all of our efforts to implementing the 'Net GameLink™ product and our operations were limited to development, construction and beta-testing of the initial 'Net GameLink™ prototype system at J. Gilligan's Bar and Grill in Arlington, Texas.

In September 2001, we completed a reverse merger with Ferris Productions, Inc., in a stock-for-stock transaction under which Ferris’ shareholders acquired a controlling interest. The acquisition provided us with a wider array of products within our industry, an experienced management team, an existing revenue stream, established distribution channels, and the opportunity for additional markets.

In addition to the opportunities brought to us by the Ferris acquisition, the acquisition also brought us substantial debt. There can be no assurances that we will be able to successfully implement our expansion plans, including addressing the debt and the anticipated expansion of the former Ferris operations. We face all of the risks, expenses, and difficulties frequently encountered in connection with the expansion and development of a new business, difficulties in maintaining delivery schedules if and when volume increases, the need to develop support arrangements for systems at widely-dispersed physical locations, and the need to control operating and general and administrative expenses. While the Ferris acquisition provided an established stream of revenues, historically favorable gross margins, and potential lucrative markets, Ferris had not yet generated a profit, and substantial additional capital, or major highly-profitable custom applications, will be needed for our operations to become profitable.

Results of Operations.

Fiscal year ended December 31, 2001 compared to fiscal year ended December 31, 2000.

Total revenue for the year ended December 31, 2001 was $2,463,064 compared to total revenue of $3,359,126 for the year ended December 31, 2000. This decrease of $896,062, or 27%, was primarily a result of lower traffic in the theme parks, fewer completed custom application projects in 2001, and the distraction of the GameCom/Ferris merger.

Cost of sales and services decreased $308,490, or 16%, to $1,574,399 for the year ended December 31, 2001 from $1,882,889 for the year ended December 31, 2000. This decrease is a direct result of the decrease in revenue offset by higher depreciation costs of entertainment equipment and fewer completed custom applications in 2001 as compared to 2000.

General and administrative expenses increased by $309,307, or 14%, to $2,443,692 for the year ended December 31, 2001 from $2,134,385 for the year ended December 31, 2000 despite a decrease in revenue. The increase is a result of costs incurred and associated with the GameCom/Ferris merger, a general increase in salaries, consulting fees and professional fees primarily related to research and development of new products, and the continued promotion of our products and services.

Interest expense and finance charges increased by $283,497, or 24%, to $1,456,647 for the year ended December 31, 2001 from $1,173,150 for the year ended December 31, 2000. This increase is a result of a net increase in debt obligations in 2001 and an increase in common stock issued to certain shareholders as an incentive for their additional loans to us.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Three major factors affect our results of operations for the six months ended June 30, 2002 compared to the corresponding period of 2001.

• revenues declined.
• general and administrative costs decreased.
• interest expense increased.

Revenues from both of our virtual reality product lines -- theme parks and arcades and custom applications - -- are somewhat unpredictable. Theme park and arcade revenues are affected by both the overall traffic at facilities of this type and by the extent to which we are able to provide new and attractive content to attract more users and increase repeat business. Custom applications tend to consist of a few large projects at any time, and the stage of completion of any particular project can significantly affect revenue. We had revenue of $502,064 for the six months ended June 30, 2002 compared to $1,372,118 for the corresponding six months of 2001. Revenue from theme parks and arcades declined primarily because

• theme park attendance is down across the country, averaging a 22% decline at the theme parks where our VR Zones are located,
• season passholder attendance is up significantly, indicating local visitors, who typically do not spend as much per capita as destination tourists, returning to their local parks, and
• we did not substantially update the content of our virtual reality systems at these facilities during 2001.

Revenue from custom applications and other sources also declined, reflecting the fact that we completed several major projects in the first two quarters of 2001 and revenues from new projects in this area had not yet begun in 2002. Cost of sales and services decreased in proportion to the reduced sales. General and administrative costs of $1,013,383 for the six months ended June 30, 2002, compared to $1,240,466 for the six months ended June 30, 2001, decreased primarily due to our efforts to reduce our overhead costs.

Interest expense increased to $686,455 for the six months ended June 30, 2002 compared to $570,835 for the corresponding period of 2001 largely because we received additional loans from our shareholders in 2002 and, as an incentive to loan additional funds, we issued common stock to those shareholders and incurred $234,500 in additional finance charges in 2002. The decrease in other income of $43,665 for the six months ended June 30, 2001 to $6,872 for the six months ended June 30, 2002 was a result primarily of the sale during the 2001 fiscal period of the entire future revenue stream of some of our games for a lump sum.

Liquidity and Plan of Operations

As of June 30, 2002 our liquidity position was extremely precarious. We had current liabilities of $5,724,792, including $1,961,760 in obligations under the lease financing for our virtual reality systems, $1,267,505 in accounts payable and short-term notes payable of $1,935,428 (plus related accrued interest ), some of which were either demand indebtedness or were payable at an earlier date and were in default. As of June 30, 2002 there were only $20,974 in current assets available to meet those liabilities.

We have not made any draws under our equity line with Swartz since January 2001, because the price and volume of trading in our shares have been too low to make that source of financing attractive. To date we have met our capital requirements by acquiring needed equipment under non-cancelable leasing arrangements, through capital contributions, loans from principal shareholders and officers, and certain private placement offerings. For the six months ended June 30, 2002, the net loss was $(1,560,015). In order to reduce our cash requirements, we issued approximately $485,000 in common stock to pay financing fees, interest and compensation for services, and allowed accounts payable and accrued liabilities to increase by approximately $280,000. After taking into account the non-cash items included in that loss, our cash requirements were approximately $130,000. To cover these cash requirements, we increased our borrowings from shareholders by $199,500 and borrowed $35,000 from an unrelated party, applying $89,067 of the proceeds of these borrowings to payments on notes payable, $7,500 to payment on one equipment financing lease/promissory note and $7,534 to repayment of a book overdraft.

The opinion of our independent auditor for each of the last two fiscal years expressed substantial doubt as to our ability to continue as a going concern. We will need substantial additional capital or new lucrative custom application projects to become profitable., We may need additional financing to acquire major custom application projects currently under negotiation, in order to carry out our expansion plans. Just after the end of the second quarter, we entered into arrangements with Dutchess Private Equities Fund, L.P. Under these arrangements, Dutchess is to purchase up to $5 million of our common stock over the next two years under an equity line. As with the previous equity line with Swartz, the numbers of shares we will be entitled to sell to Dutchess will be based upon the trading volume of our stock. Dutchess and several other investors participated in a private placement of $250,000 in convertible debentures and Dutchess and other investors will participate in the private placement of an additional $200,000 in convertible debentures with the funds to become available within a few days after the effectiveness of a registration statement covering resale of the shares to be issued under the equity line. Based on recent increases in the stock's trading volume following our entry into the training simulation field, management believes that this equity line will allow us to continue our operations for at least the next twelve months.

Business

Business Overview

VirTra Systems, Inc. (the "Company") was organized in 1996 to operate theme concept microbrewery restaurants. In 1997, we acquired First Brewery of Dallas, Inc., which operated the former Hubcap Brewery & Kitchen of Dallas, Texas (later renamed The Schooner Brewery™ brewpub). As a result of several factors, including relatively strict laws that apply to craft brewers in Texas, we found it difficult to develop this initial business, and closed down our microbrewery operations in early 1999.

In December of 1997, we acquired all rights to 'Net GameLink™ , an interactive entertainment system designed to allow a number of players to compete with one another in a game via an intranet or the Internet. From 1999 when we closed our microbrewery operations until we acquired Ferris Productions, Inc. as described below, we had been devoting substantially all of our efforts to implementing the 'Net GameLink™ product and our operations were limited to development, construction and beta-testing of the initial 'Net GameLink™ prototype system at J. Gilligan's Bar and Grill in Arlington, Texas.

In February, 2000, we changed our jurisdiction of incorporation from Nevada to Texas. We maintain our principal office at 440 North Center, Arlington, Texas 76011, and our telephone number is (817) 261-4269. We also maintain production offices at 5631 South 24^th Street, Phoenix, Arizona 85040, with a phone number of (602) 470-1177.

In September, 2001, we completed the acquisition of Ferris Productions, Inc., a leading developer and operator of virtual reality devices. “Virtual reality” is a generic term associated with computer systems that create a real-time visual/audio/haptic (touch and feel) experience. VR immerses participants in a 3-dimensional real-time synthetic environment generated or controlled by one (or several) computer(s). Ferris designed, developed, distributed, and operated technically-advanced products for the entertainment, simulation, promotion, and education markets. The acquisition provided us with a wider array of products within our industry, an experienced management team, an existing revenue stream, and established distribution channels. Post-merger, we believe we are a leading virtual reality developer and manufacturer.

Our virtual reality devices are computer-based, and allow participants to view and manipulate graphical representations of physical reality. Stimulating the senses of sight, sound, touch, and smell simultaneously, our virtual reality devices envelop the participant in dynamic computer-generated imagery, and allow the participant to interact with what he or she sees using simple controls and body motions. Virtual reality products and systems typically employ head-mounted displays that combine high-resolution miniature image source monitors, wide field-of-view optics, and tracking sensors in a unit small and light enough to be worn on the head. These products usually surround the participant with dynamic three-dimensional imagery, allowing the user to change perspective on the artificial scenes by simply moving his or her head. Virtual reality devices have in the past been used primarily in connection with electronic games, as, by surrounding the player with the sights, sounds, and smells he or she would experience in the real world, play is made far more realistic than it would be if merely presented in a two-dimensional flat screen display. Areas of application include entertainment/amusement, advertising/promotion and training/simulation.

Entertainment/amusement

Our virtual reality devices within the entertainment/amusement market are designed to produce a highly-realistic experience at a significantly lower cost than traditional virtual reality technology. Historically, the software for virtual reality games and other applications was separately created for each application. Our systems use a patented Universe™ Control Board, which, when installed in an ordinary PC, makes it possible to quickly adapt PC games for the arcade market, permitting easy conversion of PC games to behave as coin-operated arcade games, and allows the operator to change from one game to another without expensive hardware replacement.

Within the entertainment/amusement market, we have installed and operate virtual reality entertainment centers known as “VR Zones” in over a dozen theme parks and high-traffic visitor locations such as

• Six Flags,
• Paramount Parks,
• Busch Gardens, and
• Carnival Cruise Lines.

These VR Zones are equipped with systems we developed and manufactured, and are operated with Company employees on a revenue-share basis with the theme park locations.

Advertising/Promotion

We entered the advertising/promotion market with our 2000 “Drive With Confidence Tour” for Buick, featuring a virtual reality “test-drive” of a Buick LeSabre with PGA professional Ben Crenshaw accompanying the participant. This project led us to additional projects within this market, such as

• a virtual reality bi-plane experience for Red Baron Pizza, and
• the recently-completed virtual reality ski jump experience for Chevrolet in conjunction with the “Olympic Torch City Celebration Tour.”

Training/Simulation

Our anticipated entry into the training/simulation market was advanced by the aftermath of September 11, 2001. However, we have not yet sold or received contracts for any of these systems. During the past quarter, we have gained valuable market feedback from direct contact and meetings with several governmental agencies that resulted in completing the design of two unique virtual reality-based training systems for use-of-lethal force and tactical judgment objectives. The two different systems provide the law enforcement, military, and security markets with a first-of-its-kind 360-degree immersive training environment. The first prototype system is currently being built, and will be a demonstration and marketing tool. In the government marketing sector, we have developed significant ongoing relationships with several security-related federal agencies, which have resulted in the submission of confidential proposals currently under review. This has occurred during a period of intense federal agency reorganizations and personnel reassignments due to the formation of the Transportation Security Administration and the proposed Department of Homeland Defense.

Internet-Enabled Gaming

Our 'Net GameLink™ system is designed for installation at a relatively modest cost in neighborhood arcade-like gaming centers and social bars. It consists of computers, a networking system, and specially-designed networked kiosks that allow our patrons to play interactive 3D games with either other users at the same location or users at a remote location. The gamestations feature X86 (Intel central processing unit) compatible 3D-game hardware and software. Customers pay for their use of the system through a plastic debit card. Each card is prepaid and is credited with a certain amount of playing time.

Although our immediate focus is on the more-ample opportunities for our virtual reality products in the training/simulation, entertainment/amusement, and advertising/promotion markets, we intend in the future to distribute our ‘Net GameLink™ product, in conjunction with our current Universe™ amusement line of products, in company-owned centers and through third-party distribution agreements. We expect additional revenue from our ‘Net GameLink™ system to be generated through the sale of advertising to companies who wish to reach our demographic market. We expect that the cost of a system to third parties will be in the range of $5000-$6000 per kiosk, including the server for each location. On non-company owned systems, we expect to receive a royalty based on the amount spent by patrons to actually play on the system equal to 15 percent of revenues, and a royalty on the advertising generated by the ‘Net GameLink™ system at each location equal to 50 percent of the advertising revenue paid to the operator.

VR Products

Our VR products include:

• VR Sensory Theater™, a 3-seat, sit-down, multi-sensory system designed to allow a large number of entertainment center customers to experience virtual reality in a short period of time. Users seated in the theater put on a headset, suspended from a neutralization arm which allows their heads to rotate a full 360 degrees. The system integrates headset video, audio, and smell for the user. The system comes standard with 3 seats, but can link together for much larger throughput. It is approximately 84 inches long, 36 inches wide, 72 inches high, and weighs approximately 420 lbs.
• The VR-360™, a stand-up interactive system. The user has freedom of movement and is tracked in 360 degrees. The system incorporates state-of-the-art computer equipment, gyro headtracking, audio, microphone communication, and joystick interaction. The system comes standard for one user. The user wears a headset suspended from a support cable on an illuminated neutralization arm. The entire system is approximately 54 inches long, 60 inches wide, 102 inches high, and weighs approximately 490 lbs.
• The VR-720™, a sit-down interactive system designed primarily for use in the company’s VR Zones. The user, while seated, is tracked in 360 degrees. The system incorporates state-of-the-art computer equipment, gyro headtracking from an illuminated neutralization arm, audio, microphone communication, wind simulation, smell integration, and joystick interaction. The system comes standard for two users. The system is approximately 54 inches long, 60 inches wide, 102 inches high, and weighs approximately 490 lbs.

All of these products make use of video recorded images, rather than computer-generated images, allowing each system to present a variety of photorealistic virtual reality experiences without lesser-quality computer image creation.

Competition

Competition within each of our markets is intense.

Competition within the entertainment/amusement market is based primarily on the ability to deliver an exciting and realistic gaming experience beyond what the participant would experience on his or her home computer, through such items as 3-D imaging, sound, and sense of motion. Within the entertainment/amusement market, our advantages are our advanced virtual reality technology, as well as our patented Universe™ Control Board, and our EasyPlay™ overlay software, which when used in our VR Zones, 'Net GameLink ™, and in custom applications, can transform any off-the-shelf PC game or application into a coin-op-ready program without requiring “source code” software modifications to either the PC application or the operating system.

We face extensive competition with companies that supply the advertising/promotion market. However, as our virtual reality experiences are custom applications, and we deal primarily with leading advertising agencies, it is difficult to quantify the competition, because we are generally not aware of alternative methods considered by these agencies to present their message.

It is difficult to gauge the competition in the training/simulation market, which we are in the process of entering. There are several large competitors in this field. For instance, a recent (January 7, 2002) edition of Forbes magazine contains a feature story on L3 Communications, Inc., a company purportedly doing in excess of $400,000,000.00 with the United States government in this market. However we believe, based on discussions with potential customers, that our products in this market are unique, primarily due to our proprietary 360-degree form of “immersive” photorealistic virtual reality.

Some general competitors within the virtual reality industry that promote substitute and similar technologies are as follows:

• Straylight--since 1992, Straylight has focused on the exploitation of virtual reality in the promotions and conventions market, basing its original customized systems on expensive Silicon Graphics computers. Most recently, it launched the stand-up 3DXTC system, offering a headset-based, lightweight system utilized within the advertising/promotional market. We believe Straylight’s installed base (under ten units) is insignificant, and that Straylight only sells its product and service to others rather than exploiting the product and service itself.
• Virtual World Entertainment--since 1995, VWE has built single high-end enclosed game capsules, commencing with its own center in Chicago around 1995. We understand that VWE's products can be found in only a handful of international high-end locations. VWE uses a proprietary system, and thus must develop each game itself, and we believe it has released only two games in six years and has an installed base of fewer than 60 units.
• Dynavision--since 1996, Dynavision has focused on building a single stand-up headset-based virtual reality entertainment product. Dynavision’s Orion system uses PC software, in which the third-party’s source code is modified for the Orion system. We have been informed that this company was sold in 2000, and since 1999, it has not been seen at any industry tradeshows. We do not know whether Dynavision is still in business.
• Global VR--since 1997, Global VR has focused on VR Vortek, a single stand-up virtual reality entertainment product utilizing a large viewing device mounted to a steel arm. Global VR recently added products to its line from the bankruptcy purchase of the former Interactive Light company. We believe Global VR’s installed base is less than ours.
• IMAX Corporation--since 1964, IMAX has developed specialized educational and entertaining large-screen movies and theaters, with over 225 locations world-wide. IMAX is recognized as a leader of unique large-screen theaters. It is our opinion that IMAX’s products and movies do not directly compete or exclude any of our products, though it may be regarded as an indirect competitor since customers seeking a virtual reality experiences may instead choose the large-screen theater.
• Ham On Rye Technologies--introduced its first system for entertainment use at IAAPA 2000, but had rented equipment for corporate rentals prior to this. The company sells one product -- a 16-seat interactive theater which utilizes a headset for each participant. The system requires a live actor for each ‘showing,’ who asks the users to press buttons on a small remote control and perform other activities during the show (like patting the tops of their heads). The system uses 2D video composting technology, and has no traditional virtual reality capabilities (i.e., headtracking, user control of movement or view, etc.). While the system can accommodate large throughput of guests, a single system costs over $100,000, and we believe this product’s repeat level of use is low. Because of cost and market constraints for this type of product, we expect Ham on Rye to have fewer than 25 systems installed worldwide.
• Advanced Interactive Systems, Inc.--has been a provider of interactive simulation systems designed to provide training for law enforcement, military, and security agencies since 1993. Its line of products uses primarily video production in judgmental training scenarios. AIS also markets to anti-terrorist and other special application training facilities for military and special operations groups. Their systems are all based using flat screen technology and do not address issues in a 360-degree world. Although AIS is a player in the firearms training simulator space, we believe our technology and the more real world, life-like scenarios we create are far superior to their systems.
• Firearms Training Systems, Inc.--has over 4,000 FATS training systems installed worldwide by military, law enforcement, and commercial customers. FATS, Inc. is a full service training simulation company that also utilizes video scenarios and flat screen technology with an optional video-training scenario authoring system. AIS and FATS are similar in many respects, although FATS has been around a while longer. As with other competitors in this field, we feel our 360-degree technology is far superior to FATS and their systems.
• L-3 Communications, Inc. -- a supplier of Intelligence, Surveillance and Reconnaissance (ISR) products, secure communications systems and products, avionics and ocean products, training products, microwave components and telemetry, instrumentation, space and wireless products. Its customers include the Department of Defense, selected US government intelligence agencies, aerospace prime contractors and commercial telecommunications, and wireless customers. L-3’s product mix includes; secure communication systems, training systems, microwave components, avionics and ocean systems, telemetry, instrumentation, space and wireless products. L-3 is a 2 plus billion dollar company with a very diverse range of products and services geared towards defense related activities. It has a division for simulation and training with several products currently deployed. One of these simulators projects images on multiple screens using computer generated graphics. L-3 systems consist of computer generated graphics and currently do not use video or film for their content, to the best of our knowledge, nor do they produce complete 360-degree projected or head-mount display systems. Due to the size and strength of L-3 within the defense industry and other governmental agencies, it can possibly be a very formidable competitor if it chooses to enter the 360-degree, photorealistic, virtual reality simulation market.

Although our focus in the entertainment/amusement market has been on large third-party theme park operations such as Six Flags and Busch Gardens, there is also competition in the form of large gaming centers established by companies such as GameWorks and Dave & Busters. GameWorks was established by Sega Enterprises, Universal Studies, Inc., and DreamWorks SKC, and it was designed under the guidance of Steven Spielberg. GameWorks has far greater financial and technical resources than we, and Dave & Busters has far greater financial resources than we, and both operations have created entire establishments devoted to various forms of gaming, including virtual reality games. We intend to compete by our focus with our Universe™ line of products in large third-party theme park operations, and by providing more but smaller facilities for our ‘Net GameLink™ product that will be readily accessible in the gamer’s immediate neighborhood, with the companionship of the gamer’s neighbors, rather than requiring substantial travel to destination sites such as GameWorks and Dave & Busters.

The above summary of competition is by no means exhaustive, since this is a fluid and rapidly-expanding industry.

Marketing

Our marketing activities are conducted on multiple levels.

With regard to the amusement/entertainment market, marketing is conducted primarily by word-of-mouth within the theme park industry, as well as by marketing efforts conducted by our vice-president of operations. We have standing offers to dramatically increase our theme park presence, depending upon the availability of capital for expansion.

Marketing within the advertising/promotional market is conducted primarily by our executive vice-president. We have a demonstration unit featuring excerpts from our successful promotional projects for Buick, Red Baron Pizza, and Chevrolet. Marketing within this industry is conducted primarily by one-on-one appointments and demonstrations of our technology and previous successful applications to advertising agencies.

We are presently negotiating to enter the training/simulation market, primarily in dealing directly with the United States government in the areas of Homeland Security. To aid our attempt to enter this market, we have enlisted several consultants, all of whom possess a proven success in procuring governmental contracts and delivering successful training products for previous military and other security applications. However, we cannot give any assurance that we will be successful in entering this market.

Employees

At July 31, 2002 we employed 90 people. Our number of employees is highly seasonal, due to our seasonal VR Zone operations in theme parks. During the height of the amusement park season, we may employ as many as 150 people. Out of season employment shrinks to approximately 25 people. We consider relations with our employees to be satisfactory.

Trademarks/Patents

We have obtained a patent for our Universe Control Board™, we have filed for federal registration of our "'Net GameLink™," "The Internet Just Met Its Match™," and “Immersive Virtual Reality™” trademarks, and a patent application is pending for our network-enabled gaming kiosk. There can be no assurance that a patent will issue on this application, or that if the patent is issued it will be sufficiently broad to provide meaningful protection

Management

These are our current directors, executive officers and significant employees:

Directors and Executive Officers

Name	Age	Positions	Date became director or executive officer
L. Kelly Jones	49	Chief Executive Officer and Chairman of the Board of Directors	March 26, 1997
Bob Ferris	30	President and Director	September 21, 2001
Lance Loesberg	46	Executive Vice-President and Director	September 21, 2001
John F. Aleckner, Jr.	57	Director	March 26, 1997
L. Andrew Wells	34	Director	September 21, 2001
Kimberly Biggs	35	Secretary and Treasurer	March 26, 1997

The members of our board of directors are elected annually and hold office until their successors are elected and qualified. Our officers are chosen by and serve at the pleasure of its board of directors. Each of the officers and directors have positions of responsibility with other businesses and will devote only such time as they believe necessary on our business.

There are no family relationships between any of the directors and executive officers, other than Messrs. Ferris and Wells being brothers-in-law. There was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer.

L. Kelly Jones has since 1980 been a member of the law firm Jones & Cannon, a firm which he founded and which provides legal services to us. Mr. Jones is certified in the area of commercial real estate law by the Texas Board of Legal Specialization and is the author of an article, "Texas Mechanics' and Materialmen's Lien Laws: A Guide Through the Maze," which appeared in the Texas Bar Journal in March of 1985. Mr. Jones' areas of practice include corporate, construction, real estate, municipal law, and commercial litigation. Mr. Jones served from 1985 through 1989 on the Arlington City Council, and on the Stephen F. Austin State University Board of Regents from 1987 through 1993, where he was chairman from 1991 through 1993. He holds a J.D. from the University of Texas and a B.A. in Political Science from Stephen F. Austin State University.

Bob Ferris became our president in September of 2001. He previously had been the president of the former Ferris Productions, Inc. since he founded that company in 1993. Mr. Ferris attended the United States Air Force Academy with a major in management. He received a degree in systems engineering from the University of Arizona.

Lance Loesberg became our executive vice-president in September of 2001. He had previously been the vice-president of business development of the former Ferris Productions, Inc., a position he had held since 1997. Before his employment with Ferris, Mr. Loesberg had served as North American sales director for Virtuality, an early leader in the virtual reality field. He holds a B.S. degree in Marketing from Arizona State University.

John F. Aleckner, Jr. is a private investor. He was elected our president as of December 14, 1999, a post he held until September of 2001. From 1983 to 1989 Mr. Aleckner was vice-president and a shareholder of Research Polymers International Corporation, a compounder of specialty plastic materials which was acquired by another Company in 1987. From 1984 to 1998, he was vice-president of marketing and sales and a principal shareholder in UVTEC, Inc., a marketer of specialty plastic compounds which was, prior to the sale of Research Polymers, affiliated through common stock ownership with Research Polymers, and which acted as a broker in connection with purchases by Research Polymers and other companies. From 1971 to 1983 he was employed by Ciba-Geigy Corporation in various sales capacities. He holds a B.S. in Chemistry from Case Institute of Technology.

L. Andrew Wells is managing partner of CenterPoint Partners, LLC, a Houston-based corporate finance advisory firm formed in January of 2002. CenterPoint is an amalgamation of the former Strategic Securities, Inc. and some other Houston-based regional investment banking groups’ advisory divisions. From 1997 until 2002, he was the principal of Strategic Securities, Inc., a Houston-based merchant banking firm which he founded in 1997. From June 2000 until March of 2001, Mr. Wells also served on an interim bases as chief financial officer of U. S. Operators, Inc., a San Antonio-based call center which was reorganizing under Chapter 11 of the bankruptcy code. Prior to 1997, Mr. Wells was employed by a regional NASD broker/dealer in Houston, Texas. He holds a B.S. degree from Stephen F. Austin State University and NASD licenses 7 (general securities), 63, 65 (registered investment advisor), and 24 (securities principal).

Kimberly Biggs has for the last 12 years been legal administrator of the Arlington law firm of Jones & Cannon (which provides legal services for us) as legal administrator, a position which she holds to this date.

Significant Employees

In addition to the officers and directors identified above, the following employees play a significant role in our operations.

Rob White, age 35, serves as our vice-president of operations. Before joining the former Ferris Productions, Inc. in 1997, Mr. White previously worked in various theme parks from 1994-1997, when he began as an operator in the entertainment industry, including designing and managing one of the world’s largest high-tech entertainment projects, XS in New York City’s Times Square.

Steve Haag, age 42, serves as our vice-president of business development. Mr. Haag received his bachelors degree in psychology, with a minor in organizational behavior, from Webster University in 1993, and his bachelors degree in education from the University of Missouri-St. Louis in 1999. Before joining us, he was employed at Connect Computer Group, Inc., the firm which was largely responsible for the development of our kiosk and computer systems. Mr. Haag previously served as a direct-marketing project manager/trainer, representing AT&T Business Service.

Matt Burlend, age 28, serves as vice-president of production and senior engineer. Prior to his employment with the former Ferris Productions, Mr. Burlend was employed at Panduit Corporation, a designer of automated production equipment, as a machine design engineer. Mr. Burlend holds a mechanical engineering degree from Olivet Nazarene University.

Al Spivey, age 47, serves as our director of production. Mr. Spivey attended Tarrant County Junior College and the University of Texas-Dallas, majoring in computer science, and received his technical education from IBM, Hewlett-Packard, and Burroughs technical schools. Before joining us, Mr. Spivey was the owner of Premier Computers, Inc., a value-added reseller of premium computer components and software. Previously, Mr. Spivey worked as senior systems analyst at Amdahl Computer Corporation, and as a software engineer at Nortel Corporation.

Executive Compensation

Summary Compensation Table

The Summary Compensation Table shows certain compensation information for services rendered in all capacities during each of the prior 3 fiscal years.

Name and Principal Position	Year	Salary	Bonus	Other Annual Compensation	Restricted Stock Awards	Securities Underlying Options/SARs
L. Kelly Jones, chief executive officer and chairman of the board of directors	2001	-	-	-	-	-
	2000	-	-	-	-	-
	1999	-	-	-	-	-
Bob Ferris, president and director	2001	$60,000	-	-	-	687,000(1)
	2000	$60,000	-	-	-	75,000(2)
	1999	$60,000	-	-	-	-
Lance Loesberg, executive vice-president and director	2001	$75,833	-	-	-	225,000(3)
	2000	$75,000	-	-	-	75,000(4)
	1999	$75,000	-	-	-	-
John F. Aleckner, Jr.,director	2001
	2000	-	-	-	-	-
	1999	-	-	-	-	-
L. Andrew Wells, director	2001	-	-	-	-	687,000(5)
	2000	-	-	-	-	-
	1999	-	-	-	-	-
Kimberly Biggs, secretary and treasurer	2001	-	-	-	-	-
	2000	-	-	-	-	-
	1999	-	-	-	-	-

(1) These options, incentive in nature, provide that Mr. Ferris may purchase (i) 154,000 shares at par value subject to the condition precedent that our shares are trading at $1.50 per share, (ii) 279,000 shares at par value subject to the condition precedent that our shares are trading at $3.00 per share, (iii) 154,000 shares at par value subject to the condition precedent that our shares are publicly trading at $4.50 per share, and (iv) the balance of 100,000 shares at par value subject to the condition precedent that our shares are publicly trading at $5.00 per share. These incentive stock options were granted to Mr. Ferris by our board of directors (Mr. Ferris abstaining) on September 20, 2001 in conjunction with the merger of Ferris Productions, Inc. into GameCom, Inc.

(2) These options are exerciseable at $1.00 per share, are fully vested and expire January 1, 2003.

(3) Includes options on 125,000 shares which are incentive in nature and, provide that Mr. Loesberg may purchase (i) 25,000 shares at par value subject to the condition precedent that our shares are trading at $1.50 per share, (ii) 25,000 shares at par value subject to the condition precedent that our shares are trading at $3.00 per share, (iii) 25,000 shares at par value subject to the condition precedent that our shares are publicly trading at $4.50 per share, and (iv) the balance of 50,000 shares at par value subject to the condition precedent that our shares are publicly trading at $5.00 per share. These incentive stock options were granted to Mr. Loesberg by our board of directors (Mr. Loesberg abstaining) on September 20, 2001 in conjunction with the merger of Ferris Productions, Inc. into GameCom, Inc. Also includes options granted on June 1, 2001 to purchase 100,000 shares of our common stock at $0.49 per share, which was the fair market value of the common stock on the date of grant. Those options are exercisable on June 1, 2002.

(4) These options are exerciseable at $1.00 per share, are fully vested and expire January 1, 2003.

(5) These options, incentive in nature, provide that Mr. Wells may purchase (i) 154,000 shares at par value subject to the condition precedent that our shares are trading at $1.50 per share, (ii) 279,000 shares at par value subject to the condition precedent that our shares are trading at $3.00 per share, (iii) 154,000 shares at par value subject to the condition precedent that our shares are publicly trading at $4.50 per share, and (iv) the balance of 100,000 shares at par value subject to the condition precedent that our shares are publicly trading at $5.00 per share. These incentive stock options were granted to Mr. Wells by our board of directors (Mr. Wells abstaining) on September 20, 2001 in conjunction with the merger of Ferris Productions, Inc. into GameCom, Inc.

2000 Incentive Stock Option Plan

In February, 2000, the board of directors adopted, and a majority of the shareholders approved, our 2000 Incentive Stock Option Plan, subject to approval of shareholders at the next annual meeting. The purpose of the plan is to enable us to attract, retain and motivate key employees who are important to the success and growth of our business, and to create a long-term mutuality of interest between our shareholders and those key employees by granting them options to purchase our common stock. Options granted under the plan may be either incentive stock options or non-statutory options. The plan is to be administered either directly by the board, or by a committee consisting of two or more outside directors (the "Committee"). Under the plan, options may be granted to our key employees. The option price is to be fixed by the Committee at the time the option is granted. If the option is intended to to be an incentive stock option, the purchase price is to be not less than 100% of the fair market value of the common stock at the time the option is granted, or, if the person to whom the option is granted is the owner of 10% or more of our common stock, 110% of such fair market value. The Committee is to specify when and on what terms the options granted to key employees are to become exercisable. However, no option may be exercisable after the expiration of 10 years from the date of grant or 5years from the date of grant in the case of incentive stock options granted to a holder of 10% or more of our common stock. In the case of incentive stock options, the aggregate fair market value of the shares with respect to which the options are exercisable for the first time during any calendar year may not exceed $100,000 unless this limitation has ceased to be in effect under Section 422 of the Internal Revenue code. If there is a change of control of our company, all outstanding options become immediately exercisable in full. In the event of an employee's death, or following the employee's retirement at or after age 65 or before age 65 with the consent of the Committee, outstanding options may be exercised for a period of one year from the applicable date of death or retirement. If the employee's employment is terminated for reasons other than death or retirement, the options remain exercisable for a period of three months after such termination unless termination was for cause, in which case all outstanding options are immediately canceled. 1,500,000 shares of common stock have been initially authorized for issuance under the plan. Under the plan, eligible individuals may, at the discretion of the Committee, be granted options to purchase shares of common stock. However, no eligible individuals may be granted options for more than 500,000 shares in any calendar year. The option price and number of shares covered by an option will be adjusted proportionately in the event of a stock split, stock dividend, etc., and the Committee is authorized to make other adjustments to take into consideration any other event which it determines to be appropriate to avoid distortion of the operation of the plan. In the event of a merger or consolidation, option holders will be entitled to acquire the number and class of shares of the surviving corporation which they would have been entitled to receive after the merger or consolidation if they had been the holders of the number of shares covered by the options. If we are not the surviving entity in a merger and consolidation, the Committee may in its discretion terminate all outstanding options, and in that event option holders will have 20 days from the time they received notice of termination to exercise all their outstanding options. The plan terminates 10 years from its effective date unless terminated earlier by the board of directors or the shareholders. Proceeds of the sale of shares subject to options under the plan are to be added to our general funds and used for its general corporate purposes.

On September 21, 2001, our shareholders approved the 2000 Incentive Stock Option Plan, and increased the shares authorized for the plan from 1,500,000 to 6,000,000.

In May of 2002, options for 150,000 shares under the plan were granted to our corporate secretary, Kimberly Biggs (100,000 shares), and our vice-president of operations, Rob White (50,000 shares).

Compensation of Directors

No director receives or has received any compensation from us for serving on the board of directors.

Principal Shareholders

The following table shows, as of July 24, 2002, information about equity securities we believe to be owned of record or beneficially by

• each of our directors;
• each person who owns beneficially more than 5% of any class of our outstanding equity securities; and
• all of our directors and executive officers as a group.

Shareholders' Name and Address	Number of Shares Owned	Percent
L. Kelly Jones 440 North Center Arlington, Texas 76011	3,088,752 (1)	8.6 %
Bob Ferris 1941 South Brighton Circle Mesa, Arizona 85208	5,060,240(2)	14.1 %
Lance Loesberg 7700 Heather Ridge Court Irving, Texas 75063	542,169(3)	1.5 %
John F. Aleckner, Jr. 1901 Rockcliff Court Arlington, Texas 76012	2,357,261(4)	6.6 %
L. Andrew Wells 1011 Compass Cove Circle Spring, Texas 77379	2,530,120(5)	7.1 %
Kimberly Biggs 2414 Green Willow Court Arlington, Texas 76001	42,460 (6)	*
Dave and Nancy Ferris (7) 719 Misty Lea Houston, Texas 77090	5,286,556	14.8 %
All Officers and Directors As a Group (6 Persons)	18,907,558 (1)(2)(3)(4)(5)(6)	52.7 %

*less than 1%.

(1) Excludes incentive conditional options to purchase 833,000 shares of common stock for $4,165.00, which are not exercisable within 60 days.

(2) Excludes incentive conditional options to purchase 687,000 shares of common stock for $3,435.00, which are not exercisable within 60 days.

(3) Excludes incentive conditional options to purchase 225,000 shares of common stock for $625.00, which are not exercisable within 60 days.

(4) Excludes incentive conditional option to purchase 333,000 shares of restricted common stock for $1665.00, which is not exercisable within 60 days.

(5) Excludes incentive conditional options to purchase 687,000 shares of common stock for $3,435.00, which are not exercisable within 60 days.

(6) We are obligated to redeem 16,559 of these shares for a nominal amount.

(7) Mr. and Mrs. Ferris are the parents of Bob Ferris.

(8) Based on 35,771,931 shares outstanding.

The beneficial owners of securities listed above have sole investment and voting power with respect to such shares. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.

In addition, there is a possibility, which management regards as remote, that we may be required to issue a substantial number of additional shares to the holder of one of our notes under the penalty provisions of that note. Since those shares would be issued for no additional consideration, any such issuance could cause significant dilution in the book value per share of shares presently outstanding.

Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.

Certain Transactions

Mr. Jones, our chief executive officer, is also president of Jones & Cannon, a Texas professional corporation, which has provided legal services to us and which may continue to provide legal services to us in the future. We currently owe Jones & Cannon more than $246,477.51 for legal services rendered. Jones & Cannon had also been providing the limited amount of office space we require and some clerical and other services required for our operations without charge until June 5, 2000 under an oral agreement with Mr. Jones.

Mr. Ferris, our president, is the owner of Ferris Holdings, L.L.C., which is landlord on the lease for our production facilities in Phoenix, Arizona. We currently owe Ferris Holdings, L.L.C. approximately $61,265 in arrearage on our lease.

In December, 1997, we agreed to redeem at par value an aggregate of 1,505,399 shares of the Common Stock held by the ten former shareholders of First Brewery of Dallas, Inc., a company we had acquired in April, 1997. The aggregate redemption price was to have been $7,527.02. That redemption was to have occurred no later than March 31, 1998. However, we did not have sufficient funds to honor this commitment and are currently in default under the agreement. Messrs. Jones and Aleckner and Ms. Biggs were among those whose shares were to have been redeemed. In February, 2000, the Company and Messrs. Jones and Aleckner agreed that the shares that were to have been redeemed from those two individuals would not be redeemed. We expect to redeem the remaining shares during the third quarter of 2002.

During the period from July, 1997 through May, 1998 Mr. Jones, our chairman of the board and chief executive officer, lent us an aggregate of $90,000 for use as operating capital. Of this amount, $65,000 was subsequently eliminated when Mr. Jones accepted in full satisfaction of that debt certain equipment securing bank debt which Mr. Jones had guaranteed, leaving a balance of $25,000.00. This indebtedness is evidenced by an unsecured demand promissory note at an annual interest rate of 12 % per annum. During the period from November, 2000 through December, 2001, Mr. Jones lent us an aggregate of $81,000 for use as operating capital, for a total indebtedness of $106,000. This $81,000 indebtedness is evidenced by unsecured promissory notes without interest.

During the period from March, 2001 through April, 2002, Mr. John F. Aleckner, Jr., one of our directors, lent us an aggregate of $274,500 for use as operating capital. This indebtedness is evidenced by unsecured promissory notes with no annual interest rate.

During the period from June, 1993 through April, 2001, Dr. Dave and Nancy Ferris, who are shareholders, lent us an aggregate of $172,531 for use as operating capital. During October of 2001, Dr. Dave and Nancy Ferris lent us $21,500 for use as operating capital, for a total indebtedness of $194,031. This $21,500 indebtedness is evidenced by an unsecured promissory note with no annual interest rate.

Description of Securities

Our articles of incorporation authorize us to issue 50 million shares of common stock, of a par value of $.005 per share, and 2,000,000 shares of preferred stock, par value $0.005 per share. As of July 31, 2002, 35,771,931 shares of common stock were issued and outstanding and no preferred stock had been issued.

Common Stock

Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the shareholders. Holders of common stock have no cumulative voting rights. Holders of shares of common stock are entitled to share ratably in any dividends that may be declared, from time to time by the board of directors in its discretion, from funds legally available for dividends. If we are liquidated, dissolved or wound up, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive rights to purchase our common stock. There are no conversion rights or redemption or sinking fund provisions for the common stock.

Our common stock is covered by the Securities and Exchange Commission's penny stock rules. These rules include a rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouses. For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and transaction prior to the sale. The rule may affect the ability of broker-dealers to sell our securities and may also affect the availability ability of purchasers of our stock to sell their shares in the secondary market. It may also cause fewer brokers to be willing to make a market in our common stock and it may affect the level of news coverage we receive.

Preferred Stock

We are authorized to issue 2,000,000 shares of preferred stock with such voting rights, designations, preferences, limitations and relative rights as the board of directors may determine. Although we have no current plans to issue any shares of preferred stock, the issuance of preferred stock or of rights to purchase preferred stock could be used to discourage an unsolicited acquisition proposal. In addition, the possible issuance of preferred stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of our common stock, or limit the price investors might be willing to pay in the future for shares of our common stock.

We believe the preferred stock will provide us with increased flexibility in structuring possible future financing and acquisitions, and in meeting other corporate needs that might arise. Having these authorized shares available for issuance will allow us to issue shares of preferred stock without the expense and delay of a special shareholders' meeting. The authorized shares of preferred stock, as well as shares of common stock, will be available for issuance without further action by shareholders, unless action by shareholders is required by applicable law or the rules of any stock exchange on which our securities may be listed.

Convertible Promissory Notes/Promissory Notes

We have outstanding $100,000 in principal amount of our convertible promissory notes. These notes bear interest at the rate of 12 percent per annum, call for monthly payments of interest, and matured May 10, 1998. The holder of each convertible promissory note has a non-assignable option to purchase 7,500 shares of common stock at par value. Alternatively, each holder has the right to convert his convertible promissory note at the rate of 1.25 shares of common stock for each $1.00 in principal amount of notes.

We have outstanding $25,000 in principal amount of a promissory note due to L. Kelly Jones, our chief executive officer, upon demand. This note bears interest at the rate of 12 percent per annum. In addition, we have outstanding $81,000 in principal amount of promissory notes due to Mr. Jones, payable upon demand without interest.

We have outstanding $274,500 in principal amount of promissory notes due to John F. Aleckner, Jr., one of our directors, payable upon demand without interest.

We have outstanding $235,500 in principal amount of promissory notes payable to other shareholders, all of which are in default. These notes provide for an initial issuance of shares of common stock in lieu of interest, all of which (913,000 shares) have been issued. Accordingly, no additional interest is accruing on these notes. However, $103,500 in principal amount of these promissory notes provide for a per diem issuance of common stock as a penalty for late payment. As of December 31, 1999, the per diem issuance would be in excess of 2,800,000 shares of the our common stock. We have received an opinion from counsel, Richard L. Wright, P.C., that the penalty provisions are unenforceable as illegal usury under applicable Texas law. However, there has not been any litigation between us and the holder of the note as to this issue, and in the absence of a court decision directly applicable to the parties, there remains at least some risk that the opinion of counsel could be wrong. Should the holder of the note prevail in any such litigation, the shares issuable under the penalty provisions could result in the holder's becoming our largest single shareholder. Further, depending upon how long it took to resolve the issue, an adverse decision could result in that holder's becoming a controlling shareholder. We believe that upon full payment of these promissory notes along with non-usurious monetary interest, this matter of additional shares for our late payment will be amicably resolved between us and the holder of these promissory notes. However, we cannot give any assurance in that regard.

Warrants

There are outstanding warrants to purchase 500,000 shares of our common stock at a price of $0.7094 per share. These warrants were issued to the debenture holders on July 11, 2002. The warrants expire on July 11, 2005. The holders of the warrants have the right to have the common stock issuable upon exercise of the warrants included on any registration statement we file, other than a registration statement covering an employee stock plan or a registration statement filed in connection with a business combination or reclassification of our securities.

We also have outstanding 496,703 warrants issued to Swartz Private Equity L. P. in connection with an earlier equity line having terms as follows:

• 245,000 shares at $0.625 per share expiring April 14, 2005;
• 245,000 shares at $1.00 per share expiring April 14, 2005;
• 3,933 shares at $0.418 expiring October 26, 2005;
• 1,694 shares at $0.15 expiring January 2, 2006; and
• 1,076 shares at $0.275 expiring March 8, 2006.

In July 2001 we granted options to purchase 150,000 shares of common stock to a consultant as inducement for services to be provided to the Company. The options are exercisable at (i) the closing bid price per share on the date of grant for 50,000 shares; (ii) the closing bid price at the date of grant plus $.50 per share for 50,000 shares; and (iii) the closing bid price at the date of grant plus $1.00 per share for 50,000 shares. These options expire five years from the date of grant.

Convertible Debentures

On July 11, 2002, we issued to six persons $250,000 worth of convertible debentures, and within a few days after this registration statement becomes effective we expect to issue an additional $200,000 worth of these convertible debentures. These debentures

• are subordinate as to any amounts we may borrow from banks or similar financial institutions,
• pay a 5 percent cumulative interest, payable in arrears at the time of each conversion, in cash or in common stock of the company at the company's option,
• are convertible by the holder into shares of common stock of the company at any time,
• convert automatically three years after issuance,
• are convertible at the lesser of (a) 125 percent of the closing bid price of the company's common stock, as reported by Bloomberg, on July 11, 2002 (which 125 percent is $0.4434,or (b) 85 percent the average of the four lowest closing bid prices as reported by Bloomberg, during the five trading days prior to the date of conversion,
• are redeemable by the company at any time within 180 days after the date of issuance on ten days written notice at 120 percent of the principal amount being redeemed, and
• require the registration of the shares of common stock into which the debentures may be converted. The registration statement accompanying this prospectus will register such shares upon effectiveness.

Of the 19,991,703 shares of common stock covered by this Prospectus, 6 million are registered to possibly underlie the $450,000 worth of convertible debentures. Because of the uncertainty of the future market price of our common stock, it is possible that

• none of these shares would be issued should we redeem the convertible debentures by the 180th day following the issuance of the debentures
• fewer than 6,000,000 shares would be issuable should the convertible debentures be converted
• more than 6,000,000 shares would be issuable should the closing bid price of our common stock average less than $ 0.13 per share for four days during the five trading days prior to conversion of the convertible debentures.

Should fewer than 6 million shares be required, we will deregister the unneeded shares. Should more than 6 million be required, we will file a new registration statement and amend this Prospectus to add the additional needed shares of common stock.

Anti-takeover Provisions

Under our articles of incorporation, a change in our bylaws requires the affirmative vote of not less than a majority of our "Continuing Directors." A Continuing Director is a member of the board who is not and who was a member of the board of directors immediately before the time the 10% or more holder became the beneficial owner of 10% or more of that voting stock. The articles of ncorporation also require that shareholder votes be taken only at a meeting, and prohibit action by written consent.

In addition, we may not effect a "Business Combination" in which an affiliate or associate of a holder of 10% or more of our voting stock has an interest without the vote of at least 80% of our voting stock (voting as a single class), including the vote of not less than 50% of the outstanding shares of voting stock not beneficially owned by the 10% holder or its affiliates or associates. The additional voting requirements described in this paragraph does not apply if the board of directors by a vote of not less than a majority of the continuing directors then holding office expressly approves in advance the acquisition of shares that resulted in the 10% holder's becoming such, or approves the business combination before the related person became a related person. Those requirements also do not apply if, among other things,

• that the cash or fair market value of property received by holders in the Business Combination is not less than the highest price per share paid by the related person in acquiring any of its shares, and the related person does not receive the benefit of any loans, advances, guarantees or other financial assistance or tax advantages provided by us except proportionately as a shareholder, and
• that the transaction be covered by a fairness opinion of a reputable investment banking firm if deemed advisable by a majority of the Continuing Directors.

The term "Business Combination" includes, among other things

• a merger, consolidation or share exchange involving us or a subsidiary,
• a sale, mortgage or other disposition of a substantial part of the our assets,
• the issuance of additional securities, a reclassification which would increase the voting power of a Related Person or our liquidation or dissolution.

These provisions might discourage an unsolicited acquisition proposal that could be favorable to shareholders. They could also discourage a proxy contest, make more difficult the acquisition of a substantial block of our common stock or limit the price investors might be willing to pay in the future for shares of our common stock.

We are also subject to Article 13 of the Texas Business Corporation Act. That article prohibits us from engaging in a business combination with an affiliated shareholder, generally defined as a person holding 20% or more our outstanding voting stock, during the three-year period immediately following the affiliated shareholder's share acquisition date, unless the business combination or acquisition by the affiliated shareholder was approved by

• our board of directors before the affiliated shareholder's share acquisition date, or
• two-thirds of the holders of our outstanding voting shares not beneficially owned by the affiliated shareholder at a meeting of shareholders and not by written consent, called for that purpose not less than six months after the affiliated shareholder's share acquisition date.

Transfer Agent.

Continental Stock Transfer, Inc. of New York, New York is our transfer agent.

Legal Matters

The legality of the securities offered hereby has been passed upon by Raice Paykin & Krieg LLP, New York, New York.

Experts

Our balance sheet as of December 31, 2001 and 2000 and the statements of our operations, shareholders' equity and cash flows for the years then ended, have been included in this prospectus in reliance on the report, which includes an explanatory paragraph on our ability to continue as a going concern, of Ham, Langston, & Brezina certified public accountants, given on the authority of that firm as experts in accounting and auditing.

Where You Can Find More Information

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room.

We have filed with the SEC a registration statement on Form SB-2 under the Securities Act covering the sale of the securities offered under this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information in the registration statement. Certain items of the registration statement are omitted in accordance with the rules and regulations of the SEC. Statements contained in this prospectus as to the contents of any contract or other documents are not necessarily complete and in each instance where reference is made to the copy of such contract or documents filed as an exhibit to the registration statement, statements about the document are qualified in all respects by that reference and the exhibits and schedules to the exhibits. For further information regarding VirTra Systems and the securities offered under this prospectus, we refer you to the registration statement and those exhibits and schedules, which may be obtained from the SEC at its principal office in Washington, D.C. upon payment of the fees prescribed by the SEC.

Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors	37
Consolidated Financial Statements of VirTra Systems, Inc. and subsidiary:
Consolidated Statement of Financial Condition as of December 31, 2001 (audited) and June 30, 2002 (unaudited)	38
Consolidated Statements of Operations for the years ended December 31, 2001 (audited) and June 30, 2002 (unaudited)	39
Consolidated Statements of Cash Flows for the years ended December 31, 2001 (audited) and June 30, 2002 (unaudited)	40
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2001 (audited) and June 30, 2002 (unaudited)	41
Notes to Consolidated Financial Statements	42

Report of Independent Accountants

To the Board of Directors and Shareholders of
GameCom, Inc.

We have audited the accompanying consolidated balance sheet of GameCom, Inc. (the “Company”) as of December 31, 2001, and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years ended December 31, 2001 and 2000. These financial statements are the responsibility of our management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates 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 financial statements referred to above present fairly, in all material respects, the financial position of GameCom, Inc. as of December 31, 2001, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and at December 31, 2001 is in a negative working capital position and a shareholders’ deficit position. These factors raise substantial doubt about our ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Ham, Langston & Brezina, LLP
Houston, Texas
March 20, 2002

VIRTRA SYSTEMS, INC. (FORMERLY GAMECOM, INC. )
CONSOLIDATED BALANCE SHEETS
as of December 31, 2001 (Audited) and June 30, 2002 (Unaudited)
__________

	December 31, 2001	June 30, 2002
ASSETS
Current assets:
Cash and cash equivalents	$             -
Accounts receivable	15,669	20,974
Total current assets	15,669	20,974
Property and equipment, net	822,964	559,108
Note receivable-related party	67,885	67,885
Intangible assets, net	54,389	45,325
Total assets	$  960,907	$ 693,292
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable	$1,079,464	$ 1,025,397
Current portion of obligations under product financing arrangements	1,840,436	1,961,760
Notes payable-shareholders	710,531	910,031
Accounts payable	1,020,574	1,267,505
Book overdraft	33,172	25,638
Accrued interest payable	146,341	185,810
Accrued liabilities	355,365	348,651
Total current liabilities	5,185,883	5,724,792
Obligations under product financing arrangements, net of current portion	2,513,914	2,782,480
Total liabilities	7,699,797	8,507,272
Redeemable common stock, 778,291 shares at $.005 par value	3,891	3,891
Shareholders’ deficit:
Common stock, $.005 par value, 100,000,000 shares authorized, 32,931,842 and 35,671,931 shares issued and outstanding, respectively	164,660	178,361
Additional paid-in capital	2,129,589	2,600,813
Accumulated deficit	(9,037,030)	(10,597,045)
Total shareholders’ deficit	(6,742,781)	(7,817,871)
Total liabilities and shareholders’ deficit	$     960,907	$ 693,292

See accompanying notes

VIRTRA SYSTEMS, INC. (FORMERLY GAMECOM, INC. )
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 2001 and 2000 (Audited) and the six months ended June 30, 2002 (Unaudited)
__________

	Year Ended December 31		Six Months Ended June 30
	2001	2000	2002	2001
Revenue:
Theme parks and arcades	$ 1,763,280	$ 2,173,025	$   364,177	$   553,057
Custom applications and other	699,784	1,186,101	137,887	819,061
Total revenue	2,463,064	3,359,126	502,064	1,372,118
Cost of sales and services	1,574,399	1,882,889	369,113	968,134
Gross margin	888,665	1,476,237	132,951	403,984
General and administrative expenses	2,443,692	2,134,385	1,013,383	1,240,466
Loss from operations	(1,555,027)	(658,148)	(880,432)	(836,482)
Other income (expenses):
Interest income	1,338	1,415	-	1,338
Interest expense and finance charges	(1,456,647)	(1,173,150)	(686,455)	(570,835)
Other income	55,760	22,863	6,872	43,665
Total other income (expenses)	(1,399,549)	(1,148,872)	(679,583)	(525,832)
Net loss before extraordinary item	(2,954,576)	(1,807,020)	$(1,560,015)	$(1,362,314)
Extraordinary item:
Gain from extinguishment of debt	-	455,149	-	-
Net loss	$(2,954,576)	$(1,351,871)	$(1,560,015)	$(1,362,314)
Weighted average shares outstanding	31,758,516	30,400,649	34,356,598	31,400,100
Basic and diluted net loss per common share before extraordinary item	$ (0.09)	$ (0.06)	$       (0.05)	$       (0.04)
Effect of extraordinary item	$         -	$ 0.01	-	-
Basic and diluted net loss per common share after extraordinary item	$ (0.09)	$ (0.05)	$       (0.05)	$       (0.04)

See accompanying notes

VIRTRA SYSTEMS, INC. (FORMERLY GAMECOM, INC. )
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 2001 and 2000 (Audited) and the six months ended June 30, 2002 and 2001 (Unaudited)

	Years ended December 31,		Six Months Ended June 30,
	2001	2000	2002	2001
Cash flows from operating activities:
Net loss	$(2,954,576)	$(1,351,871)	$(1,560,015)	$(1,362,314)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	610,246	556,701	272,920	302,691
Amortization of debt issuance costs	517,034	210,854	397,390	258,517
Bad debt expense	33,471	-	-	33,471
Common stock issued for services	88,225	16,251	250,425	58,754
Common stock issued for interest and finance charges	225,900	198,696	234,500	73,400
Changes in operating assets and liabilities:
Accounts receivable	144,253	(159,742)	(5,305)	19,025
Prepaid and other assets	38,887	(4,898)	-	-
Accounts payable	283,517	(682)	246,931	57,001
Accrued interest payable	56,401	8,106	39,469	11,124
Accrued liabilities	267,365	(132,400)	(6,714)	-
Net cash used in operating activities	(689,277)	(658,985)	(130,399)	(548,331)
Cash flows from investing activities:
Capital expenditures	(88,656)	(930,776)	-	(16,656)
Increase in intangible asset	-	(22,392)	-	-
Issuance of note receivable-related party	-	(102,782)	-	-
Payment received on note receivable	34,897	91,529	-	-
Net cash used in investing activities	(53,759)	(964,421)	-	(16,656)
Cash flows from financing activities:
Proceeds from issuance of notes payable	79,990	1,085,000	35,000	60,000
Proceeds from issuance of notes payable-shareholders	152,500	86,000	199,500	45,000
Proceeds from obligations under product financing arrangements	563,860	234,240	-	563,860
Payments on notes payable	(68,326)	(162,200)	(89,067)	(34,008)
Payments on obligations under product financing arrangements	(101,000)	(90,060)	(7,500)	(101,000)
Increase in book overdraft	27,598	5,574	(7,534)	-
Proceeds from issuance of common stock	82,279	64,847	-	25,000
Net cash provided by financing activities	736,901	1,223,401	130,399	558,852
Increase (decrease) in cash and cash equivalents	(6,135)	(400,005)	-	(6,135)
Cash and cash equivalents, beginning of period	6,135	406,140	-	6,135
Cash and cash equivalents, end of period	$              -	$     6,135	-	$              -
Non-cash investing and financing activities:
Interest paid	$   657,312	$ 733,995	$    18,589	$   379,118
Income taxes paid	$              -	$             -	$              -	$              -
Common stock issued as repayment of notes payable to stockholders	$              -	$             -	$              -	$    95,000

See accompanying notes to financial statements

VIRTRA SYSTEMS, INC. (FORMERLY GAMECOM, INC. )
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
for the years ended December 31, 2001 and 2000 (Audited) and the six months ended June 30, 2002 (Unaudited)
__________

	Common Stock		Additional Paid-In Capital	Accumulated Deficit	Total
	Shares	Amount
Balance at December 31, 1999	28,389,040	$  141,945	$1,422,470	$(4,730,583)	$(3,166,168)
Common stock issued for services	84,571	423	15,828	-	16,251
Common stock issued for interest and finance  charges	1,133,967	5,670	193,026	-	198,696
Common stock issued for cash	127,694	638	64,209	-	64,847
Expiration of redeemable common stock	727,108	3,636	-	-	3,636
Net loss	-	-	-	(1,351,871)	(1,351,871)
Balance at December 31, 2000	30,462,380	152,312	1,695,533	(6,082,454)	(4,234,609)
Common stock issued for services	333,661	1,668	86,557	-	88,225
Common stock issued for interest and finance  charges	1,400,492	7,003	218,897	-	225,900
Common stock issued for cash	485,309	2,427	79,852	-	82,279
Common stock issued as repayment of notes to  shareholders	250,000	1,250	48,750	-	50,000
Net loss	-	-	-	(2,954,576)	(2,954,576)
Balance at December 31, 2001	32,931,842	164,660	2,129,589	(9,037,030)	(6,742,781)
Common stock issued for
financing fees (unaudited)	1,780,089	8,901	225,599	-	234,500
Common stock issued for
Services (unaudited)	960,000	4,800	245,625	-	250,425
Net loss (unaudited)	-	-	-	(1,560,015)	(1,560,015)
Balance at June 30, 2002 (unaudited)	35,671,931	$  178,361	$2,600,813	$(10,597,045)	$(7,817,871)

See accompanying notes to financial statements

VIRTRA SYSTEMS, INC. (FORMERLY GAMECOM, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Background and Summary of Significant Accounting Policies

Background

GameCom, Inc. (“GameCom”), a Texas corporation, was founded in 1996 and is currently headquartered in Arlington, Texas. Effective September 21, 2001 GameCom merged with Ferris Productions, Inc. (“Ferris”) (together “the Company”). Ferris, which was based in Phoenix, Arizona, develops, manufactures and operates technically advanced personal computer and non-personal computer based products including virtual reality (“VR”) entertainment products for the entertainment, simulation, promotion and education industries.

GameCom’s merger with Ferris was effected by issuing 18,072,289 shares of GameCom common stock for all of the outstanding common stock of Ferris. The merger, since it was initiated prior to June 30, 2001, is accounted for as a pooling of interests in the accompanying consolidated financial statements. The pooling of interest method of accounting assumes that Gamecom and Ferris have been merged since their inception and the consolidated financial statements for periods prior to the consummation of the merger are restated as though the companies have been combined since their inception. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized at the time services are performed or when products are shipped.

Deferred Revenue and Expenses

Deferred revenue represents advanced billings on custom application projects and is recognized as revenue in the year the work is performed. Deferred expenses represent expenses incurred related to custom application projects not recognized until the work commences.

Concentrations of Credit Risk

Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents and accounts receivable.

The Company maintains its cash in well known banks selected based upon management’s assessment of the banks’ financial stability. Balances periodically exceed the $100,000 federal depository insurance limit; however, the Company has not experienced any losses on deposits.

Accounts receivable generally arise from sales of equipment and services to various companies throughout the world and from revenue sharing arrangements with certain theme parks located throughout the United States. Collateral is generally not required for credit granted. During the years ended December 31, 2001 and 2000 the Company had two customers representing 49% and 52% of its total revenue, respectively.

Cash Equivalents

For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.

Intangible Assets

Intangible assets consist of direct costs incurred in developing proprietary technology exclusively used in its entertainment products and costs incurred in obtaining a patent on such technology. The intangible assets are being amortized on a straight-line basis over a five-year period. As of December 31, 2001, accumulated amortization of these intangible assets is $36,260. During each of the years ended December 31, 2001 and 2000, the Company recorded amortization expense of $18,130.

Debt Issuance Costs

Debt issuance costs are deferred and recognized, using the interest method, over the term of the related debt.

Shipping and Delivery Costs

The cost of shipping and delivery of arcade games are charged directly to cost of sales and service at the time of shipment.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company provides a valuation allowance to reduce deferred tax assets to their net realizable value.

Loss Per Share

Basic and diluted loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period. Common equivalent shares from common stock options and warrants are excluded from the computation as their effect would dilute the loss per share for all periods presented.

Stock-Based Compensation

The Company accounts for its stock compensation arrangements under the provisions of Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees”. The Company provides disclosure in accordance with the disclosure-only provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123 “Accounting for Stock-Based Compensation”.

Impairment of Long-Lived Assets

In the event that facts and circumstances indicate that the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset or the asset’s estimated fair value to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow is required.

Fair Value of Financial Instruments

The Company includes fair value information in the notes to financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made.

Comprehensive Income

The Company has adopted SFAS No. 130, “Reporting Comprehensive Income”. Comprehensive income includes such items as unrealized gains or losses on certain investment securities and certain foreign currency translation adjustments. the Company's financial statements include none of the additional elements that affect comprehensive income. Accordingly, comprehensive income and net income are identical.

Segment Information

The Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. SFAS No. 131 supersedes SFAS No. 14, “Financial Reporting for Segments of a Business Enterprise”. Under the new standard, the Company is required to use the management approach to reporting its segments. The management approach designates that the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's segments. The accounting policies of the segments are the same as those described elsewhere in Note 1.

Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 eliminates the amortization of goodwill and requires that goodwill be reviewed annually for impairment. SFAS No. 142 also requires that the useful lives of previously recognized intangible assets be reassessed and the remaining amortization periods be adjusted accordingly. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and affects all goodwill and other intangible assets recorded on the Company's balance sheet at that date, regardless of when the assets were initially recorded. The implementation of SFAS No. 142 is not expected to have a material impact on the Company's results of operations or financial position.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The Company does not expect the implementation of SFAS No. 143 to have a material impact on the Company's results of operation or financial position.

In July 2001, the FASB issued SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, which is effective for fiscal years beginning after December 15, 2001. The provisions of this statement provide a single accounting model for impairment of long-lived assets. The Company does not expect the implementation of SFAS No. 144 to have a material impact on the Company's results of operation or financial position.

2. Going Concern Considerations

During the years ended December 31, 2001 and 2000, the Company has defaulted on its notes payable, has continued to accumulate payables to its vendors and has experienced negative financial results as follows:

	2001	2000
Net loss	$(2,954,576)	$(1,351,871)
Negative cash flows from operations	(689,277)	(658,985)
Negative working capital	(5,170,214)	-
Accumulated deficit	(9,037,030)	-
Shareholders’ deficit	(6,742,781)	-

Management has developed specific current and long-term plans to address its viability as a going concern as follows:

• Our anticipated entry into the training/simulation market was advanced by the aftermath of September 11, 2001. The Company is currently in advanced discussions with representatives of Homeland Security of the U.S. Government regarding use of the Company's technology in detecting and mitigating the risk of similar problems in the future.
• The Company is also attempting to raise funds through debt and/or equity offerings. If successful, these additional funds would be used to pay down debt and for working capital purposes.
• In the long-term, the Company believes that cash flows from continued growth in its operations will provide the resources for continued operations.

There can be no assurance that the Company's debt reduction plans will be successful or that the Company will have the ability to implement its business plan and ultimately attain profitability. the Company's long-term viability as a going concern is dependent upon three key factors, as follows:

• Our ability to obtain adequate sources of debt or equity funding to meet current commitments and fund the continuation of its business operations in the near term.
• The ability of the Company to control costs and expand revenues from existing or new businesses.
• The ability of the Company to ultimately achieve adequate profitability and cash flows from operations to sustain its operations.

3. Accounts Receivable

Accounts receivable consist primarily of amounts due from certain companies for the purchase of equipment and services. An allowance for doubtful accounts is provided, when appropriate, based on past experience and other factors which, in management’s judgment, deserve current recognition in estimating probable bad debts. Such factors include circumstances with respect to specific accounts receivable, growth and composition of accounts receivable, the relationship of the allowance for doubtful accounts to accounts receivable and current economic conditions. As of December 31, 2001 all accounts receivable are considered collectible and the allowance for doubtful accounts is $-0-.

4. Property and Equipment

Property and equipment consisted of the following at December 31, 2001:

Arcade equipment	$1,795,612
Furniture and equipment	277,314
	2,072,926
Less: accumulated depreciation	(1,249,962)
Property and equipment, net	$    822,964

Depreciation expense for the years ended December 31, 2001 and 2000 was $582,017 and $528,471, respectively.

5. Notes Payable

Notes payable consist of the following at December 31, 2001:

Notes payable to a bank, bearing interest ranging from the prime rate (4.75% at December 31, 2001) to the prime rate plus 2% per year and due in average monthly payments of approximately $31,000, including interest, through November 2002. These notes are collateralized by certain equipment, licensing rights and by the personal guarantees of officers/shareholders of the Company.	$  559,474
Notes payable to banks, bearing interest from 6.75% to 9.5% per year, interest due monthly and principal due on demand. These notes are not collateralized but are guaranteed by officers/shareholders of the Company. Effective January 17, 2002, certain of these notes were refinanced into a single note which bears interest at the prime rate (4.75% at December 31, 2001) plus 1.5%, due in 36 monthly installments of $8,824 and collateralized by an office building owned by an officer/shareholder of the Company.	250,000
Notes payable to third party entities and individuals bearing interest at a stated rate of 10% payable semi- annually with principal due three years after issuance of the note, which ranges from October 2001 to March 2002. These notes are not collateralized. In connec- tion with the funding of these notes, Ferris issued a total of 412,500 shares of its common stock as equity attachments to the note holders and to pay debt issuance costs. Accordingly, the actual weighted average interest rate on these notes, including the effect of the issuance of common stock and the payment of debt issuance costs, was approximately 16%.	250,000
Note payable to a financing entity, due on demand, non- interest bearing. This note is not collateralized.	19,990
Total notes payable	$1,079,464
The notes payable to banks contain various financial and non-financial covenants, which require the Company, among other things, to maintain certain levels of shareholders’ equity and to comply with certain financial ratios. The Company was in violation of these covenants as of December 31, 2001 and the banks could demand full payment of all principal and interest.

6. Notes Payable-Shareholders

Notes payable to shareholders consisted of the following at December 31, 2001:

Convertible notes payable to shareholders, principal and interest due on demand, accruing interest at 12% per year. These notes are collateralized by certain equipment and contain a provision to convert the note to common stock.	$  100,000
Note payable to a shareholder, principal and interest due on demand, interest accrues at 10% per year. This note is not collateralized.	194,031
Notes payable to shareholders, non-interest bearing with principal due on demand. These notes are not collateralized.	416,500
Total notes payable to shareholders	$  710,531

All notes due to shareholders were in default as of December 31, 2001. Convertible notes payable to shareholders in the amount of $100,000 were issued by the Company in increments of $10,000 having an original maturity date of May 10, 1998. The holder of each $10,000 of convertible note has a non-assignable option to purchase 7,500 shares of common stock at par value. Alternately, each holder has the right to convert their convertible note to equity in the form of 12,500 shares of restricted common stock. None of the notes have been converted.

Of the $416,500 of notes payable without interest described above, a $103,500 note provides for a per diem issuance of common stock as penalty for late payments. As of December 31, 2001, the per diem issuance would be in excess of 5,800,000 shares of the Company's common stock. The Company has received an opinion from counsel that the penalty provisions are unenforceable as illegal usury under applicable Texas law. However, there has not been any litigation between the Company and the holder of the note as to this issue, and in the absence of a court decision directly applicable to the parties, there remains at least some risk that the opinion of counsel could be wrong. According to legal counsel there is no likelihood of a sustainable assessment of the per diem late penalty. Therefore, no provision for such charges has been provided.

7. Obligations Under Product Financing Arrangements

In financing the production of its arcade equipment, the Company has entered into agreements whereby an entity or individual advances funds to the Company to produce specific arcade equipment. Under this arrangement, the Company has agreed to make monthly payments of a specified amount for three years, with an automatic renewal for an additional three years unless canceled in writing, from the origination date as specified in the agreement. In addition, the entity or individual advancing the funds has the right to exercise a buy-out whereby the Company has 180 days to repay the obligation upon exercise of the buy-out. Interest is payable monthly at an annual rate of approximately 16%.

In connection with these financing arrangements, the Company has incurred debt issuance costs of approximately 21% of the total obligation. These costs are being amortized over a three year period using the interest method resulting in an effective annual interest rate of approximately 29% on these obligations.

Obligations under these product financing arrangements consist of the following at December 31, 2001:

Contractual balance	$4,569,796
Less: unamortized debt issuance costs	(215,446)
Total obligation	$4,354,350

As of December 31, 2001, the Company was in default of its obligations under the product financing arrangements. The Company has not made any interest payments on these obligations since September 2001 and has received notices from various individuals and entities requesting buyouts of approximately $1,350,000 as of December 31, 2001.

8. Income Taxes

The Company has incurred losses since its inception and, therefore, has not been subject to federal income taxes. As of December 31, 2001, the Company had net operating loss (“NOL”) carryforwards for income tax purposes of approximately $8,500,000 which expire in various tax years through 2021. Under the provisions of Section 382 of the Internal Revenue Code the ownership change in the Company that resulted from the merger of the Company could severely limit the Company's ability to utilize its NOL carryforward to reduce future taxable income and related tax liabilities. Additionally, because United States tax laws limit the time during which NOL carryforwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOL for federal income tax purposes should the Company generate taxable income.

The composition of deferred tax assets and liabilities and the related tax effects at December 31, 2001 are as follows:

Deferred tax assets:
Net operating losses	$2,912,633
Intangible assets	8,219
Valuation allowance	(2,820,112)
Total deferred tax assets	100,740
Deferred tax liabilities:
Property and equipment	(100,740)
Total deferred tax liability	(100,740)
Net deferred tax asset (liability)	$                 -

The difference between the income tax benefit in the accompanying statement of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax loss for the years ended December 31, 2001 and 2000 is as follows:

	2001		2000
	Amount	%	Amount	%
Benefit for income tax at
federal statutory rate	$(1,004,556)	(34.0)%	$ (459,636)	(34.0)
Other	9,323	0.0	(37,400)	(0.3)
Increase in valuation
allowance	995,233	34.0	497,036	34.3
	$               -	0.0%	$              -	0.0%

9. Redeemable Common Stock

In 1997 the Company entered into an agreement to redeem 1,505,399 shares of common stock from certain shareholders at par value of $.005 per share with the consideration for such redemption to be paid pro-rata to such shareholders by March 31, 1998. In February 2000 the Company and shareholders released 727,108 shares of common stock from the redemption requirement, leaving 778,291 shares to be redeemed. As of December 31, 2001 none of the shares have been redeemed but may be redeemed at the option of the Company.

10. Stock Options and Warrants

The Company periodically issues incentive stock options to key employees, officers, directors and outside consultants to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons.

In 1997 and 1998 the Company granted incentive stock options to certain officers and members of the Company's board of directors to purchase 1,499,000 shares of the Company's common stock at par value of $.005 per share. These options are exercisable based on various levels of the Company's stock price: (i) options to purchase 333,000 shares at par value are exercisable if the Company's stock is trading at $1.50 per share; (ii) options to purchase 583,000 shares at par value are exercisable if the Company's stock is trading at $3.00 per share; (iii) options to purchase 333,000 shares at par value are exercisable if the Company's stock is trading at $4.50 per share; and (iv) options to purchase 250,000 shares at par value are exercisable if the Company's common stock is trading at $5.00 per share. In 1999, options to purchase 300,000 shares of common stock were exercised. There is no expiration date on these options.

In 1997 and 1998 in connection with the convertible notes payable to certain shareholders (See Note 6) the Company granted options to purchase 75,000 shares of its common stock, at its par value of $.005 per share, to these convertible note holders.

On January 1, 2000 the Company granted options to certain employees and non-employees to purchase 350,000 shares of the Company's common stock at $0.15 per share, which approximated fair market value. The options are fully vested and exercisable at the date of grant and expire on January 1, 2003.

In July 2001 options to purchase 150,000 shares of common stock were granted to a consultant as inducement for services to be provided to the Company. The options are exercisable at (i) the closing bid price per share on the date of grant for 50,000 shares; (ii) the closing bid price at the date of grant plus $.50 per share for 50,000 shares; and (iii) the closing bid price at the date of grant plus $1.00 per share for 50,000 shares. These options expire five years from the date of grant. The Company deemed the value of these options to be immaterial at the date of grant.

On June 1, 2001 the Company granted options to an employee to purchase 100,000 shares of the Company's common stock at $0.49 per share, which was the fair market value of the common stock on the date of grant. The options are exercisable on June 1, 2002.

In September 2001 the Company granted incentive stock options to certain officers and members of the Company's board of directors to purchase 1,499,000 shares of the Company's common stock at par value of $.005 per share. These options are exercisable based on various levels of the Company's stock price: (i) options to purchase 333,000 shares at par value are exercisable if the Company's stock is trading at $1.50 per share; (ii) options to purchase 583,000 shares at par value are exercisable if the Company's stock is trading at $3.00 per share; (iii) options to purchase 333,000 shares at par value are exercisable if the Company's stock is trading at $4.50 per share; and (iv) options to purchase 250,000 shares at par value are exercisable if the Company's common stock is trading at $5.00 per share. There is no expiration date on these options.

In September 2001, the Company's shareholders amended the 2000 Incentive Stock Option Plan (the “Plan”). The shareholders have authorized 6,000,000 shares for the Plan and options granted under the Plan may be either incentive stock options or non-statutory stock options subject to certain restrictions as specified in the Plan. During the year ended December 31, 2001 no options have been granted under this Plan.

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock-Based Compensation”, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is greater equals the fair market price of lighting stock on the date of grant, no compensation expense has been recognized.

Proforma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model, with the following weighted average assumptions for 2001 and 2000:

risk free interest rate of 5%; no dividend yield; weighted average volatility factor of the expected market price of the Company's common stock of 70%; and a weighted average expected life of the options of 1 to 5 years. For purposes of proforma disclosures, the estimated fair value of the options is included in expense at the date of issuance, as required by Statement 123. the Company's proforma information is as follows:

	2001	2000
Net loss–as reported	$(2,954,576)	$(1,351,871)
Net loss–proforma	$(2,982,396)	$(1,377,876)
Basic and diluted loss per share-as reported	$     (0.09)	$     (0.05)
Basic and diluted loss per share-proforma	$     (0.09)	$     (0.05)

The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

A summary of the Company's stock option activity and related information for the years ended December 31, 2001 and 2000 follows:

	Number of
	Shares
	Under	Weighted-Average
	Options	Exercise Price
Outstanding - December 31, 1999	1,274,000	$0.005
Granted	350,000	$0.15
Exercised	-	-
Forfeited	-	-
Outstanding - December 31, 2000	1,624,000	$0.04
Granted	1,749,000	$0.10
Exercised	-	-
Forfeited	-	-
Outstanding – December 31, 2001	3,373,000	$0.12
Exercisable – December 31, 2001	575,000	$0.30

Following is a summary of outstanding stock options at December 31, 2001:

Number of		Expiration	Weighted Average
Shares	Vested	Date	Exercise Price
2,698,000	-		$0.005
350,000	350,000	2003	$0.15
150,000	150,000	2006	$0.81
100,000	-	2002	$0.49
75,000	75,000	-	$0.005
3,373,000	575,000

In June 2000, the Company entered into a subscription agreement for up to a $15,000,000 sale of common stock and warrants under an investment financing agreement with an institutional private equity fund (the “Investor”). This financing allows the Company to issue common stock and warrants at the Company's discretion as often as monthly as funds are needed in amounts based upon certain market conditions. The pricing of each common stock sale is based upon current market prices at the time of each sale, and the Company may set a floor price for the shares each month at the Company's discretion.

In connection with the execution of this agreement, the Company issued warrants to the Investor to purchase 245,000 shares of the Company's common stock at $0.625 per share and 245,000 shares of the Company's common stock at $1.00 per share, which was the stock’s approximate market value at the time of each issuance. These warrants are exercisable until they expire in April 2005. In addition, for each sale on this equity line the Investor receives additional warrants to purchase the Company's common stock equal to 10% of equity sold, exercisable at a price equal to 110% of the market price. These warrants are exercisable for a five-year period from the date of issuance. As of December 31, 2001, the Company has issued 6,703 such warrants to the Investor with exercise prices ranging from $0.16 to $0.42 per share.

A summary of the Company's stock warrant activity and related information is as follows:

		Weighted
		Average
	Number of	Exercise
	Shares	Price
Outstanding at December 31, 1999	-	$ -
Granted	493,933	$0.81
Exercised	-	-
Forfeited	-	-
Outstanding at December 31, 2000	493,933	$0.81
Granted	2,770	$0.21
Exercised	-	-
Forfeited	-	-
Outstanding at December 31, 2001	496,703	$0.81

11. Commitments and Contingencies

Lease Obligations

On August 4, 2000 the Company entered into a long-term operating lease for its office and manufacturing facility in Phoenix, Arizona, which is owned by an entity controlled by a shareholder of the Company. The monthly lease cost to the Company is equal to all expenses related to the building, including, but not limited to, mortgage, taxes, fees, maintenance and improvements. The minimum monthly cost is approximately $9,000. As of December 31, 2001 the Company owed approximately $35,000 to the shareholder for rent in 2001 that had not been paid.

Minimum lease payments due under leases with remaining lease terms of greater than one year are as follows:

2002	$  142,000
2003	107,410
2004	107,410
2005	107,410
2006 and thereafter	2,218,160
	$2,682,390

The Company rents office space in Arlington, Texas on a month-to-month basis at $1,500 per month from an officer and shareholder of the Company. No payments have been made to date.

Litigation

The Company is currently a party to certain litigation arising in the normal course of business. Management believes that such litigation will not have a material impact on the Company's financial position, results of operations or cash flows.

12. Business Segments

During the year ended December 31, 2001 and 2000, the Company operated primarily in two strategic business units that offer different products and services: revenue sharing arrangements with theme parks and arcades and custom applications utilizing its virtual reality concept. Financial information regarding these business segments is as follows:

	Theme Parks	Custom
	and Arcades	Applications	Other	Total
Year ended December 31,
2001:
Revenues	$1,763,280	$  699,599	$      185	$2,463,064
Income (loss) from oper-
ations	(421,253)	62,358	(1,216,132)	(1,555,027)
Total assets	845,558	-	115,349	960,907
Interest expense	1,053,097	-	403,550	1,456,647
Depreciation expense	514,926	-	67,091	582,017
Capital expenditures	88,656	-	-	88,656
Year ended December 31,
2000:
Revenues	$2,173,025	$  739,251	$  446,850	$3,359,126
Income (loss) from op-
erations	(509,407)	268,580	(417,321)	(658,148)
Interest expense	848,140	-	325,010	1,173,150
Depreciation expense	467,552	-	60,919	528,471
Capital expenditures	847,114	-	83,662	930,776

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating earnings of the respective business units.

13. Related Party Transactions

Included in the December 31, 2001 balance sheet is a note receivable from a shareholder of the Company. This note originated when the Company made a down payment of $102,782 on behalf of the shareholder who purchased the building which the Company currently leases (See Note 11). The note is non-interest bearing and is due on demand. The note was paid down by $34,897 during the year ended December 31, 2001.

Included in accounts payable in the December 31, 2001 balance sheet is $204,592 payable to a firm which is owned by an officer/shareholder of the Company for legal services and office rent (See Note 11).

Included in accrued interest payable in the December 31, 2001 balance sheet is $108,732 of interest due to shareholders of the Company.

The following table of contents has been designed to help you find important information contained in this prospectus. We encourage you to read the entire prospectus.

PROSPECTUS Resale of 19,991,703 Shares of Common Stock

TABLE OF CONTENTS Prospectus Summary Our Business The Offering Key Facts Summary Financial Data Risk Factors Selling Shareholders Use of Proceeds Dilution Capitalization Equity line Mechanics. Open Period. Purchase Price. Maximum Put Notice Amount. Maximum Amount Subject to Each Put Notice. Cancellation of Puts Number of Shares To Be Issued. Shareholder approval. Registration Rights. Dutchess's right to indemnification. Right of first refusal. Net Proceeds. Plan of Distribution Price Range of Common Stock Penny Stock Regulations Dividend Policy Management's Discussion and Analysis of Financial Condition and Results of Operations Overview. Results of Operations. Liquidity and Plan of Operations Business Business Overview VR Products Competition Marketing Employees Trademarks/Patents Management Executive Compensation Certain Transactions Description of Securities Legal Matters Experts Where You Can Find More Information Financial Statements

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. Indemnification of Directors and Officers

The articles of incorporation generally limit the personal liability of directors for monetary damages for any act or omission in their capacities as directors to the fullest extent permitted by law. In addition, our bylaws provide that the Company shall indemnify and advance or reimburse reasonable expenses incurred by, directors, officers, employees or agents of the Company, to the fullest extent that a Company may grant indemnification to a director under the Texas Business Corporations Act, and may indemnify such persons to such further extent as permitted by law.

ITEM 25. Other Expenses of Issuance and Distribution

The following is an itemized statement of the estimated amounts of all expenses payable by the registrant in connection with the registration of the common stock offered hereby:

SEC filing fee	$ 1,000
Blue sky fees and expenses	5,000
Legal fees	40,000
Accounting fees
Miscellaneous	10,000
Total

ITEM 26. Recent Sales of Unregistered Securities

In January of 1999, the Company issued $88,500 in principal amount of promissory notes to existing shareholders and issued 240,000 shares of its common stock in lieu of future interest on such notes. Management believes that the fair market value of the 240,000 shares issued in lieu of interest was approximately $55,200. These notes and shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In January of 1999, the Company issued 300,000 shares of its common stock to its chief executive officer and two employees at $0.005 per share upon the exercise of stock options for an aggregate of $1,500. The shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act.

In April of 1999, the Company issued in aggregate of 1,000,000 shares of its common stock to two investors not previously associated or affiliated with the Company at $0.06 per share for an aggregate of $60,000, and an additional 100,000 shares also valued at $0.06 per share for an aggregate of $6,000, to the law firm handling the transaction and a financial services firm in payment for their services in connection with the transaction. The shares were issued in reliance upon the limited offering exemption of Rule 504 under the Act.

In July of 1999, the Company issued 119,048 shares of its common stock at $0.42 per share for an aggregate of $50,000. These shares were sold to one individual who had been directly involved in development of the Company's game machine and was thoroughly familiar with its business, and were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In October of 1999, the Company issued 250,000 shares of its common stock to an accredited investor not previously associated with the Company at $0.10 per share for an aggregate of $25,000. Also in October of 1999, the Company issued 25,000 shares of its common stock in partial payment of legal fees incurred in connection with registration of its common stock under the Securities Exchange Act of 1934. Management believes that the fair market value of the 25,000 shares issued in payment of the legal fee was approximately $2,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) and the accredited investor exemption contained in section 4(6) of the Act.

In January of 2000, the Company issued 100,000 shares of its common stock to its chief executive officer as compensation for his guaranty of an unsecured bank loan to the Company in the amount of $20,000. Management believes that the fair market value of the shares was approximately $17,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In April of 2000, the Company issued 88,968 shares of its common stock to its chief executive officer as compensation for his guaranty of an unsecured bank loan to the Company in the amount of $25,000. Management believes that the fair market value of the shares was approximately $25,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In June of 2000, the Company issued 71,429 shares of its common stock to an accredited investor which was previously a shareholder of the Company at $0.70 per share for an aggregate of $50,000. Additionally, the Company issued to such accredited investor $50,000 in principal amount of promissory notes and an additional 8,571 shares of its common stock in lieu of future interest on such note. Management believes that the fair market value of the 8,571 shares issued in lieu of interest was approximately $2,571. These shares and notes were issued in reliance upon the private offering exemption contained in section 4(2) and the accredited investor exemption contained in section 4(6) of the Act.

In June of 2000, the Company issued 136,364 shares of its common stock to its chief executive officer for guaranteeing unsecured bank loans to the Company in the amount of $20,000 and $25,000, for the months of March, 2000 and December, 1999, respectively. Management believes that the fair market value of the shares was approximately $30,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act, and the accredited investor exemption contained in section 4(6) of the Act.

In September of 2000, the Company issued 272,997 shares of its common stock to its board of directors for collectively guaranteeing the Company’s $60,000 unsecured bank note to SouthTrust Bank. Management believes that the fair market value of the shares was approximately $58,694. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In October of 2000, the Company issued 162,162 shares of its common stock to its board of directors as consideration for guaranteeing the Company’s $30,000 unsecured note to Northwest National Bank. Management believes that the fair market value of the shares was approximately $30,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In October of 2000, the Company issued 39,330 shares of its common stock to Swartz Private Equity, L.L.C., in conjunction with a draw upon the Company’s equity line. Management believes that the fair market value of the shares was approximately $11,799. These shares were issued in reliance upon the Company’s SB-2 filing.

In November of 2000, the Company issued 76,000 shares of its common stock to Mary Anne Cannon. Management believes that the fair market value of the shares was approximately $13,680. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act.

In November of 2000, the Company issued 60,976 shares of its common stock to the Company’s chief executive officer for guaranteeing a $25,000 loan. Management believes that the fair market value of the shares was approximately $12,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In November of 2000, the Company issued 16,935 shares of its common stock to Swartz Private Equity, L.L.C., in conjunction with a draw upon the Company’s equity line. Management believes that the fair market value of the shares was approximately $3048. These shares were issued in reliance upon the Company’s SB-2 filing.

In December of 2000, the Company issued 312,500 shares of its common stock to its chief executive officer for his guaranty of a $25,000 loan to the Company from Northwest National Bank. Management believes that the fair market value of the shares was approximately $25,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In January of 2001, the Company issued a total of 255,320 shares of its common stock to its chief executive officer and president for their personal guaranties of a $60,000 unsecured loan to the Company from Mercantile National Bank. Management believes that the fair market value of the shares was approximately $60,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In February of 2001, the Company issued 10,000 shares of its common stock in partial payment of legal fees incurred in connection with preparation of the Company’s SB-2 registration to Raice Paykin Krieg & Schrader, L.L.P. Management believes that the fair market value of the 10,000 shares issued in payment of legal fees was approximately $2100. These shares were issued in reliance upon the private offering exemption contained in section 4(2) and the accredited investor exemption contained in section 4(6) of the Act.

In February of 2001, the Company issued 50,000 shares of its common stock to Brandon Hale, in connection with development of the ‘Net GameLink™ system by Connect Computer Solutions, Inc. Management believes that the fair market value of the shares was approximately $10,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act. The Company had previously taken a charge of $200,000 to earnings in connection with the work performed by Connect Computer Solutions, Inc. on the ‘Net GameLink™ development.

In February of 2001, the Company issued 25,000 shares of its common stock to Al Spivey, in connection with development of the ‘Net GameLink™ system by Connect Computer Solutions, Inc. Management believes that the fair market value of the shares was approximately $5250. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act. The Company had previously taken a charge of $200,000 to earnings in connection with the work performed by Connect Computer Solutions, Inc. on the ‘Net GameLink™ development.

In February of 2001, the Company issued 50,000 restricted shares of its common stock to Gary Cella in connection with management services to be provided to the Company. Management believes that the fair market value of the shares was approximately $10,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In March of 2001, the Company issued 10,755 shares of its common stock to Swartz Private Equity, L.L.C., in conjunction with a draw upon the Company’s equity line. Management believes that the fair market value of the shares was approximately $2904. These shares were issued in reliance upon the Company’s SB-2 filing.

In March of 2001, the Company issued 24,554 shares of its common stock to The Taxin Network in connection with advertising services to be provided to the Company. Management believes that the fair market value of the shares was approximately $4375. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In March of 2001, the Company issued a total of 58,824 shares of its common stock to its president for his loan of $10,000 to the Company. Management believes that the fair market value of the shares was approximately $10,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In March of 2001, the Company issued 125,000 shares of its common stock to an accredited investor which was previously a shareholder of the Company at $.20 per share for an aggregate of $25,000. Additionally, the Company issued to such credited investor 250,000 shares of its common stock to convert $50,000 in principal amount of promissory notes issued by the company to this investor in June of 2000. Management believes that the fair market value of the 250,000 shares issued to convert these promissory notes was approximately $50,000. Additionally, the Company issued to such accredited investor 17,000 shares of its common stock in lieu of interest owed by the Company on the promissory notes which were converted to equity. Management believes that the fair market value of the 17,000 shares issued in lieu of interest on the past-due notes was approximately $3400. These shares were issued in reliance upon the private offering exemption contained in section 4(2) and the accredited investor exemption contained in section 4(6) of the Act.

In April of 2001, the Company issued 34,375 shares of its common stock to The Taxin Network in connection with advertising services to be provided to the Company. Management believes that the fair market value of the shares was approximately $4375. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In April of 2001, the Company issued a total of 40,000 shares of its common stock to its president for his loan of $10,000 to the Company. Management believes that the fair market value of the shares was approximately $10,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In May of 2001, the Company issued 22,917 shares of its common stock to The Taxin Network in connection with advertising services to be provided to the Company. Management believes that the fair market value of the shares was approximately $4,375. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In May of 2001, the Company issued 40,000 shares of its common stock to an accredited investor which was previously a shareholder of the Company at $0.25 per share for an aggregate of $10,000. Management believes that the fair market value of the 40,000 shares issued in lieu of interest was approximately $10,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) and the accredited investor exemption contained in section 4(6) of the Act.

In June of 2001, the Company issued a total of 40,000 shares of its common stock to its chief executive officer for his loan of $10,000 to the Company. Management believes that the fair market value of the shares was approximately $10,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In June of 2001, the Company issued 16,369 shares of its common stock to The Taxin Network in connection with advertising services to be provided to the Company. Management believes that the fair market value of the shares was approximately $4375. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In June of 2001, the Company issued a total of 41,667 shares of its common stock to its chief executive officer for his loan of $7500 to the Company. Management believes that the fair market value of the shares was approximately $7,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In June of 2001, the Company issued a total of 39,474 shares of its common stock to its president for his loan of $7500 to the Company. Management believes that the fair market value of the shares was approximately $7,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In July of 2001, the Company issued a total of 52,632 shares of its common stock to its chief executive officer for his loan of $10,000 to the Company. Management believes that the fair market value of the shares was approximately $10,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In July of 2001, the Company issued a total of 40,000 shares of its common stock to its chief executive officer for his loan of $10,000 to the Company. Management believes that the fair market value of the shares was approximately $10,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In August of 2001, the Company issued a total of 23,809 shares of its common stock to its chief executive officer for his loan of $5,000 to the Company. Management believes that the fair market value of the shares was approximately $5,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In August of 2001, the Company issued a total of 144,736 shares of its common stock to its president for his loan of $27,500 to the Company. Management believes that the fair market value of the shares was approximately $27,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In September of 2001, the Company issued 18,072,289 shares of its common stock to the former shareholders of Ferris Productions, Inc., in exchange for all of the outstanding shares of that corporation, accounted for as a pooling of interests. The shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act.

In October of 2001, the Company issued 226,316 shares of its restricted common stock to an accredited investor which was previously a shareholder of the Company for the loan of $21,500 to the Company. Management believes that the fair market value of the shares was approximately $21,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In November of 2001, the Company issued 325,000 shares of its restricted common stock to an accredited investor which was previously a shareholder of the Company at $0.154 for an aggregate of $50,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) and the accredited investor exemption contained in 4(6) of the Act.

In December of 2001, the Company issued 15,000 shares of its restricted common stock to its chief executive officer for his loan of $1500 to the Company. Management believes that the fair market value of the shares was approximately $1500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In December of 2001, the Company issued 137,143 shares of its restricted common stock to its chief executive officer for his loan of $12,000 to the Company. Management believes that the fair market value of the shares was approximately $12,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In December of 2001, the Company issued 228,571 shares of its restricted common stock to a director of the Company for his loan of $20,000 to the Company. Management believes that the fair market value of the shares was approximately $20,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In January of 2002, the Company issued 238,095 shares of its restricted common stock to a director of the Company for his loan of $25,000 to the Company. Management believes that the fair market value of the shares was approximately $25,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In January of 2002, the Company issued 400,000 shares of its restricted common stock to a director of the Company for his loan of $40,000 to the Company. Management believes that the fair market value of the shares was approximately $40,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In January of 2002, the Company issued 20,000 shares of its restricted common stock to two consultants to the Company, in accord with the terms of their respective consulting agreements. These shares were issued in reliance upon the accredited investor exemption contained in section 4(6) of the Act.

In February of 2002, the Company issued 78,125 shares of its restricted common stock to a director of the Company for his loan of $12,500 to the Company. Management believes that the fair market value of the shares was approximately $12,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In February of 2002, the Company issued 172,414 shares of its restricted common stock to a director of the Company for his loan of $25,000 to the Company. Management believes that the fair market value of the shares was approximately $25,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In February of 2002, the Company issued 151,724 shares of its restricted common stock to a director of the Company for his loan of $22,000 to the Company. Management believes that the fair market value of the shares was approximately $22,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In March of 2002, the Company issued 318,182 shares of its restricted common stock to a director of the Company for his loan of $35,000 to the Company. Management believes that the fair market value of the shares was approximately $35,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In March of 2002, the Company issued 136,364 shares of its restricted common stock to a director of the Company for his loan of $15,000 to the Company. Management believes that the fair market value of the shares was approximately $15,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In April of 2002, the Company issued 185,185 shares of its restricted common stock to a director of the Company for his loan of $25,000 to the Company. Management believes that the fair market value of the shares was approximately $25,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In May of 2002, the Company issued 65,000 shares of its restricted common stock to three key employees for their extraordinary services rendered to the Company. Management believes the fair market value of the 65,000 shares was approximately $7800. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act.

In May of 2002, the Company issued 100,000 shares of its restricted common stock to a licensed brokerage firm for its loan of $35,000 to the Company. These shares have “piggy-back” rights. Management believes that the fair market value of the shares was approximately $35,000. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

In July of 2002, the Company issued 100,000 restricted shares of its common stock to Gary Cella in connection with management services to be provided to the Company. Management believes that the fair market value of the shares was approximately $16,500. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act. This registration statement covers resale of 50,000 of those shares.

In August of 2002, the Company issued 20,000 shares of stock to a consultant employed by FilmXero in connection with website services to be provided to the Company. Management believes that the fair market value of the shares was approximately $4,600. These shares were issued in reliance upon the private offering exemption contained in section 4(2) of the Act. This registration statement covers resale of those shares.

ITEM 27. Exhibits
EXHIBIT DESCRIPTION

NO

(3.1) Articles of Incorporation of The Schooner Brewery Incorporated incorporated by reference from Exhibit 3.1 to the registrant's Registration Statement on Form 10SB

(3.2) Certificate of Amendment of Articles of Incorporation of The Schooner Brewery Incorporated dated February 14, 1997 incorporated by reference from Exhibit 3.2 to the registrant's Registration Statement on Form 10SB

(3.3) Certificate of Amendment of Articles of Incorporation of The Schooner Brewery Incorporated filed February 10, 1999 incorporated by reference from Exhibit 3.3 to the registrant's Registration Statement on Form 10SB

(3.4) Plan of Merger between GameCom, Inc., a Nevada corporation and GameCom, Inc., a Texas corporation incorporated by reference from Exhibit 3.5 to Amendment No. 1 to the registrant's Registration Statement on Form 10SB

(3.5) Articles of Incorporation of GameCom, Inc., a Texas corporation incorporated by reference from Exhibit 3.6 to Amendment No. 1 to the registrant's Registration Statement on Form 10SB

(3.6) Articles of Amendment to Articles of Incorporation of GameCom, Inc. dated April 30, 2002 effecting change in corporate name

(3.7) Articles of Amendment to Articles of Incorporation of VirTra Systems, Inc. dated June 25, 2002 increasing authorized shares

(3.9) Bylaws of GameCom, Inc. incorporated by reference from Exhibit 3.7 to Amendment No. 1 to the registrant's Registration Statement on Form 10SB

(4.1) Form of Subordinated Notes incorporated by reference from Exhibit 4.1 to the registrant's Registration Statement on Form 10SB

(4.2) Form of Convertible Subordinated Notes incorporated by reference from Exhibit 4.2 to the registrant's Registration Statement on Form 10SB

(4.3) Form of Convertible Subordinated Notes providing for penalty payable in shares incorporated by reference from Exhibit 4.3 to the registrant's Registration Statement on Form 10SB

(4.4) Form of Warrant issued to Swartz Private Equity L.P. as commitment warrant

(4.5) Form of Warrant issued to Swartz Private Equity L.P. as purchase warrant

(4.6) Form of Warrant issued to Dutchess and other debenture holders on July 11, 2002.

(4.7) Form of the convertible debentures described in Exhibit 10.1.

(5.1) Legal opinion of Raice Paykin & Krieg LLP

(10) 2000 Incentive Stock Option Plan incorporated by reference from Exhibit 4.3 to Amendment No. 1 to the registrant's Registration Statement on Form 10SB

(10.1) Subscription Agreement of July 11, 2002 between VirTra Systems, Inc. and the Purchasers of $250,000 of Convertible Debentures of VirTra Systems, Inc.

(10.3) Registration Rights Agreement of July 11, 2002 between VirTra Systems, Inc. and the Purchasers of the convertible debentures described in Exhibit 10.1.

(10.4) Investment Agreement (Equity Line Financing) of July 11, 2002 between VirTra Systems, Inc. and the Investors bound by the equity line financing.

(10.5) Registration Rights Agreement of July 11, 2002 between VirTra Systems, Inc. and the Investors described in Exhibit 10.4.

(10.6) Escrow Agreement of July 11, 2002 among VirTra Systems, Inc., Dutchess Private Equities Fund, L.P. and Joseph B. LaRocco, Esq

(23.1) Consent of Raice Paykin & Krieg (contained in Exhibit 5)

(23.2) Consent of Ham, Langston & Brezina, LLC

(24.1) Powers of Attorney (included on the signature page to this registration statement)

(99.1) Sample form of equipment lease for equipment used in amusement and theme parks.

(99.2) Lease for Arizona facility

ITEM 28. Undertakings.

(a) The undersigned registrant hereby undertakes that it will:

(1) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;

(iii) To include any additional or changed material information on the plan of distribution;

(2) For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.

(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(c) The undersigned registrant hereby undertakes that it will:

(1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497 (h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.

(2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned in the City of Arlington, Texas on August 12, 2002..

VirTra Systems, Inc.

By: /s/ L. Kelly Jones

Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints L. Kelly Jones, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for and in his name, place and stead, in any and all capacities, to sign any or all amendments to this registration statement, including post-effective amendments, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and as of the dates indicated.

Signature	Title	Date
/s/ L. Kelly Jones              L. Kelly Jones	Chief Executive Officer, Chairman of the Board of Directors and Chief Financial Officer	August 12, 2002
/s/ Bob Ferris                  Bob Ferris	President and Director	August 12, 2002
/s/ Lance Loesberg         Lance Loesberg	Executive Vice-President and Director	August 12, 2002
/s/ John F. Aleckner, Jr  John F. Aleckner, Jr.	Director	August 12,2002
/s/ Andrew Wells           Andrew Wells	Director	August 12,2002

EX-3

Exhibit 3.6

ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
GAMECOM, INC.

Pursuant to section 4.04 of the Texas Business Corporation Act, the undersigned corporation adopts the following articles of amendment to its articles of incorporation:

ARTICLE I

The name of the corporation is GameCom, Inc. (the “Corporation”).

ARTICLE II

The following amendment to the articles of incorporation was adopted by the shareholders of the Corporation on April 30, 2002. The amendment changes ARTICLE ONE of the original articles of incorporation, and the full text of ARTICLE ONE of the articles of incorporation of the Corporation, as amended, shall read as follows:

“The name of the corporation is VirTra Systems, Inc.”

ARTICLE III

The number of shares of the Corporation outstanding at the time of such adoption was 14,462,269, and the number of shares entitled to vote on the amendment was 14,462,269.

ARTICLE IV

The number of shares voted for such amendment was 12,552,906, and the number of shares voted against such amendment was 2500.

Executed on the 30^th day of April, 2002.

GAMECOM, INC.


by:
L. Kelly Jones, chief executive

EX-4

Exhibit 4.4

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.  HOLDERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED.  

Warrant to Purchase

245,000 shares

Warrant to Purchase Common Stock

of

GAMECOM, INC.

THIS CERTIFIES that Swartz Private Equity, LLC or any subsequent holder hereof pursuant to Section 8 hereof ("Holder"), has the right to purchase from GAMECOM, INC., a Texas corporation (the "Company"), up to 245,000 fully paid and nonassessable shares of the Company's common stock, $.005 par value per share ("Common Stock"), subject to adjustment as provided herein, at a price equal to the Exercise Price as defined in Section 3 below, at any time beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New York, New York time the date that is five (5) years after the Date of Issuance (the “Exercise Period”).

Holder agrees with the Company that this Warrant to Purchase Common Stock of the Company(this “Warrant”) is issued and all rights hereunder shall be held subject to all of the conditions, limitations and provisions set forth herein.

1.

Date of Issuance and Term.

This Warrant shall be deemed to be issued on April 14, 2000 (“Date of Issuance”).  The term of this Warrant is five (5) years from the Date of Issuance.

Of this Warrant to purchase two hundred forty five thousand (245,000) shares of Common Stock of the Company, the Warrant is exercisable as to one hundred twenty two thousand five hundred (122,500) shares of Common Stock of the Company after the ten (10) business day document review period, as the same may be extended by mutual consent, in writing, of the Company and the Holder (the “Review Period”) referenced in the Equity Line Letter of Agreement dated on or about April 14, 2000, between Holder and Company (the “Letter of Agreement”) has ended, and shall be further exercisable as to the remaining one hundred twenty two thousand five hundred (122,500) shares of Common Stock of the Company upon the earlier of (i) the date of effectiveness of Company’s registration statement (the “Registration Statement”) to be filed pursuant to the Clo sing Documents, or (ii) October 14, 2000.

Anything in this Warrant to the contrary notwithstanding, if the Company delivers written notice to Swartz Private Equity, LLC prior to the expiration of the Review Period that the legal documents for the transaction are unacceptable and the Company wishes to terminate the transaction (a “Company Termination Notice”), Holder shall return this Warrant to the Company and all of Holder’s rights under this Warrant shall be null and void and of no effect, provided that, if the Company has not delivered a Company Termination Notice to Swartz Private Equity, LLC, prior to the expiration of the Review Period, ownership of this Warrant shall irrevocably vest to the Holder, regardless of whether a Company Termination Notice is delivered anytime thereafter.

2.

Exercise.

(a) Manner of Exercise.  During the Exercise Period, this Warrant may be exercised as to all or any lesser number of full shares of Common Stock covered hereby (the “Warrant Shares”) upon surrender of this Warrant, with the Exercise Form attached hereto as Exhibit A (the “Exercise Form”) duly completed and executed, together with the full Exercise Price (as defined below) for each share of Common Stock as to which this Warrant is exercised, at the office of the Company, Attention: L. Kelly Jones, CEO, Gamecom, Inc., 440 North Center Adington, TX 76011; Telephone: (817) 265-0440, Facsimile: (817) 265-1440, or at such other office or agency as the Company may designate in writing, by overnight mail, with an advance copy of the Exercise Form sent to the Company and its Transfer Agent by facsimile (such surrender and payment of the Exercise Price hereinafter called the "Exercise of this Warrant").

(b) Date of Exercise.  The "Date of Exercise" of the Warrant shall be defined as the date that the advance copy of the completed and executed Exercise Form is sent by facsimile to the Company, provided that the original Warrant and Exercise Form are received by the Company as soon as practicable thereafter.  Alternatively, the Date of Exercise shall be defined as the date the original Exercise Form is received by the Company, if Holder has not sent advance notice by facsimile.

(c) Cancellation of Warrant.  This Warrant shall be canceled upon the Exercise of this Warrant, and, as soon as practical after the Date of Exercise, Holder shall be entitled to receive Common Stock for the number of shares purchased upon such Exercise of this Warrant, and if this Warrant is not exercised in full, Holder shall be entitled to receive a new Warrant (containing terms identical to this Warrant) representing any unexercised portion of this Warrant in addition to such Common Stock.

(d) Holder of Record.  Each person in whose name any Warrant for shares of Common Stock is issued shall, for all purposes, be deemed to be the Holder of record of such shares on the Date of Exercise of this Warrant, irrespective of the date of delivery of certificates evidencing the Common Stock purchased upon the Exercise of this Warrant.  Nothing in this Warrant shall be construed as conferring upon Holder any rights as a stockholder of the Company.

3.

Payment of Warrant Exercise Price.

The Exercise Price per share (“Exercise Price”) shall initially equal (the “Initial Exercise Price”) the lowest Closing Price for the five (5) trading days immediately preceding April 14, 2000, which is $0.625. If the lowest Closing Price of the Company's Common Stock for the five (5) trading days immediately preceding the date, if any, that both the Company and Swartz Private Equity, LLC executed Closing Documents pursuant to the Letter of Agreement (the "Closing Market Price") is less than the Initial Exercise Price, the Exercise Price shall be reset to equal the Closing Market Price, or, if the$1.00.  If the  Date of Exercise is more than six (6) months after the Date of Issuance, the Exercise Price shall be reset to equal the lesser of (i) the Exercise Price then in effect, or (ii) the “Lowest Reset Price,” as that term is defined below.  The Company shall calculate a “Reset Price” on the last day of each six-month period following the Date of Issuance (each a “Reset Date”) which shall equal one hundred percent (100%) of the lowest Closing Price of the Company’s Common Stock for the most recent five (5) trading days (which dates Swartz Private Equity, LLC shall certify in writing) preceding the applicable Reset Date during which Swartz Private Equity, LLC has not made or caused to be made any sales of shares of the Company’s Common Stock, provided that, if any of the five (5) trading days immediately preceding the applicable Reset Date falls during the pricing period for any “Put” of Common Shares by the Company to Swartz Private Equity, LLC pursuant to the equity line transaction described in the Letter of Agreement, the “Reset Price” shall equal one hundred percent (100%) of the lowest Closing Price of the Company’s Common Stock for the most recent five (5) trading days preceding the applicable Reset Date (regardless of whether or not Swartz Private Equity, LLC has made or caused to be made any sales of shares of the Company’s Common Stock during such five (5) trading day period).  The “Lowest Reset Price” shall equal the lowest Reset Price determined on any Reset Date preceding the Date of Exercise, taking into account, as appropriate, any adjustments made pursuant to Section 5 hereof.

Payment of the Exercise Price may be made by either of the following, or a combination thereof, at the election of Holder:

(i)

Cash Exercise: cash, bank or cashiers check or wire transfer; or

(ii)

Cashless Exercise: The Holder, at its option, may exercise this Warrant in a cashless exercise transaction under this subsection (ii) if and only if, on the Date of Exercise, there is not then in effect a current registration statement that covers the resale of the shares of Common Stock to be issued upon exercise of this Warrant . In order to effect a Cashless Exercise, the Holder shall surrender this Warrant at the principal office of the Company together with notice of cashless election, in which event the Company shall issue Holder a number of shares of Common Stock computed using the following formula:

X = Y (A-B)/A

where:

X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock for which this Warrant is being

exercised.

A = the Market Price of one (1) share of Common Stock (for purposes of this Section 3(ii), the "Market Price" shall be defined as the average Closing Price of the Common Stock for the five (5) trading days prior to the Date of Exercise of this Warrant (the "Average Closing Price"), as reported by the O.T.C. Bulletin Board, National Association of Securities Dealers Automated Quotation System (“Nasdaq”) Small Cap Market, or if the Common Stock is not traded on the Nasdaq Small Cap Market, the Average Closing Price in any other over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Market Price shall be the Average Closing Price on such exchange for the five (5) trading days prior to the date of exercise of the Warrants.  If the Common Stock is/w as not traded during the five (5) trading days prior to the Date of Exercise, then the closing price for the last publicly traded day shall be deemed to be the closing price for any and all (if applicable) days during such five (5) trading day period.

B = the Exercise Price.

For purposes hereof, the term “Closing Price” shall mean the closing price on the the Nasdaq Small Cap Market, the National Market System (“NMS”), the New York Stock Exchange, or the O.T.C. Bulletin Board, or if no longer traded on the Nasdaq Small Cap Market, the National Market System (“NMS”), the New York Stock Exchange, or the O.T.C. Bulletin Board, the “Closing Price” shall equal the closing price on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded and, if not available, the mean of the high and low prices on the principal national securities exchange on which the Common Stock is so traded.

For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended, understood and acknowledged that the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have been acquired at the time this Warrant was issued.  Moreover, it is intended, understood and acknowledged that the holding period for the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have commenced on the date this Warrant was issued.

4.

Transfer and Registration.

(a) Transfer Rights.  Subject to the provisions of Section 8 of this Warrant, this Warrant may be transferred on the books of the Company, in whole or in part, in person or by attorney, upon surrender of this Warrant properly completed and endorsed.  This Warrant shall be canceled upon such surrender and, as soon as practicable thereafter, the person to whom such transfer is made shall be entitled to receive a new Warrant or Warrants as to the portion of this Warrant transferred, and Holder shall be entitled to receive a new Warrant as to the portion hereof retained.

(b) Registrable Securities.  In addition to any other registration rights of the Holder, if the Common Stock issuable upon exercise of this Warrant is not registered for resale at the time the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its Common Stock under the Act (other than a registration relating solely for the sale of securities to participants in a Company stock plan or a registration on Form S-4 promulgated under the Act or any successor or similar form registering stock issuable upon a reclassification, upon a business combination involving an exchange of securities or upon an exchange offer for securities of the issuer or another entity)(a “Piggyback Registration Statement”), the Company shall cause to be included in such Piggyback Regist ration Statement (“Piggyback Registration”) all of the Common Stock issuable upon the exercise of this Warrant (“Registrable Securities”) to the extent such inclusion does not violate the registration rights of any other securityholder of the Company granted prior to the date hereof.  Nothing herein shall prevent the Company from withdrawing or abandoning the Piggyback Registration Statement prior to its effectiveness.

(c)

Limitation on Obligations to Register under a Piggyback Registration.    In the case of a Piggyback Registration pursuant to an underwritten public offering by the Company, if the managing underwriter determines and advises in writing that the inclusion in the registration statement of all Registrable Securities proposed to be included would interfere with the successful marketing of the securities proposed to be registered by the Company, then the number of such Registrable Securities to be included in the Piggyback Registration Statement, to the extent such Registrable Securities may be included in such Piggyback Registration Statement, shall be allocated among all Holders who had requested Piggyback Registration pursuant to the terms hereof, in the proportion that the number of Registrable Securities which each such Holder seeks to register bea rs to the total number of Registrable Securities sought to be included by all Holders.  If required by the managing underwriter of such an underwritten public offering, the Holders shall enter into a reasonable agreement limiting the number of Registrable Securities to be included in such Piggyback Registration Statement to that number, if any, which the managing underwriter determines in its sole discretion would not interfere with the successful marketing of the securities, and the number of shares to be so included shall be allocated among all Holders who had requested Piggyback Registration pursuant to the terms hereof, in the proportion that the number of Registrable Securities which each such Holder seeks to register bears to the total number of Registrable Securities sought to be included by all Holders.  If required by the managing underwriter of such an underwritten public offering, the Holders shall enter into a reasonable agreement as to the terms, if any, (which may include among other things a "lock-up" agreement) regarding the future sale of such Registrable Securities."

5.

Anti-Dilution Adjustments.

(a)

Stock Dividend.  If the Company shall at any time declare a dividend payable in shares of Common Stock, then Holder, upon Exercise of this Warrant after the record date for the determination of holders of Common Stock entitled to receive such dividend, shall be entitled to receive upon Exercise of this Warrant, in addition to the number of shares of Common Stock as to which this Warrant is exercised, such additional shares of Common Stock as such Holder would have received had this Warrant been exercised immediately prior to such record date and the Exercise Price will be proportionately adjusted.

(b)

Recapitalization or Reclassification.  

(i)  Stock Split.  If the Company shall at any time effect a recapitalization, reclassification or other similar transaction of such character that the shares of Common Stock shall be changed into or become exchangeable for a larger number of shares (a “Stock Split”), then upon the effective date thereof, the number of shares of Common Stock which Holder shall be entitled to purchase upon Exercise of this Warrant shall be increased in direct proportion to the increase in the number of shares of Common Stock by reason of such recapitalization, reclassification or similar transaction, and the Exercise Price shall be proportionally decreased.   

(ii) Reverse Stock Split.  If the Company shall at any time effect a recapitalization, reclassification or other similar transaction of such character that the shares of Common Stock shall be changed into or become exchangeable for a smaller number of shares (a “Reverse Stock Split”), then upon the effective date thereof, the number of shares of Common Stock which Holder shall be entitled to purchase upon Exercise of this Warrant  shall be proportionately decreased and the Exercise Price shall be proportionally increased.  The Company shall give Holder the same notice it provides to holders of Common Stock of any transaction described in this Section 5(b).

(c)

Distributions.  If the Company shall at any time distribute for no consideration to holders of Common Stock cash, evidences of indebtedness or other securities or assets (other than cash dividends or distributions payable out of earned surplus or net profits for the current or preceding years) then, in any such case, Holder shall be entitled to receive, upon Exercise of this Warrant, with respect to each share of Common Stock issuable upon such exercise, the amount of cash or evidences of indebtedness or other securities or assets which Holder would have been entitled to receive with respect to each such share of Common Stock as a result of the happening of such event had this Warrant been exercised immediately prior to the record date or other date fixing shareholders to be affected by such event (the "Determination Date") or, in lieu thereof, if the Board of Directors of the Company should so determine at the time of such distribution, a reduced Exercise Price determined by multiplying the Exercise Price on the Determination Date by a fraction, the numerator of which is the result of such Exercise Price reduced by the value of such distribution applicable to one share of Common Stock (such value to be determined by the Board of Directors of the Company in its discretion) and the denominator of which is such Exercise Price.

(d)

Notice of Consolidation or Merger.  In the event of a merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or there is a sale of all or substantially all the Company’s assets (a “Corporate Change”), then this Warrant shall be exerciseable into such class and type of securities or other assets as Holder would have received had Holder exercised this Warrant immediately prior to such Corporate Change; provided, however, that Company may not effect any Corporate Change unless it first shall have given thirty (30) days notice to Holder hereof of any Corporate Change.

(e)

Exercise Price Adjusted.  As used in this Warrant, the term "Exercise Price" shall mean the purchase price per share specified in Section 3 of this Warrant, until the occurrence of an event stated in subsection (a), (b) or (c) of this Section 5, and thereafter shall mean said price as adjusted from time to time in accordance with the provisions of said subsection.  No such adjustment under this Section 5 shall be made unless such adjustment would change the Exercise Price at the time by $.01 or more; provided, however, that all adjustments not so made shall be deferred and made when the aggregate thereof would change the Exercise Price at the time by $.01 or more.

(f)

Adjustments: Additional Shares, Securities or Assets.  In the event that at any time, as a result of an adjustment made pursuant to this Section 5, Holder shall, upon Exercise of this Warrant, become entitled to receive shares and/or other securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 5.

6.

Fractional Interests.

No fractional shares or scrip representing fractional shares shall be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may purchase only a whole number of shares of Common Stock.  If, on Exercise of this Warrant, Holder would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon exercise shall be the next higher number of shares.

7.

Reservation of Shares.

The Company shall at all times reserve for issuance such number of authorized and unissued shares of Common Stock (or other securities substituted therefor as herein above provided) as shall be sufficient for the Exercise of this Warrant and payment of the Exercise Price.  The Company covenants and agrees that upon the Exercise of this Warrant, all shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid, nonassessable and not subject to preemptive rights, rights of first refusal or similar rights of any person or entity.

8.

Restrictions on Transfer.

(a) Registration or Exemption Required.  This Warrant has been issued in a transaction exempt from the registration requirements of the Act by virtue of Regulation D and exempt from state registration under applicable state laws. The Warrant and the Common Stock issuable upon the Exercise of this Warrant may not be pledged, transferred, sold or assigned except pursuant to an effective registration statement or unless the Company has received an opinion from the Company's counsel to the effect that such registration is not required, or the Holder has furnished to the Company an opinion of the Holder's counsel, which counsel shall be reasonably satisfactory to the Company, to the effect that such registration is not required; the transfer complies with any applicable state securities laws; and, if no registration covering the resale of the Warrant Shar es is effective at the time the Warrant Shares are issued, the Holder consents to a legend being placed on certificates for the Warrant Shares stating that the securities have not been registered under the Securities Act and referring to such restrictions on transferability and sale.

(b) Assignment.  If Holder can provide the Company with reasonably satisfactory evidence that the conditions of (a) above regarding registration or exemption have been satisfied, Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a written notice to Company, substantially in the form of the Assignment attached hereto as Exhibit B, indicating the person or persons to whom the Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days, and shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of like tenor and terms for the appropriate number of shares.

9.

Benefits of this Warrant.

Nothing in this Warrant shall be construed to confer upon any person other than the Company and Holder any legal or equitable right, remedy or claim under this Warrant and this Warrant shall be for the sole and exclusive benefit of the Company and Holder.

10.

Applicable Law.

This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the state of Georgia, without giving effect to conflict of law provisions thereof.

11.

Loss of Warrant.

Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date.

12.

Notice or Demands.

Notices or demands pursuant to this Warrant to be given or made by Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Company, to the address set forth in Section 2(a) above. Notices or demands pursuant to this Warrant to be given or made by the Company to or on Holder shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, to the address of Holder set forth in the Company’s records, until another address is designated in writing by Holder.

IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the ____ day of April, 2000.

GAMECOM, INC.

By:  ________________________________

L. Kelly Jones, CEO

swartzcommwt.doc

EXHIBIT A

EXERCISE FORM FOR WARRANT

TO:   GAMECOM, INC.

The undersigned hereby irrevocably exercises the right to purchase ____________ of the shares of Common Stock (the “Common Stock”) of GAMECOM, INC. a Texas corporation (the “Company”), evidenced by the attached warrant (the “Warrant”), and herewith makes payment of the exercise price with respect to such shares in full, all in accordance with the conditions and provisions of said Warrant.

1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of any of the Common Stock obtained on exercise of the Warrant, except in accordance with the provisions of Section 8(a) of the Warrant.

2.  The undersigned requests that stock certificates for such shares be issued free of any restrictive legend, if appropriate, and a warrant representing any unexercised portion hereof be issued, pursuant to the Warrant in the name of the undersigned and delivered to the undersigned at the address set forth below:

Dated: _________

________________________________________________________________________

Signature

_______________________________________________________________________

Print Name

________________________________________________________________________

Address

_______________________________________________________________________

NOTICE

The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever.

________________________________________________________________________

swartzcommwt.doc

EXHIBIT B

ASSIGNMENT

(To be executed by the registered holder

desiring to transfer the Warrant)

FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the “Warrant”) hereby sells, assigns and transfers unto the person or persons below named the right to purchase _______ shares of the Common Stock of GAMECOM, INC., evidenced by the attached Warrant and does hereby irrevocably constitute and appoint _______________________ attorney to transfer the said Warrant on the books of the Company, with full power of substitution in the premises.

Dated:

______________________________

Signature

Fill in for new registration of Warrant:

 ___________________________________

Name

___________________________________

Address

___________________________________

Please print name and address of assignee

(including zip code number)

_______________________________________________________________________

NOTICE

The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever.

________________________________________________________________________

EX-4

Exhibit 4.5

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.  HOLDERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED.  SEE THE RISK FACTORS SET FORTH UNDER THAT CERTAIN INVESTMENT AGREEMENT BY AND BETWEEN THE COMPANY AND HOLDER REFERENCED THEREIN AS EXHIBIT J.

Warrant to Purchase

      ”N” shares

Warrant Number ____

Warrant to Purchase Common Stock

of

GameCom, Inc.

THIS CERTIFIES that Swartz Private Equity, LLC or any subsequent holder hereof ("Holder"), has the right to purchase from GameCom, Inc., a Texas corporation (the "Company"), up to ”N” fully paid and nonassessable shares, wherein “N” is defined below, of the Company's common stock, $0.005 par value per share ("Common Stock"), subject to adjustment as provided herein, at a price equal to the Exercise Price as defined in Section 3 below, at any time beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New York, New York time the date that is five (5) years after the Date of Issuance (the “Exercise Period”); provided, that, with respect to each “Put,” as that term is defined in that certain Investment Agreement (the “Investment Agreement”) by and between the initi al Holder and Company, dated on or about June 1, 2000, “N” shall equal ten percent (10%) of the number of shares of Common Stock purchased by the Holder in that Put.

Holder agrees with the Company that this Warrant to Purchase Common Stock of the Company (this “Warrant”) is issued and all rights hereunder shall be held subject to all of the conditions, limitations and provisions set forth herein.

1.

Date of Issuance and Term.

This Warrant shall be deemed to be issued on _____________, ______ (“Date of Issuance”).  The term of this Warrant is five (5) years from the Date of Issuance.

2.

Exercise.

(a) Manner of Exercise.  During the Exercise Period, this Warrant may be exercised as to all or any lesser number of full shares of Common Stock covered hereby (the “Warrant Shares”) upon surrender of this Warrant, with the Exercise Form attached hereto as Exhibit A (the “Exercise Form”) duly completed and executed, together with the full Exercise Price (as defined below) for each share of Common Stock as to which this Warrant is exercised, at the office of the Company, Attention: L. Kelly Jones, CEO; 440 North Center, Arlington, TX 76011; Telephone: (817) 265-0440, Facsimile: (817) 265-1440, or at such other office or agency as the Company may designate in writing, by overnight mail, with an advance copy of the Exercise Form sent to the Company and its Transfer Agent by facsimile (such surrender and payment of the Exerci se Price hereinafter called the "Exercise of this Warrant").

(b) Date of Exercise.  The "Date of Exercise" of the Warrant shall be defined as the date that the advance copy of the completed and executed Exercise Form is sent by facsimile to the Company, provided that the original Warrant and Exercise Form are received by the Company as soon as practicable thereafter.  Alternatively, the Date of Exercise shall be defined as the date the original Exercise Form is received by the Company, if Holder has not sent advance notice by facsimile.  The Company shall not be required to deliver the shares of Common Stock to the Holder until the requirements of Section 2(a) above are satisfied.

(c) Cancellation of Warrant.  This Warrant shall be canceled upon the Exercise of this Warrant, and, as soon as practical after the Date of Exercise, Holder shall be entitled to receive Common Stock for the number of shares purchased upon such Exercise of this Warrant, and if this Warrant is not exercised in full, Holder shall be entitled to receive a new Warrant (containing terms identical to this Warrant) representing any unexercised portion of this Warrant in addition to such Common Stock.

(d) Holder of Record.  Each person in whose name any Warrant for shares of Common Stock is issued shall, for all purposes, be deemed to be the Holder of record of such shares on the Date of Exercise of this Warrant, irrespective of the date of delivery of the Common Stock purchased upon the Exercise of this Warrant.  Nothing in this Warrant shall be construed as conferring upon Holder any rights as a stockholder of the Company.

3.

Payment of Warrant Exercise Price.

The Exercise Price (“"Exercise Price”"), shall initially equal $Y per share ("InitialExercise Price"), where "Y" shall equal 110% of   the Market Price for the applicable Put (as both are defined in the Investment Agreement) or, if the Date of Exercise is more thansix (6) months after the Date of Issuance, the lesser of (i) the Initial Exercise Price or (ii) the "Lowest Reset Price," as that term is defined below.   The Company shall calculate a “"Reset Price”" on the last day of each six-month period following the Date of Issuance (each a "Reset Date") which shall equal one hundred and ten percent (110%) of the lowest Closing Price of the Company's Common Stock for the most rece nt five (5) trading days (which dates Swartz Private Equity, LLC shall certify in writing) preceding the applicable Reset Date during which Swartz Private Equity, LLC has not made or caused to be made any sales of shares of the Company's Common Stock, provided that, if any of the five (5) trading days immediately preceding the applicable Reset Date falls during the pricing period for any "Put" of Common Shares by the Company to Swartz Private Equity, LLC pursuant to the equity line transaction described in the Letter of Agreement, the "Reset Price" shall equal one hundred and ten percent (110%) of the lowest Closing Price of the Company's Common Stock for the most recent five (5) trading days preceding the applicable Reset Date (regardless of whether or not Swartz Private Equity, LLC has made or caused to be made any sales of shares of the Company's Common Stock during five (5) trading day period).   The "Lowest Reset Price" shall equal the lowest Reset Price determine d on any preceding the Date of Exercise, taking into account, as appropriate, any adjustments made pursuant to Section 5 hereof.

Payment of the Exercise Price may be made by either of the following, or a combination thereof, at the election of Holder:

(i)

Cash Exercise: cash, bank or cashiers check or wire transfer; or

(ii)

Cashless Exercise:  subject to the last sentence of this Section 3, surrender of this Warrant at the principal office of the Company together with notice of cashless election, in which event the Company shall issue Holder a number of shares of Common

Stock computed using the following formula:

X = Y (A-B)/A

where:

X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock for which this Warrant is being

exercised.

A = the Market Price of one (1) share of Common Stock (for purposes of this Section 3(ii), the "Market Price" shall be defined as the average Closing Price of the Common Stock for the five (5) trading days prior to the Date of Exercise of this Warrant (the "Average Closing Price"), as reported by the O.T.C. Bulletin Board, National Association of Securities Dealers Automated Quotation System (“Nasdaq”) Small Cap Market, or if the Common Stock is not traded on the Nasdaq Small Cap Market, the Average Closing Price in any other over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Market Price shall be the Average Closing Price on such exchange for the five (5) trading days prior to the date of exercise of the Warrants.  If the Common Stock is /was not traded during the five (5) trading days prior to the Date of Exercise, then the closing price for the last publicly traded day shall be deemed to be the closing price for any and all (if applicable) days during such five (5) trading day period.

B = the Exercise Price.

For purposes hereof, the term “Closing Bid Price” shall mean the closing bid price on the O.T.C. Bulletin Board, the National Market System (“NMS”), the New York Stock Exchange, the Nasdaq Small Cap Market, or if no longer traded on the O.T.C. Bulletin Board, the NMS, the New York Stock Exchange, the Nasdaq Small Cap Market, the “Closing Bid Price” shall equal the closing price on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded and, if not available, the mean of the high and low prices on the principal national securities exchange on which the Common Stock is so traded.

For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended, understood and acknowledged that the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have been acquired at the time this Warrant was issued.  Moreover, it is intended, understood and acknowledged that the holding period for the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have commenced on the date this Warrant was issued.

Notwithstanding anything to the contrary contained herein, this Warrant may not be exercised in a cashless exercise transaction if, on the Date of Exercise, the shares of Common Stock to be issued upon exercise of this Warrant would upon such issuance be then registered pursuant to an effective registration statement filed pursuant to that certain Registration Rights Agreement dated on or about June 1, 2000 by and among the Company and certain investors, or otherwise be registered under the Securities Act of 1933, as amended.

4.

Transfer and Registration.

(a) Transfer Rights.  Subject to the provisions of Section 8 of this Warrant, this Warrant may be transferred on the books of the Company, in whole or in part, in person or by attorney, upon surrender of this Warrant properly completed and endorsed.  This Warrant shall be canceled upon such surrender and, as soon as practicable thereafter, the person to whom such transfer is made shall be entitled to receive a new Warrant or Warrants as to the portion of this Warrant transferred, and Holder shall be entitled to receive a new Warrant as to the portion hereof retained.

(b) Registrable Securities.  The Common Stock issuable upon the exercise of this Warrant constitutes "Registrable Securities" under that certain Registration Rights Agreement dated on or about June 1, 2000 between the Company and certain investors and, accordingly, has the benefit of the registration rights pursuant to that agreement.

5.

Anti-Dilution Adjustments.

(a)

Stock Dividend.  If the Company shall at any time declare a dividend payable in shares of Common Stock, then Holder, upon Exercise of this Warrant after the record date for the determination of holders of Common Stock entitled to receive such dividend, shall be entitled to receive upon Exercise of this Warrant, in addition to the number of shares of Common Stock as to which this Warrant is exercised, such additional shares of Common Stock as such Holder would have received had this Warrant been exercised immediately prior to such record date and the Exercise Price will be proportionately adjusted.

(b)

Recapitalization or Reclassification.  If the Company shall at any time effect a recapitalization, reclassification or other similar transaction of such character that the shares of Common Stock shall be changed into or become exchangeable for a larger or smaller number of shares, then upon the effective date thereof, the number of shares of Common Stock which Holder shall be entitled to purchase upon Exercise of this Warrant shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason of such recapitalization, reclassification or similar transaction, and the Exercise Price shall be, in the case of an increase in the number of shares, proportionally decreased and, in the case of decrease in the number of shares, proportionally increased.  The Company shall give Holder the same notice it provides to holders of Common Stock of any transaction described in this Section 5(b).

(c)

Distributions.  If the Company shall at any time distribute for no consideration to holders of Common Stock cash, evidences of indebtedness or other securities or assets (other than cash dividends or distributions payable out of earned surplus or net profits for the current or preceding years) then, in any such case, Holder shall be entitled to receive, upon Exercise of this Warrant, with respect to each share of Common Stock issuable upon such exercise, the amount of cash or evidences of indebtedness or other securities or assets which Holder would have been entitled to receive with respect to each such share of Common Stock as a result of the happening of such event had this Warrant been exercised immediately prior to the record date or other date fixing shareholders to be affected by such event (the "Determination Date") or, in lieu thereof, if the Board of Directors of the Company should so determine at the time of such distribution, a reduced Exercise Price determined by multiplying the Exercise Price on the Determination Date by a fraction, the numerator of which is the result of such Exercise Price reduced by the value of such distribution applicable to one share of Common Stock (such value to be determined by the Board of Directors of the Company in its discretion) and the denominator of which is such Exercise Price.

(d)

Notice of Consolidation or Merger.  In the event of a merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or there is a sale of all or substantially all the Company’s assets (a “Corporate Change”), then this Warrant shall be exerciseable into such class and type of securities or other assets as Holder would have received had Holder exercised this Warrant immediately prior to such Corporate Change; provided, however, that Company may not affect any Corporate Change unless it first shall have given thirty (30) days notice to Holder hereof of any Corporate Change.

(e)

Exercise Price Adjusted.  As used in this Warrant, the term "Exercise Price" shall mean the purchase price per share specified in Section 3 of this Warrant, until the occurrence of an event stated in subsection (a), (b) or (c) of this Section 5, and thereafter shall mean said price as adjusted from time to time in accordance with the provisions of said subsection.  No such adjustment under this Section 5 shall be made unless such adjustment would change the Exercise Price at the time by $.01 or more; provided, however, that all adjustments not so made shall be deferred and made when the aggregate thereof would change the Exercise Price at the time by $.01 or more. No adjustment made pursuant to any provision of this Section 5 shall have the net effect of increasing the Exercise Price in relation to the split adjusted and distribution adjust ed price of the Common Stock.  The number of shares of Common Stock subject hereto shall increase proportionately with each decrease in the Exercise Price.

(f)

Adjustments: Additional Shares, Securities or Assets.  In the event that at any time, as a result of an adjustment made pursuant to this Section 5, Holder shall, upon Exercise of this Warrant, become entitled to receive shares and/or other securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 5.

6.

Fractional Interests.

No fractional shares or scrip representing fractional shares shall be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may purchase only a whole number of shares of Common Stock.  If, on Exercise of this Warrant, Holder would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon exercise shall be the next higher number of shares.

7.

Reservation of Shares.

The Company shall at all times reserve for issuance such number of authorized and unissued shares of Common Stock (or other securities substituted therefor as herein above provided) as shall be sufficient for the Exercise of this Warrant and payment of the Exercise Price.  The Company covenants and agrees that upon the Exercise of this Warrant, all shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid, nonassessable and not subject to preemptive rights, rights of first refusal or similar rights of any person or entity.

8.

Restrictions on Transfer.

(a) Registration or Exemption Required.  This Warrant has been issued in a transaction exempt from the registration requirements of the Act by virtue of Regulation D and exempt from state registration under applicable state laws. The Warrant and the Common Stock issuable upon the Exercise of this Warrant may not be pledged, transferred, sold or assigned except pursuant to an effective registration statement or an exemption to the registration requirements of the Act and applicable state laws.

(b) Assignment.  If Holder can provide the Company with reasonably satisfactory evidence that the conditions of (a) above regarding registration or exemption have been satisfied, Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a written notice to Company, substantially in the form of the Assignment attached hereto as Exhibit B, indicating the person or persons to whom the Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days, and shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of like tenor and terms for the appropriate number of shares.

9.

Benefits of this Warrant.

Nothing in this Warrant shall be construed to confer upon any person other than the Company and Holder any legal or equitable right, remedy or claim under this Warrant and this Warrant shall be for the sole and exclusive benefit of the Company and Holder.

10.

Applicable Law.

This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the state of Texas, without giving effect to conflict of law provisions thereof.

11.

Loss of Warrant.

Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date.

12.

Notice or Demands.

Notices or demands pursuant to this Warrant to be given or made by Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Company, to the address set forth in Section 2(a) above. Notices or demands pursuant to this Warrant to be given or made by the Company to or on Holder shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, to the address of Holder set forth in the Company’s records, until another address is designated in writing by Holder.

IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the ______ day of _______, 200__.

GameCom, Inc.

By:  ________________________________

L. Kelly Jones, CEO  

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EXHIBIT A

EXERCISE FORM FOR WARRANT

TO: GameCom, Inc.

The undersigned hereby irrevocably exercises the right to purchase ____________ of the shares of Common Stock (the “Common Stock”) of GameCom, Inc., a Texas corporation (the “Company”), evidenced by the attached warrant (the “Warrant”), and herewith makes payment of the exercise price with respect to such shares in full, all in accordance with the conditions and provisions of said Warrant.

1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of any of the Common Stock obtained on exercise of the Warrant, except in accordance with the provisions of Section 8(a) of the Warrant.

2.  The undersigned requests that stock certificates for such shares be issued free of any restrictive legend, if appropriate, and a warrant representing any unexercised portion hereof be issued, pursuant to the Warrant in the name of the undersigned and delivered to the undersigned at the address set forth below:

Dated:

________________________________________________________________________

Signature

_______________________________________________________________________

Print Name

________________________________________________________________________

Address

_______________________________________________________________________

NOTICE

The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever.

________________________________________________________________________

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EXHIBIT B

ASSIGNMENT

(To be executed by the registered holder

desiring to transfer the Warrant)

FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the “Warrant”) hereby sells, assigns and transfers unto the person or persons below named the right to purchase _______ shares of the Common Stock of GameCom, Inc., evidenced by the attached Warrant and does hereby irrevocably constitute and appoint _______________________ attorney to transfer the said Warrant on the books of the Company, with full power of substitution in the premises.

Dated:

_________

______________________________

Signature

Fill in for new registration of Warrant:

 ___________________________________

Name

___________________________________

Address

___________________________________

Please print name and address of assignee

(including zip code number)

_______________________________________________________________________

NOTICE

The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever.

________________________________________________________________________

EX-4

Exhibit 4.6

THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

VIRTRA SYSTEMS, INC.

WARRANT

Dated: July __, 2002

VirTra Systems, Inc., a corporation organized under the laws of the State of Texas (the "Company"), hereby certifies that, for value received from _________________________ ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of ____________________ (__________) shares of Common Stock, $.005 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to 200% of the closing bid on the Company’s Common Stock on the date of funding (as adjusted from time to time as provided in Section 8, the "Exercise Price"). The Warrant may be exercised any time after its issuance. The Warrant may be exercised on a cashless basis pursuant to Section 9. This Warrant will expire on the third (3rd) anniversary of its issuance (the "Expiration Date"), and is subject to the following terms and conditions:

1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary.

2. Registration of Transfers and Exchanges.

(a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant to the Transfer Agent or to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant.

(b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange.

3. Duration and Exercise of Warrants.

(a) This Warrant shall be exercisable by the registered Holder on any business day before 5:00 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant without the prior written consent of the Holder.

(b) Subject to Sections 2(b), 6 and 10, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise (as defined in this subsection) of this Warrant.

A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased.

(c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant.

In the event the Common Stock representing the Warrant Shares is not delivered per the written instructions of the Purchaser, within 10 (ten) business days after the Notice of Election and Warrant is received by the Company (the “Delivery Date”), then in such event the Company shall pay to Holder one-half percent (0.5%) in cash, of the dollar value of the Warrant Shares to be issued per each day after the Delivery Date that the Warrant Shares are not delivered.

The Company acknowledges that its failure to deliver the Warrant Shares by the Delivery Date will cause the Holder to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Warrant a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Warrant.

To the extent that the failure of the Company to issue the Common Stock pursuant to this Section is due to the unavailability of authorized but unissued shares of Common Stock, the provisions of this Section 3 shall not apply but instead the provisions of Section 7 shall apply.

The Company shall make any payments incurred under this Section 3 in immediately available funds within ten (10) business days from the date of issuance of the applicable Warrant Shares. Nothing herein shall limit Holder’s right to pursue actual damages or cancel the Notice of Election for the Company’s failure to issue and deliver Common Stock to the Holder within ten (10) business days following the Delivery Date.

4. Piggyback Registration Rights. During the term of this Warrant, the Company may not file any registration statement with the Securities and Exchange Commission (other than registration statements of the Company filed on Form S-8 or Form S-4, each as promulgated under the Securities Act, pursuant to which the Company is registering securities pursuant to a Company employee benefit plan or pursuant to a merger, acquisition or similar transaction including supplements thereto, but not additionally filed registration statements in respect of such securities) at any time when there is not an effective registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder (unless the Warrant Shares are otherwise freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Act), unless the Company provides the Holder with not less than twenty (20) calendar days notice of its intention to file such registration statement and provides the Holder the option to include any or all of the applicable Warrant Shares therein. The piggyback registration rights granted to the Holder pursuant to this Section shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date. The Company will pay all registration expenses in connection therewith.

5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe.

7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. In the event the Company fails to have sufficient authorized but unissued Common Stock to allow for the issuance of Warrant Shares upon the exercise of the Warrant the Company shall be liable for liquidated damages in the amount of 2% interest per thirty calendar day period on the value of the Warrant Shares based on the closing bid price of the Company’s Common Stock on the business day prior to the Company’s receipt of its Election to Purchase. The damages shall accrue until the Common Stock is issued.

The Company acknowledges that its failure to reserve a sufficient number of Warrant Shares as required in this Section 7, will cause the Holder to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Warrant a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Warrant.

It is the intention of the parties that interest payable under any of the terms of this Warrant shall not exceed the maximum amount permitted under any applicable law. If a law, which applies to this Warrant which sets the maximum interest amount, is finally interpreted so that the interest in connection with this Warrant exceeds the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Company which exceed the permitted limits will be refunded to the Company. The Holder may choose to make this refund by reducing the amount that the Company owes under this Warrant or by making a direct payment to the Company. If a refund reduces the amount that the Company owes the Holder, the reduction will be treated as a partial payment. In case any provision of this Warrant is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Warrant will not in any way be affected or impaired thereby.

8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8; provided, that there shall be no adjustment in the number of Warrant Shares issuable upon exercise of this Warrant upon any adjustment of the Exercise Price pursuant to paragraph (d) of this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.

(a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations.

(b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 9(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange.

(c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser").

(d) If, at any time while this Warrant is outstanding, the Company shall issue or cause to be issued rights or warrants to acquire or otherwise sell or distribute shares of Common Stock for a consideration per share less than the Exercise Price then in effect, except for (i) the granting of options, warrants, or shares to employees, officers, or directors (in the instance of the issuance of shares, for services rendered) and the issuance of shares upon exercise of options granted, under any stock option plan heretofore or hereafter duly adopted by the Company; (ii) shares issued upon exercise of any currently outstanding warrants or options and upon conversion of any currently outstanding convertible debenture or (iii) shares issued pursuant to the Investment Agreement then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance, and (ii) the number of shares of Common Stock which the aggregate consideration received (or to be received, assuming exercise or conversion in full of such rights, warrants and convertible securities) for the issuance of such additional shares of Common Stock would purchase at the Exercise Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made.

(e) For the purposes of this Section 8, the following clauses shall also be applicable:

(i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

(ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.

(f) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.

(g) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above.

(h) If:

(i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or

(ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or

(iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or

(iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or

(v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company,

then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.

9. Payment of Exercise Price. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners:

• Cash Exercise. The Holder shall deliver immediately available funds; or

(b) Cashless Exercise. The Holder shall surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:

X = Y (A-B)/A

where:

X = the number of Warrant Shares to be issued to the Holder.

Y = the number of Warrant Shares with respect to which this Warrant is being exercised.

A = the closing bid price of the Common Stock for the trading day immediately prior to the Date of Exercise.

B = the Exercise Price.

For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date.

(c) The Holder is limited in the amount of this Warrant it may exercise. In no event shall the Holder be entitled to exercise any amount of this Warrant in excess of that amount upon exercise of which the sum of (1) the number of shares of Common Stock beneficially owned (as such term is defined under Section 13(d) and Rule 13d-3 of the Securities Exchange Act of 1934 (the 1934 Act”)) by the Holder, and (2) the number of Warrant Shares issuable upon the exercise of any Warrants then owned by Holder, would result in beneficial ownership by the Holder of more than 4.99% of the outstanding shares of Common Stock of the Company, as determined in accordance with Rule13d-1(j). Furthermore, the Company shall not process any exercise that would result in beneficial ownership by the Holder of more than 4.99% of the outstanding shares of Common Stock of the Company.

10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction.

11. Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:

VirTra Systems, Inc.
440 North Center
Arlington, TX 76011
Attention: L. Kelly Jones, CEO and CFO

Telephone: 817-265-0440

Facsimile: 817-265-1440

With a copy to:

Raice Paykin & Krieg LLP

185 Madison Avenue

10^th Floor

New York, New York 10016

Attention: David C. Thomas, Esq.

Telephone: 212-725-4423

Facsimile: 212-684-9022

If to the Investor:

At the address listed in the Questionnaire.

With a copy to:

Joseph B. LaRocco, Esq.

49 Locust Avenue, Suite 107

New Canaan, CT 06840

Telephone: 203-966-0566

Facsimile: 203-966-0363

Each party shall provide five (5) business days prior notice to the other party of any change in address, phone number or facsimile number.

12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register.

13. Miscellaneous.

(a) This Warrant shall not be assignable. This Warrant may be amended only in writing signed by the Company and the Holder.

(b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder.

(c) This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Texas without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the State of Texas, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.

(d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.

(e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.

VIRTRA SYSTEMS, INC.

By: ___________        ____________

L. Kelly Jones, CEO and CFO

FORM OF ELECTION TO PURCHASE

(To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant)

To: VIRTRA SYSTEMS, INC.

In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of Common Stock ("Common Stock"), $.005 par value per share, of VIRTRA SYSTEMS, INC., and encloses herewith $________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant.

The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of

PLEASE INSERT SOCIAL SECURITY OR

TAX IDENTIFICATION NUMBER

(Please print name and address)


If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to:


(Please print name and address)





Dated: _____________, _____ Name of Holder:

(Print)

(By:)
(Name:)
(Title:)

(Signature must conform in all respects to name of holder as specified on the face of the Warrant)

EX-4

Exhibit 4.7

FORM OF DEBENTURE

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS.  THE SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM.  THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.  ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

AMOUNT

       $

DEBENTURE NUMBER

       JULY-2002-101

ISSUANCE DATE

       JULY __, 2002

MATURITY DATE

       JULY __, 2005

FOR VALUE RECEIVED, VirTra Systems, Inc., a Texas corporation (the “Company”), hereby promises to pay _________________________ (the “Holder”) on July __, 2005, (the “Maturity Date”), the principal amount of ___________________________  Dollars ($_______) U.S., and to pay interest on the principal amount hereof, in such amounts, at such times and on such terms and conditions as are specified herein.

Article 1  Subordination

Section 1.1

 The Company covenants and agrees, and each holder of Debentures issued hereunder by his acceptance thereof likewise covenants and agrees, that all Debentures issued hereunder shall be issued subject to the provisions of this Section 1.1.

Section 1.2

 All Debentures shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right to the prior payment in full of Superior Indebtedness as defined in this Section 1.2. The term "Superior Indebtedness" shall mean (i) all indebtedness now existing or hereafter issued, created, incurred or assumed by the Company for money borrowed from or guaranteed to banks, trust companies, insurance companies and other financial institutions and charitable trusts, pension trusts and other investing organizations, which indebtedness shall be evidenced by notes or other instruments or evidences of indebtedness, and (ii) any deferrals, renewals or extensions of any such Superior Indebtedness, or debentures, notes or other instruments or evidences of indebtedness issued in respect of or in exchange for any such Superior Indebtedness, unless in the instrument creating or evidencing the same, or pursuant to which it is outstanding, it is provided that such indebtedness or such deferral, renewal or extension thereof is not superior in right of payment to the Debentures.

Section 1.3

No payment on account of principal or interest on the Debentures shall be made, nor shall any property or assets be applied to the purchase or other acquisition or retirement of the Debentures, unless current payment of amounts then due for principal, premium, if any, or interest on Superior Indebtedness has been made or duly provided for in accordance with the terms of such Superior Indebtedness.

Section 1.4

 No payment on account of principal or interest on the Debentures shall be made, nor shall any property or assets be applied to the purchase or other acquisition or retirement of the Debentures, if, at the time of such payment or application or immediately after giving effect thereto, (i) there shall exist a default in the payment of principal, premium, if any, or interest with respect to any Superior Indebtedness, or (ii) there shall have occurred an event of default (other than a default in the payment of principal, premium, if any, or interest) with respect to any Superior Indebtedness, as defined therein or in the instrument under which the same is outstanding, permitting the holders thereof to accelerate the maturity thereof and such event of default shall not have been cured or waived or shall not have ceased to exist.

Section 1.5

 Upon (i) any acceleration of maturity of the principal amount due on the Debentures or (ii) any payment or distribution of any kind or character, whether in cash, property or securities, upon any dissolution or winding-up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, or assignment for the benefit of creditors or any marshalling of assets and liabilities in respect of the Company, all principal, premium, if any, and interest due or to become due upon all Superior Indebtedness shall first be paid in full, including costs of collection or payment thereof provided for, in money or money's worth, in accordance with the terms of such Superior Indebtedness, before any payment is made on account of principal or interest on the indebtedness evidenced by t he Debentures, and upon any such dissolution or winding-up or liquidation or reorganization any payment or distribution of any kind or character, whether in cash, property or securities, to which the holders of the Debentures would be entitled, except for the provisions hereof, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, directly to the holders of Superior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Superior Indebtedness may have been issued, pro rata, as their respective interests may appear, to the extent necessary to pay all Superior Indebtedness in full in accordance with its terms after giving effect to any concurrent payment or distribution to or for the holders of Superior Indebtedness, before any payment or distribution is made to the holders of the indebtedness evidenced by t he Debentures.

Section 1.6

 The Company shall give prompt written notice to the holders of the Debentures of any dissolution, winding-up, liquidation, reorganization, readjustment, arrangement or similar proceedings, assignment for the benefit of creditors, or any marshalling of assets and liabilities, in respect of the Company, within the meaning of Section 1.3 and shall also give prompt written notice to the holders of the Debentures of any event which pursuant to Section 1.2 would prevent payment by the Company on account of the principal or interest on the Debentures or with respect to the purchase of Debentures. The holders of the Debentures shall be entitled to assume that no such event has occurred unless the Company, or a holder of Superior Indebtedness, or any trustee therefor, has given such notice.

Section 1.7

 Subject to the payment in full of the principal of (and premium, if any) and interest on all Superior Indebtedness, the holders of the Debentures shall be subrogated to the rights of the holders of Superior Indebtedness to receive distributions of assets of the Company or payments by or on behalf of the Company, made on the Superior Indebtedness, until the principal of and interest on the Debentures shall be paid in full; and, for the purposes of such subrogation, no distributions or payments to the holders of Superior Indebtedness of any cash, property, or securities to which the holders of the Debentures would be entitled except for the provisions of this Article 1, and no payment over pursuant to the provisions of this Article 1 to the holders of Superior Indebtedness by the holders of the Debentures, shall, as between the Company, its creditors other than th e holders of Superior Indebtedness, and the holders of Debentures, be deemed to be a payment by the Company to or on account of Superior Indebtedness, it being understood that the provisions of this Article 1 are, and are intended, solely for the purpose of defining the relative rights of the holders of the Debentures, on the one hand, and the holders of Superior Indebtedness, on the other hand.

Section 1.8

 Nothing contained in this Article 1 or elsewhere in the Debentures, is intended to or shall alter or impair, as between the Company, its creditors other than the holders of Superior Indebtedness, and the holders of the Debentures the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of and interest on the Debentures at the time and place and at the rate and in the currency therein prescribed, or affect the relative rights of the holders of the Debentures and creditors of the Company other than the holders of Superior Indebtedness, nor shall anything herein or therein prevent the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under the Debenture, subject to the rights, if any, under this Article 1 of the holders of Superior Indebtedness in respect of cash, property or securities of the Company received or receivable upon the exercise of any such remedy.

Section 1.9

 Each holder of any Debenture by his acceptance thereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Superior Indebtedness, whether such Superior Indebtedness was created or acquired before or after the issuance of the Debentures, to acquire and continue to hold, or to continue to hold, such Superior Indebtedness, and each holder of Superior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Superior Indebtedness.

Section 1.10

A conversion in whole or in part of this Debenture shall not be considered a “payment” for the purposes of this Article I.  Any default in the terms or payment of Superior Indebtedness shall in no way affect the rights of the Holder to convert this Debenture in whole or in part.

Article 2

Interest

The Company shall pay interest on the unpaid principal amount of this Debenture (the “Debenture”) at the time of each conversion until the principal amount hereof is paid in full or has been converted. The  Debentures shall pay five percent (5%) cumulative interest, in cash or in shares of common stock, par value $.005 per share, of the Company (“Common Stock”), at the Company’s option, at the time of each conversion. The closing shall be deemed to have occurred on the date the funds (less commitment fees, escrow fees and attorney fees) are received by the Company (the “Closing Date”).  If the interest is to be paid in cash, the Company shall make such payment within five (5) business days of the date of conversion.   If the interest is to be paid in Common Stock, said Common Stock shall be delivered to the Holder, or per Holder’s instructions, within five (5) business days of the date of conversion. The Debentures are subject to automatic conversion at the end of three (3) years from the date of issuance at which time all Debentures outstanding will be automatically converted based upon the formula set forth in Section 4.2.  

Article 3

Method of Payment

This Debenture must be surrendered to the Company in order for the Holder to receive payment of the principal amount hereof.  The Company shall have the option of paying the interest on this Debenture in United States dollars or in Common Stock upon conversion pursuant to Article 1 hereof.  The Company may draw a check for the payment of interest to the order of the Holder of this Debenture and mail it to the Holder’s address as shown on the Register (as defined in Section 8.2 below).  Interest and principal payments shall be subject to withholding under applicable United States Federal Internal Revenue Service Regulations.

Article 4

Conversion

Section 4.1

Conversion Privilege

(a)

The Holder of this Debenture shall have the right to convert it into shares of Common Stock at any time following the Closing Date and  which is before the close of business on the Maturity Date, except as set forth in Section 4.1(c) below.  The number of shares of Common Stock issuable upon the conversion of this Debenture is determined pursuant to Section 4.2 and rounding the result to the nearest whole share.     

(b)

Less than all of the principal amount of this Debenture may be converted into Common Stock if the portion converted is $5,000 or a whole multiple of $5,000 and the provisions of this Article 3 that apply to the conversion of all of the Debenture shall also apply to the conversion of a portion of it.  This Debenture may not be converted, whether in whole or in part, except in accordance with Article 3.

(c)

In the event all or any portion of this Debenture remains outstanding on the Maturity Date, the unconverted portion of such Debenture will automatically be converted into shares of Common Stock on such date in the manner set forth in Section 4.2.

Section 4.2

Conversion Procedure.

(a)

Conversion Procedures. The face amount of this Debenture may be converted, in whole or in part, any time following the Closing Date.  Such conversion shall be effectuated by surrendering to the Company, or its attorney, this Debenture to be converted together with a facsimile or original of the signed Notice of Conversion which evidences Holder’s intention to convert the Debenture indicated.  The date on which the Notice of Conversion is effective (“Conversion Date”) shall be deemed to be the date on which the Holder has delivered to the Company a facsimile or original of the signed Notice of Conversion, as long as the original Debenture(s) to be converted are received by the Company within five (5) business days thereafter.  Notwithstanding the above, any Notice of Conversion not received by 5:00 P.M. EST, shall be deemed to have b een received the next business day.

(b)

Common Stock to be Issued.

Upon the conversion of any Debentures and upon receipt by the Company or its attorney of a facsimile or original of Holder’s signed Notice of Conversion the Company shall instruct its transfer agent to issue stock certificates without restrictive legend or stop transfer instructions, if at that time the Registration Statement has been deemed effective (or with proper restrictive legend if the Registration Statement has not as yet been declared effective), in such denominations to be specified at conversion representing the number of shares of Common Stock issuable upon such conversion, as applicable.   The Company shall act as Registrar and shall maintain an appropriate ledger containing the necessary information with respect to each Debenture. The Company warrants that no instructions, other than these instructions, have been given or will be gi ven to the transfer agent and that the Common Stock shall otherwise be freely resold, except as may be set forth herein.

(c)

Conversion Rate.  Holder is entitled to convert the face amount of this Debenture, plus accrued interest, any time following the Closing Date, at the lesser of (i) 125% of the final “Volume Weighted Average Price” of the Closing Date or (ii) 85% of the average of the four (4) lowest closing bid prices during the five (5) trading days prior to the Conversion Date, each being referred to as the “Conversion Price”.  “Volume Weighted Average Price” shall mean the daily volume average weighted price of the Common Stock on the Principal Market between the hours of 9:00 a.m. and 4:00 p.m. on a trading day as reported by Bloomberg Financial Markets (“BLOOMBERG”), or if not available through Bloomberg because of delisting, then the average of the bid prices for the Common Stock of any market makers for the Common S tock as reported in the “pink sheets” by the National Quotation Bureau, Inc. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded up or down, as the case may be, to the nearest whole share.

(d)

Nothing contained in this Debenture shall be deemed to establish or require the payment of interest to the Holder at a rate in excess of the maximum rate permitted by governing law.  In the event that the rate of interest required to be paid exceeds the maximum rate permitted by governing law, the rate of interest required to be paid thereunder shall be automatically reduced to the maximum rate permitted under the governing law and such excess shall be returned with reasonable promptness by the Holder to the Company.

(e)

It shall be the Company’s responsibility to take all necessary actions and to bear all such costs to issue the Common Stock as provided herein, including the responsibility and cost for delivery of an opinion letter to the transfer agent, if so required.  The person in whose name the certificate of Common Stock is to be registered shall be treated as a shareholder of record on and after the conversion date. Upon surrender of any Debentures that are to be converted in part, the Company shall issue to the Holder a new Debenture equal to the unconverted amount, if so requested in writing by Holder.

(f)

Within five (5) business days after receipt of the documentation referred to above in Section 4.2(b), the Company shall deliver a certificate, in accordance with Section 4.2(c) for the number of shares of Common Stock issuable upon the conversion.  In the event the Company does not make delivery of the Common Stock, as instructed by Holder, within five (5) business days after the Conversion Date, then in such event the Company shall pay to Holder one percent (1%) in cash, of the dollar value of the Debentures being converted per each day after the fifth (5^th) business day following the Conversion Date that the Common Stock is not delivered to the Purchaser.

The Company acknowledges that its failure to deliver the Common Stock within five (5) business days after the Conversion Date will cause the Holder to suffer damages in an amount that will be difficult to ascertain.  Accordingly, the parties agree that it is appropriate to include in this Debenture a provision for liquidated damages.  The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty.  The payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Debenture.

To the extent that the failure of the Company to issue the Common Stock pursuant to this Section 4.2(g) is due to the unavailability of authorized but unissued shares of Common Stock, the provisions of this Section 4.2(g) shall not apply but instead the provisions of Section 4.2(h) shall apply.

The Company shall make any payments incurred under this Section 4.2(g) in immediately available funds within five (5) business days from the date the Common Stock is fully delivered.  Nothing herein shall limit a Holder’s right to pursue actual damages or cancel the conversion for the Company’s failure to issue and deliver Common Stock to the Holder within five (5) business days after the Conversion Date.

(g)

The Company shall at all times reserve (or make alternative written arrangements for reservation or contribution of shares) and have available all Common Stock necessary to meet conversion of the Debentures by all Holders of the entire amount of Debentures then outstanding. If, at any time Holder submits a Notice of Conversion and the Company does not have sufficient authorized but unissued shares of Common Stock (or alternative shares of Common Stock as may be contributed by Stockholders) available to effect, in full, a conversion of the Debentures (a “Conversion Default”, the date of such default being referred to herein as the “Conversion Default Date”), the Company shall issue to the Holder all of the shares of Common Stock which are available, and the Notice of Conversion as to any Debentures requested to be converted but not converted (the
47;Unconverted Debentures”), may be deemed null and void upon written notice sent by the Holder to the Company.  The Company shall provide notice of such  Conversion Default (“Notice of Conversion Default”) to all existing Holders of outstanding Debentures, by facsimile, within three (3) business day of such default  (with the original delivered by overnight or two day courier), and the Holder shall give notice to the Company by facsimile within five business days of receipt of the original Notice of Conversion Default (with the original delivered by overnight or two day courier) of its election to either nullify or confirm the Notice of Conversion.

The Company agrees to pay to all Holders of outstanding Debentures payments for a Conversion Default (“Conversion Default Payments”) in the amount of (N/365) x (.24) x the initial issuance price of the outstanding and/or tendered but not converted Debentures held by each Holder where N = the number of days from the Conversion Default Date to the date (the “Authorization Date”) that the Company authorizes a sufficient number of shares of Common Stock to effect conversion of all remaining Debentures.  The Company shall send notice (“Authorization Notice”) to each Holder of outstanding Debentures that additional shares of Common Stock have been authorized, the Authorization Date and the amount of Holder’s accrued  Conversion Default Payments.  The accrued Conversion Default shall be paid in cash or shall be convertible int o Common Stock at the Conversion Rate, upon written notice sent by the Holder to the Company, which Conversion Default shall be payable as follows:  (i) in the event Holder elects to take such payment in cash, cash payments shall be made to such Holder of outstanding Debentures by the fifth day of the following calendar month, or (ii) in the event Holder elects to take such payment in stock, the Holder may convert such payment amount into Common Stock  at  the conversion rate set forth in Section 4.2(d) at any time after the 5th day of the calendar month following the month in which the Authorization Notice was received, until the expiration of the mandatory three (3) year conversion period.

The Company acknowledges that its failure to maintain a sufficient number of authorized but unissued shares of Common Stock to effect in full a conversion of the Debentures will cause the Holder to suffer damages in an amount that will be difficult to ascertain.  Accordingly, the parties agree that it is appropriate to include in this Agreement a provision for liquidated damages.  The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty.  The payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Debenture.  Nothing herein shall limit the Holder’ s right to pursue actual damages for the Company’s failure to maintain a sufficient number of authorized shares of  Common Stock.

(h)

If, by the fifth (5^th) business day after the Conversion Date of any portion of the Debentures to be converted (the “Delivery Date”), the transfer agent fails for any reason to deliver the Common Stock upon conversion by the Holder and after such Delivery Date, the Holder purchases, in an open market transaction or otherwise, shares of Common Stock (the "Covering Shares") solely in order to make delivery in satisfaction of a sale of Common Stock by the Holder (the "Sold Shares"), which delivery such Holder anticipated to make using the Common Stock issuable upon conversion (a "Buy-In"), the Company shall pay to the Holder, in addition to any other amounts due to Holder pursuant to this Debenture, and not in lieu thereof, the Buy-In Adjustment Amount (as defined below).  The "Buy In Adjustment Amount" is the amount equal to the excess, if any, of (x) the Holder's total purchase price (including brokerage commissions, if any) for the Covering Shares over (y) the net proceeds (after brokerage commissions, if any) received by the Holder from the sale of the Sold Shares.  The Company shall pay the Buy-In Adjustment Amount to the Holder in immediately available funds within five (5) business days of written demand by the Holder.  By way of illustration and not in limitation of the foregoing, if the Holder purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which the Company will be required to pay to the Holder will be $1,000.

(i)

Prospectus and Other Documents. The Company shall furnish to Holder such number of prospectuses and other documents incidental to the registration of the shares of Common Stock underlying the Debentures, including any amendment of or supplements thereto.

(j)

Limitation on Issuance of Shares. If the Company’s Common Stock becomes listed on the Nasdaq SmallCap Market after the issuance of the Debentures, the Company may be limited in the number of shares of Common Stock it may issue by virtue of (X) the number of authorized shares or (Y) the applicable rules and regulations of the principal securities market on which the Common Stock is listed or traded, including, but not necessarily limited to, NASDAQ Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable (collectively, the “Cap Regulations”).  Without limiting the other provisions thereof, (i) the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock on conversion of the Debentures without violating the Cap Regulations and (ii) if, despite taking such steps, the Company still cannot issue s uch shares of Common Stock without violating the Cap Regulations, the holder of a Debenture which cannot be converted as result of the Cap Regulations (each such Debenture, an “Unconverted Debenture”) shall have the right to elect either of the following remedies:

(x)  if permitted by the Cap Regulations, require the Company to issue shares of Common Stock in accordance with such holder's Notice of Conversion at a conversion purchase price equal to the average of the closing bid price per share of Common Stock for any five (5) consecutive trading days (subject to certain equitable adjustments for certain events occurring during such period) during the sixty (60) trading days immediately preceding the Conversion Date; or

(y)  require the Company to redeem each Unconverted Debenture for an amount (the “Redemption Amount”), payable in cash, equal to the sum of (i) one hundred thirty-three percent (133%) of the principal of an Unconverted Debenture, plus (ii) any accrued but unpaid interest thereon through and including the date (the “Redemption Date”) on which the Redemption Amount is paid to the holder.

A holder of an Unconverted Debenture may elect one of the above remedies with respect to a portion of such Unconverted Debenture and the other remedy with respect to other portions of the Unconverted Debenture.  The Debentures shall contain provisions substantially consistent with the above terms, with such additional provisions as may be consented to by the Holder.  The provisions of this section are not intended to limit the scope of the provisions otherwise included in the Debentures.

(k)

Limitation on Amount of Conversion and Ownership. Notwithstanding anything to the contrary in this Debenture, in no event shall the Holder be entitled to convert that amount of Debenture, and in no event shall the Company permit that amount of conversion, into that number of shares, which when added to the sum of the number of shares of Common Stock beneficially owned, (as such term is defined under Section 13(d) and Rule 13d-3 of the Securities Exchange Act of 1934, as may be amended, (the “1934 Act”)), by the Holder, would exceed 4.99% of the number of shares of Common Stock outstanding on the Conversion Date, as determined in accordance with Rule 13d-1(j) of the 1934 Act. In the event that the number of shares of Common Stock outstanding as determined in accordance with Section 13(d) of the 1934 Act is different on any Conversion Date than it was on the Closing Date, then the number of shares of Common Stock outstanding on such Conversion Date shall govern for purposes of determining whether the Holder would be acquiring beneficial ownership of more than 4.99% of the number of shares of Common Stock outstanding on such Conversion Date.

(l)

Legend. The Holder acknowledges that each certificate representing the Debentures, and the Common Stock unless registered pursuant to the Registration Rights Agreement, shall be stamped or otherwise imprinted with a legend substantially in the following form:

THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.

(m)

Prior to conversion of all the Debentures and exercise of all the Warrants, if at any time the conversion of all the Debentures and exercise of all the Warrants outstanding would result in an insufficient number of authorized shares of Common Stock being available to cover all the conversions, then in such event, the Company will move to call and hold a shareholder’s meeting or have shareholder action with written consent of the proper number of shareholders within thirty (30) days of such event, or such greater period of time if statutorily required or reasonably necessary as regards standard brokerage house and/or SEC requirements and/or procedures, for the purpose of authorizing additional shares of Common Stock to facilitate the conversions.   In such an event management of the Company shall recommend to all shareholders to vote their shares in favor of increasing the authorized number of shares of Common Stock. Management of the Company shall vote all of its shares of Common Stock in favor of increasing the number of shares of authorized Common Stock.  Company represents and warrants that under no circumstances will it deny or prevent Holder’s right to convert the Debentures as permitted under the terms of this Subscription Agreement or the Registration Rights Agreement.  Nothing in this Section shall limit the obligation of the Company to make the payments set forth in Section 4.2(g).   In the event the Company’s shareholder’s meeting does not result in the necessary authorization, the Company shall redeem the outstanding Debentures for an amount equal to (x) the sum of the principal of the outstanding Debentures plus accrued interest thereon multiplied by (y) 133%.

Section 4.3

Fractional Shares.  The Company shall not issue fractional shares of Common Stock, or scrip representing fractions of such shares, upon the conversion of this Debenture.  Instead, the Company shall round up or down, as the case may be, to the nearest whole share.

Section 4.4

Taxes on Conversion.  The Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion of this Debenture.  However, the Holder shall pay any such tax which is due because the shares are issued in a name other than its name.

Section 4.5

Company to Reserve Stock.  The Company shall reserve the number of shares of Common Stock required pursuant to and upon the terms set forth in the Subscription Agreement to permit the conversion of this Debenture.  All shares of Common Stock which may be issued upon the conversion hereof shall upon issuance be validly issued,  fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof.

Section 4.6

Restrictions on Sale.  This Debenture has not been registered under the Securities Act of 1933, as amended, (the “Act”) and is being issued under Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the Act.  This Debenture and the Common Stock issuable upon the conversion thereof may only be sold pursuant to registration under or an exemption from the Act.

Section 4.7

Mergers, Etc.  If the Company merges or consolidates with another corporation or sells or transfers all or substantially all of its assets to another person and the holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such merger, consolidation, sale or transfer, it may thereafter be converted on the terms and subject to the conditions set forth above into the kind and amount of stock, securities or property receivable upon such merger, consolidation, sale or transfer by a holder of the number of shares of Common Stock into which this Debenture might have been converted immediately before such merger, consolidation, sale or transfer, subject to adjustments which shall be as nearly equivalent as may be practicable to adjustments provided for in this Article 3.

Section 4.8

Company Mandatory Redemption. During the first one hundred eighty (180) calendar days following the Issuance Date, the Company, at its sole option, shall have the right to exercise a “Mandatory Redemption” to redeem, in whole or in part, the outstanding amount of the Debenture, as follows: The Company must notify the Holder in writing, via facsimile transmission, that it is exercising its right of Mandatory Redemption.  The Company shall not be entitled to exercise a Mandatory Redemption of any amount being converted once it receives a Notice of Conversion, unless it is for the balance remaining unconverted on the Debenture. In the event the Company exercises such right of Mandatory Redemption the Company shall pay the Holder in U.S. currency 120% of that portion of the Debenture being redeemed, plus accrued but unpaid interest and liquidated dam ages, if any.  The redemption amount shall be paid to the Holder within five (5) calendar days of the date the Holder receives written notice from the Company of the Mandatory Redemption notice and if not paid in such time the Company shall not be entitled to any further Mandatory Redemption.

Article 5

Mergers

The Company shall not consolidate or merge into, or transfer all or substantially all of its assets to, any person, unless such person assumes in writing the obligations of the Company under this Debenture and immediately after such transaction no Event of Default exists.  Any reference herein to the Company shall refer to such surviving or transferee corporation and the obligations of the Company shall terminate upon such written assumption.

Article 6   Reports

The Company will mail to the Holder hereof at its address as shown on the Register a copy of any annual, quarterly or current report that it files with the Securities and Exchange Commission promptly after the filing thereof and a copy of any annual, quarterly or other report or proxy statement that it gives to its shareholders generally at the time such report or statement is sent to shareholders.

Article 7

Defaults and Remedies

Section 7.1

Events of Default.  An “Event of Default” occurs if (a) the Company does not make the payment of the principal of this Debenture by conversion into Common Stock within ten (10) business days of the Maturity Date, upon redemption or otherwise, (b) the Company does not make a payment, other than a payment of principal, for a period of five (5) business days thereafter, (c) any of the Company’s representations or warranties contained in the Subscription Agreement or this Debenture were false when made or the Company fails to comply with any of its other agreements in the Subscription Agreement or this Debenture and such failure continues for the period and after the notice specified below, (d) the Company pursuant to or within the meaning of any Bankruptcy Law (as hereinafter defined):  (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case; (iii) consents to the appointment of a Custodian (as hereinafter defined) of it or for all or substantially all of its property or (iv) makes a general assignment for the benefit of its creditors or (v) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:  (A) is for relief against the Company in an involuntary case; (B) appoints a Custodian of the Company or for all or substantially all of its property or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for sixty (60) calendar days, (e) the Company’s Common Stock is suspended or no longer listed on any recognized exchange including electronic over-the-counter bulletin board for in excess of five (5) consecutive trading days.  As used in this Section 7.1, the term “Bankruptcy Law” means Title 11 of the United States Code or any similar federal or state law for the relief of debtors. &n bsp;The term “Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.  A default under clause (c) above is not an Event of Default until the holders of at least 25% of the aggregate principal amount of the Debentures outstanding notify the Company of such default and the Company does not cure it within thirty (30) business days after the receipt of such notice, unless the Company commences to cure such default within such period, which must specify the default, demand that it be remedied and state that it is a “Notice of Default”. Prior to the expiration of the time for curing a default as set forth in the preceding sentence, the holders of a majority in aggregate principal amount of the Debentures at the time outstanding (exclusive of Debentures then owned by the Company or any subsidiary or affiliate) may, on behalf of the holders of all of the Debentures, waive any past Event of Default hereunder (or any past event which, with the lapse of time or notice and lapse of time designated in subsection 6(a), would constitute an Event of Default hereunder) and its consequences, except a default in the payment of the principal of or interest on any of the Debentures. In the case of any such waiver, such default or Event of Default shall be deemed to have been cured for every purpose of this Debenture and the Company and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.

Section 7.2

Acceleration.  If an Event of Default occurs and is continuing, the Holder hereof by notice to the Company, may declare the remaining principal amount of this Debenture, together with all accrued interest and any liquidated damages, to be due and payable.  Upon such declaration, the remaining principal amount shall be due and payable immediately.

Section 7.3

Concerning Seniority.  Except as disclosed in the Company’s SEC filings, no indebtedness of the Company is senior to this Debenture in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise.

Article 8

Registered Debentures

Section 8.1

Record Ownership.  The Company, or its attorney, shall maintain a register of the holders of the Debentures (the “Register”) showing their names and addresses and the serial numbers and principal amounts of Debentures issued to them.  The Register may be maintained in electronic, magnetic or other computerized form.  The Company may treat the person named as the Holder of this Debenture in the Register as the sole owner of this Debenture.   The Holder of this Debenture is the person exclusively entitled to receive payments of interest on this Debenture, receive notifications with respect to this Debenture, convert it into Common Stock and otherwise exercise all of the rights and powers as the absolute owner hereof.

Section 8.2

Worn or Lost Debentures.  If this Debenture becomes worn, defaced or mutilated but is still substantially intact and recognizable, the Company or its agent may issue a new Debenture in lieu hereof upon its surrender.   Where the Holder of this Debenture claims that the Debenture has been lost, destroyed or wrongfully taken, the Company shall issue a new Debenture in place of the original Debenture if the Holder so requests by written notice to the Company actually received by the Company before it is notified that the Debenture has been acquired by a bona fide purchaser and the Holder has delivered to the Company an indemnity bond in such amount and issued by such surety as the Company deems satisfactory together with an affidavit of the Holder setting forth the facts concerning such loss, destruction or wrongful taking and such other information in such form with such proof or verification as the Company may request.

Article 9

Notice.

Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Debenture must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same.  The addresses and facsimile numbers for such communications shall be:

If to the Company:

VirTra Systems, Inc.

440 North Center

Arlington, TX 76011

Attention: L. Kelly Jones, CEO and CFO

Telephone:

817-265-0440

Facsimile:

817-265-1440

With a copy to:

Raice Paykin & Krieg LLP

185 Madison Avenue

10^th Floor

New York, New York 10016

Attention:  David C. Thomas, Esq.

Telephone:

212-725-4423

Facsimile:  

212-684-9022

If to the Investor:

At the address listed in the Questionnaire.

With a copy to:

Joseph B. LaRocco, Esq.

49 Locust Avenue, Suite 107

New Canaan, CT 06840

Telephone:  203-966-0566

Facsimile:  203-966-0363

Each party shall provide five (5) business days prior notice to the other party of any change in address, phone number or facsimile number.

Article 10

Time

Where this Debenture authorizes or requires the payment of money or the performance of a condition or obligation on a Saturday or Sunday or a public holiday, or authorizes or requires the payment of money or the performance of a condition or obligation within, before or after a period of time computed from a certain date, and such period of time ends on a Saturday or a Sunday or a public holiday, such payment may be made or condition or obligation performed on the next succeeding business day, and if the period ends at a specified hour, such payment may be made or condition performed, at or before the same hour of such next succeeding business day, with the same force and effect as if made or performed in accordance with the terms of this Debenture.  A “business day” shall mean a day on which the banks in New York are not required or allowed to be closed .

Article 11

No Assignment

This Debenture shall not be assignable.

Article 12

Rules of Construction.

In this Debenture, unless the context otherwise requires, words in the singular number include the plural, and in the plural include the singular, and words of the masculine gender include the feminine and the neuter, and when the sense so indicates, words of the neuter gender may refer to any gender.  The numbers and titles of sections contained in the Debenture are inserted for convenience of reference only, and they neither form a part of this Debenture nor are they to be used in the construction or interpretation hereof.  Wherever, in this Debenture, a determination of the Company is required or allowed, such determination shall be made by a majority of the Board of Directors of the Company and if it is made in good faith, it shall be conclusive and binding upon the Company and the Holder of this Debenture.

Article 13

Governing Law

The validity, terms, performance and enforcement of this Debenture shall be governed and construed by the provisions hereof and in accordance with the laws of the State of Texas applicable to agreements that are negotiated, executed, delivered and performed solely in the State of Texas.

Article 14

Litigation

Section 14.1

Forum Selection and Consent to Jurisdiction. Any litigation arising out of, under, or in connection with, this Debenture or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Company or Holder shall be brought and maintained exclusively in the courts of the State of New York.  The Company hereby expressly and irrevocably submits to the jurisdiction of the state and federal courts of the State of New York for the purpose of any such litigation as set forth above and irrevocably agrees to be bound by any final judgment rendered thereby in connection with such litigation.  The Company further irrevocably consents to the service of process by registered mail, postage prepaid, or by personal service within or without the State of New York. The Company hereby expressly and irrevocably waives, to the fulle st extent permitted by law, any objection which it may have or hereafter may have to the laying of venue of any such litigation brought in any such court referred to above and any claim that any such litigation has been brought in any inconvenient forum.  To the extent that the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations under this Debenture.

Section 14.2

Waiver of Jury Trial.  The Holder and the Company hereby knowingly, voluntarily and intentionally waive any rights they may have to a trial by jury in respect of any litigation based hereon, or arising out of, under, or in connection with, this Debenture, or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Holder or the Company.  The Company acknowledges and agrees that it has received full and sufficient consideration for this provision and that this provision is a material inducement for the Holder purchasing this Debenture.

IN WITNESS WHEREOF, the Company has duly executed this Debenture as of the date first written above.

VirTra Systems, Inc.

By

Name:

  L. Kelly Jones

Title:

  CEO and CFO

#

VTSI.Deb v2    Z/11

 EXHIBIT C

NOTICE OF CONVERSION

(To be Executed by the Registered owner in order to Convert the Debentures.)

The undersigned hereby irrevocably elects, as of ______________, 200_ to convert $__________ of Convertible Debentures into Common Stock of VirTra Systems, Inc. (the “Company”) according to the conditions set forth in the Debenture dated July of 2002, and issued by the Company.

This conversion is being made for an immediate sale.

Date of Conversion________________________________________________

Applicable Conversion Price________________________________________

Number of Shares Issuable upon this conversion_______________________

Name (Print) ______________________________________________________  

Address__________________________________________________________

_________________________________________________________________

Phone______________________   Fax_________________________________

By: _______________________________  

#

VTSI.Deb v2    Z/11

EX-5

Exhibit 5

RAICEPAYKIN& KRIEGLLP

ATTORNEYS AT LAW

185MADISONAVENUE,10^THFLOOR

NEW YORK, NEW YORK 10016

_______________________________________

(212) 725-4423 • FAX (212) 684-9022

PINCHUS D.RAICE ••	DAVID J.WOLKENSTEIN •
JOSEPH N. PAYKIN Δ	ROBERT M.STECKMAN •
CHARLES D.KRIEG •	BENJAMIN SUESS *
DAVID C.THOMAS •	AARON WARD *
JAMES KLATSKY •

OF COUNSEL	••	ADMITTED IN NY AND NJ
JOHN M.TANENBAUM +	•	ADMITTED IN NY
	Δ	ADMITTED IN NY AND FL
	+	ADMITTED IN NY, CT AND DC

August 12, 2002


VirTra Systems, Inc.
440 North Center
Arlington, TX 76011

Re: VirTra Systems, Inc.- Registration Statement on Form SB-2 (the "Registration Statement")

Gentlemen:

We are are acting as counsel for VirTra Systems, Inc., a Texas corporation (the "Company"), in connection with the proposed issuance and sale pursuant to the Registration Statement of (i) up to 12,500,000 shares of Common Stock, $.005 par value, of the Company, to be issued pursuant to an Investment Agreement dated July 11, 2002 (the "Investment Agreement"), (ii) up to 6,000,000 shares of such Common Stock upon conversion of $450,000 in principal amount of convertible subordinated debentures (the "Debentures"), (iii) up to 500,000 shares of such Common Stock which may be issued upon exercise of warrants held by Dutchess Private Equities Fund, L.P. (the "Dutchess Warrants") and (iv) up to 495,000 shares issuable upon conversion of warrants previously issued to Swartz Private Equity LLP (the "Swartz Warrants"). The shares to be so issued are referred to in this letter as the "Shares".

We have examined such corporate records, certificates and other documents as we have considered necessary for the purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies and the authenticity of the originals of such latter documents. As to any facts material to our opinion, we have, when relevant facts were not independently established, relied upon the records, certificates and documents referred to above.

Based on the foregoing, we are of the opinion that, upon issuance and delivery in accordance with the Investment Agreement, the Debentures, the Dutchess Warrants and the Swartz Warrants, the Shares will be duly authorized, validly issued, fully paid and nonassessable.

Our opinion is limited in all cases to matters arising under the Business Corporation Act of the State of Texas. We consent to the use of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the prospectus that is a part of the Registration Statement. In giving such consent, we do not concede that we are within the category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Commission
thereunder.

Very truly yours,

Raice Paykin & Krieg LLP

By: ______________________________

EX-10

Exhibit 10.3

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of July __, 2002, by and between VIRTRA SYSTEMS, INC., a company organized under the laws of state of Texas, with its principal executive office at 440 North Center, Arlington, TX 76011 (the “Company”), and the undersigned investor (the “Investor”).

WHEREAS, upon the terms and subject to the conditions of the Subscription Agreement between the Investor and the Company (the “Subscription Agreement”), the Company has agreed to issue and sell to the Investor convertible debentures of the Company (the “Debentures”), which will be convertible into shares of the common stock, $.005 par value per share (the “Common Stock”), of the Company, and a Warrant to purchase 5,556 shares of Common Stock per $5,000 invested, upon the terms and subject to the conditions of such Debentures; and

WHEREAS, to induce the Investor to execute and deliver the Subscription Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities laws, with respect to the shares of Common Stock issuable pursuant to the Subscription Agreement and Debenture.

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained hereinafter and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows:

1. DEFINITIONS.

As used in this Agreement, the following terms shall have the following meanings:

a. “Closing Date” means the date funds are received by the Company pursuant to the Subscription Agreement.

b. “Holder” means the Investor.

c. “Person” means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency.

d. "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a Registration Statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the Registration Statement would be detrimental to the business and affairs of the Company, or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a Registration Statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the Registration Statement would be materially misleading absent the inclusion of such information.

e. “Principal Market” means either The American Stock Exchange, Inc., The New York Stock Exchange, Inc., the Nasdaq National Market, The Nasdaq SmallCap Market or the National Association of Securities Dealer’s, Inc. OTC electronic bulletin board whichever is the principal market on which the Common Stock is listed.

f. “Register,” “Registered,” and “Registration” refer to a registration effected by preparing and filing with the United States Securities and Exchange Commission (the "SEC") one or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and effectiveness of such Registration Statement(s).

g. “Registrable Securities” means the shares of Common Stock issued or issuable (i) pursuant to the Subscription Agreement, (ii) upon exercise of the Warrants, and (iii) any shares of capital stock issued or issuable with respect to the such shares of Common Stock and Warrants, if any, as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, which have not been (x) included in a Registration Statement that has been declared effective by the SEC, or (y) sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the 1933 Act.

h. “Registration Statement” means a registration statement of the Company filed under the 1933 Act.

i. “Debenture” means the convertible debenture issued by the Company to the Investor.

All capitalized terms used in this Agreement and not otherwise defined herein shall have the same meaning ascribed to them as in the Subscription Agreement.

2. REGISTRATION.

a. Mandatory Registration. The Company shall prepare, and, as soon as practicable file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form SB-2 (or, if such form is unavailable for such a registration, on such other form as is available for such a registration), covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon stock splits, stock dividends or similar transactions. The Company shall initially register for resale 4,000,000 shares of Common Stock which would be issuable on the date preceding the filing of the Registration Statement based on the closing bid price of the Company’s Common Stock on such date and the amount reasonably calculated that represents the number of shares underlying the Warrants issuable pursuant to the terms of the Offering. In the event the Company cannot register sufficient shares of Common Stock, due to the remaining number of authorized shares of Common Stock being insufficient, the Company will use its best efforts to register the maximum number of shares it can based on the remaining balance of authorized shares and will use its best efforts to increase the number of its authorized shares as soon as reasonably practicable.

b. The Company shall use its best efforts to have the Registration Statement filed with the SEC within forty (40) calendar days after the Closing Date. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not filed within forty (40) calendar days following the Closing Date, then the Company shall pay the Investor the sum of two percent (2%) of the face amount of the Debentures outstanding as liquidated damages, and not as a penalty, for each thirty (30) calendar day period, pro rata, following the forty (40) calendar day period until the Registration Statement is filed.

Notwithstanding the foregoing, the amounts payable by the Company pursuant to this Section shall not be payable to the extent any delay in the filing of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Investor. The damages set forth in this Section shall continue until the obligation is fulfilled and shall be paid within three (3) business days after each thirty (30) day period, or portion thereof, until the Registration Statement is filed. Failure of the Company to make payment within said three (3) business days shall be considered a default.

The Company acknowledges that its failure to have the Registration Statement filed within said forty (40) calendar day period will cause the Investor to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Agreement a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to register the Common Stock and deliver the Common Stock pursuant to the terms of this Agreement, the Subscription Agreement and the Debenture.

c. The Company shall use its best efforts to have the Registration Statement declared effective by the SEC within one hundred ten (110) calendar days after the Closing Date. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof has not become effective within one hundred ten (110) calendar days following the Closing Date, then the Company shall pay the Investor the sum of two percent (2%) of the face amount of the Debentures outstanding as liquidated damages and not as a penalty for each thirty (30) calendar day period, pro rata, following the one hundred ten (110)calendar day period until the Registration Statement is declared effective.

If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof has become effective, but after the effective date the Investor’s right to sell is suspended, then the Company shall pay the Investor the sum of 2% of the purchase price paid by the Investor for the Registrable Securities pursuant to the Subscription Agreement for each thirty (30) calendar day period, pro rata, following the suspension until such suspension ceases.

Notwithstanding the foregoing, the amounts payable by the Company pursuant to this Section shall not be payable to the extent any delay in the effectiveness of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Investor. The damages set forth in this Section shall continue until the obligation is fulfilled and shall be paid within three (3) business days after each thirty (30) day period, or portion thereof, until the Registration Statement is declared effective or such suspension is released. Failure of the Company to make payment within said three (3) business days shall be considered a default.

The Company acknowledges that its failure to have the Registration Statement become effective within said one hundred ten (110) calendar day period or to permit the suspension of the effectiveness of the Registration Statement, will cause the Investor to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Agreement a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to register the Common Stock and deliver the Common Stock pursuant to the terms of this Agreement, the Subscription Agreement and the Debenture.

d. The Company agrees not to include any other securities, other than those for the equity credit line financing, in this Registration Statement without Investor prior written consent. Furthermore, the Company agrees that it will not file any other Registration Statement for other securities (other than those for the equity credit line financing, existing option holders, strategic partners or in connection with a merger or acquisition), until ninety (90) calendar days after the Registration Statement for the Registrable Securities is declared effective.

e. Counsel. Subject to Section 5 hereof, in connection with any offering pursuant to this Section 2, the Investor shall have the right to select one legal counsel to administer at such Investor's own expense, its interests in the Offering. The Company shall reasonably cooperate with any such counsel.

3. RELATED OBLIGATIONS.

At such time as the Company is obligated to prepare and file a Registration Statement with the SEC pursuant to Section 2(a), the Company will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, with respect thereto, the Company shall have the following obligations:

a. The Company shall use its best efforts to cause such Registration Statement relating to the Registrable Securities to become effective within one hundred ten (110) calendar days after the date and shall keep such Registration Statement effective pursuant to Rule 415 until the earlier of (i) the date as of which the Investor may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act or (ii) the date on which (A) the Investor shall have sold all the Registrable Securities and (B) the Investor has no right to convert the Shares it owns into Common Stock under the Subscription Agreement respectively (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall respond to all SEC comments within seven (7) business days of receipt by the Company. If the Company fails to respond within seven (7) business days of receipt of SEC comments, the Company shall pay to the Investor a cash amount within three (3) business days of the end of the month equal to 2% per month, on a pro rata basis, of the amount paid to purchase the Debentures then outstanding, as liquidated damages and not as a penalty; provided that the seven (7) business day period provided herein shall be extended as may be required by delays caused by Holders’ counsel pursuant to paragraph 3g below, and, provided further, that such seven (7) business day period shall be extended five (5) business days for responses to SEC staff accounting comments. The Company shall cause the Registration Statement relating to the Registrable Securities to become effective no later than three (3) business days after notice from the SEC that the Registration Statement may be declared effective.

b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the Investor thereof as set forth in such Registration Statement. In the event the number of shares of Common Stock available under a Registration Statement filed pursuant to this Agreement is at any time insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within thirty (30) calendar days after the necessity therefor arises (based on the then Purchase Price of the Common Stock and other relevant factors on which the Company reasonably elects to rely), assuming the Company has sufficient authorized shares at that time, and if it does not, within thirty (30) calendar days after such shares are authorized. The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof.

Prior to conversion of all the Shares, if at any time the conversion of all the Shares outstanding would result in an insufficient number of authorized shares of Common Stock being available to cover all the conversions, then in such event, the Company will move to call and hold a shareholder’s meeting within thirty (30) calendar days of such event for the sole purpose of authorizing additional shares of Common Stock to facilitate the conversions. In such an event the Company shall recommend to all shareholders and management of the Company to vote their shares in favor of increasing the authorized number of shares of Common Stock. The Company represents and warrants that under no circumstances will it deny or prevent Purchaser’s right to convert the Shares as permitted under the terms of this Subscription Agreement or this Registration Rights Agreement.

c The Company shall furnish to the Investor whose Registrable Securities are included in any Registration Statement and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, the prospectus included in such Registration Statement (including each preliminary prospectus) and, with regards to such Registration Statement(s), any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as the Investor may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as the Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities.

d. The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under the applicable securities or "blue sky" laws of such states of the United States as specified by the Holder, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify each Holder who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose.

e. As promptly as practicable after becoming aware of such event, the Company shall notify each Holder in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (“Registration Default”) and use all diligent efforts to promptly prepare a supplement or amendment to such Registration Statement and take any other necessary steps to cure the Registration Default, (which, if such Registration Statement is on Form S-3, may consist of a document to be filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act (as defined below) and to be incorporated by reference in the prospectus) to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Holder (or such other number of copies as such Holder may reasonably request). Failure to cure the Registration Default within ten (10) business days shall result in the Company paying liquidated damages of 2.0% of the price paid to purchase the Shares then held by the Holders for each thirty (30) calendar day period or portion thereof, beginning on the date of suspension. The Company shall also promptly notify each Holder in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to each Holder by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate, (iv) in the event the Registration Statement is no longer effective or, (v) the Registration Statement is stale for a period of more than five (5) Trading Days as a result of the Company’s failure to timely file its financials.

The Company acknowledges that its failure to cure the Registration Default within ten (10) business days will cause the Investor to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Agreement a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty.
It is the intention of the parties that interest payable under any of the terms of this Agreement shall not exceed the maximum amount permitted under any applicable law. If a law, which applies to this Agreement which sets the maximum interest amount, is finally interpreted so that the interest in connection with this Agreement exceeds the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Company which exceed the permitted limits will be refunded to the Company. The Investor may choose to make this refund by reducing the amount that the Company owes under this Agreement or by making a direct payment to the Company. If a refund reduces the amount that the Company owes the Investor, the reduction will be treated as a partial payment. In case any provision of this Agreement is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby.

f. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Holder who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

g. The Company shall permit each Holder and a single firm of counsel, designated as selling shareholders' counsel by the Holders who hold a majority of the Registrable Securities being sold, to review and comment upon a Registration Statement and all amendments and supplements thereto at least three (3) business days prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. The Company shall not submit to the SEC a request for acceleration of the effectiveness of a Registration Statement or file with the SEC a Registration Statement or any amendment or supplement thereto without the prior approval of such counsel, which approval shall not be unreasonably withheld.

h. At the request of any Holder, the Company shall cause to be furnished to such Holder, on the date of the effectiveness of a Registration Statement, an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in the form of Exhibit D attached to the Subscription Agreement.

i. The Company shall make available for inspection by (i) any Holder and (ii) one firm of attorneys and one firm of accountants or other agents retained by the Holders (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall hold in strict confidence and shall not make any disclosure (except to a Holder) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector has knowledge. Each Holder agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential.

j. The Company shall hold in confidence and not make any disclosure of information concerning a Holder provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning a Holder is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Holder and allow such Holder, at the Holder's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

k. The Company shall use its best efforts to secure designation and quotation of all the Registrable Securities covered by any Registration Statement on the Principal Market. If, despite the Company's best efforts, the Company is unsuccessful in satisfying the preceding sentence, it shall use its best efforts to cause all the Registrable Securities covered by any Registration Statement to be listed on each other national securities exchange and automated quotation system, if any, on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or system. If, despite the Company's best efforts, the Company is unsuccessful in satisfying the two preceding sentences, it will use its best efforts to secure the inclusion for quotation with Pink Sheets, LLC. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(k).

l. The Company shall cooperate with the Investor to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Holders may reasonably request and registered in such names of the Persons who shall acquire such Registrable Securities from the Holders, as the Holders may request.

m. The Company shall provide a transfer agent for all the Registrable Securities not later than the effective date of the first Registration Statement filed pursuant hereto.

n. If requested by the Holders holding a majority of the Registrable Securities, the Company shall (i) as soon as reasonably practical incorporate in a prospectus supplement or post-effective amendment such information as such Holders reasonably determine should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably requested by such Holders.

o. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

p. The Company shall make generally available to its security holders as soon as reasonably practical, but not later than ninety (90) calendar days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of any Registration Statement.

q. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

r. Within one (1) business day after the Registration Statement which includes Registrable Securities is declared effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities, with copies to the Investor, confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A.

s. At or prior to the date of the first Put Notice (as that term is defined in the Subscription Agreement) and at such other times as the Holders may reasonably request, the Company shall cause to be delivered, letters from the Company's independent certified public accountants (i) addressed to the Holders that such accountants are independent public accountants within the meaning of the 1933 Act and the applicable published rules and regulations thereunder, and (ii) in customary form and covering such financial and accounting matters as are customarily covered by letters of independent certified public accountants delivered to underwriters in connection with public offerings.

t. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Holders of Registrable Securities pursuant to a Registration Statement.

4. OBLIGATIONS OF THE HOLDERS.

a. At least five (5) calendar days prior to the first anticipated filing date of a Registration Statement the Company shall notify each Holder in writing of the information the Company requires from each such Holder if such Holder elects to have any of such Holder's Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Holder that such Holder shall furnish in writing to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall reasonably be required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. Each Holder covenants and agrees that, in connection with any resale of Registrable Securities by it pursuant to a Registration Statement, it shall comply with the "Plan of Distribution" section of the current prospectus relating to such Registration Statement.

b. Each Holder, by such Holder's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Holder has notified the Company in writing of such Holder's election to exclude all of such Holder's Registrable Securities from such Registration Statement.

c. Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), such Holder will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or the first sentence of 3(e).

5. EXPENSES OF REGISTRATION.

All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printing and accounting fees, and fees and disbursements of counsel for the Company shall be paid by the Company.

6. INDEMNIFICATION.

In the event any Registrable Securities are included in a Registration Statement under this Agreement:

a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Holder who holds such Registrable Securities, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls, any Holder within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the “1934 Act”), (each, an “Indemnified Person”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, “Claims”), incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Holders and each such controlling person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus were timely made available by the Company pursuant to Section 3(c); (ii) shall not be available to the extent such Claim is based on (a) a failure of the Holder to deliver or to cause to be delivered the prospectus made available by the Company or (b) the Indemnified Person's use of an incorrect prospectus despite being promptly advised in advance by the Company in writing not to use such incorrect prospectus; and (iii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the resale of the Registrable Securities by the Holders pursuant to the Registration Statement.

b. In connection with any Registration Statement in which a Holder is participating, each such Holder agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in connection with such Registration Statement; and, subject to Section 6(c), such Holder will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Holder, which consent shall not be unreasonably withheld; provided, further, however, that the Holder shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the resale of the Registrable Securities by the Holders pursuant to the Registration Statement. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus were corrected on a timely basis in the prospectus, as then amended or supplemented.

c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such counsel shall be selected by Holders holding a majority-in-interest of the Registrable Securities included in the Registration Statement to which the Claim relates, if the Holders are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully appraised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim. Following indemnification as provided for hereunder, the indemnifying party shall be surrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred.

e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

7. CONTRIBUTION.

To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities.

8. REPORTS UNDER THE 1934 ACT.

With a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Holders to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to:

a. make and keep public information available, as those terms are understood and defined in Rule 144;

b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Subscription Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

c. furnish to the Investor, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration.

9. NO ASSIGNMENT OF REGISTRATION RIGHTS.

The rights under this Agreement shall not be assignable.

10. AMENDMENT OF REGISTRATION RIGHTS.

Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Holders who hold two-thirds (2/3) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Holder and the Company. No such amendment shall be effective to the extent that it applies to less than all of the Holders of the Registrable Securities. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

11. MISCELLANEOUS.

a. A Person is deemed to be a Holder of Registrable Securities whenever such Person owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.

b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:

VirTra Systems, Inc.
440 North Center
Arlington, TX 76011
Attention: L. Kelly Jones, CEO and CFO

Telephone: 817-265-0440

Facsimile: 817-265-1440

With a copy to:
Raice Paykin & Krieg LLP
185 Madison Avenue
10^th Floor
New York, New York 10016
Attention: David C. Thomas, Esq.
Telephone: 212-725-4423

Facsimile: 212-684-9022

If to the Investor:

At the address listed in the Questionnaire.

With a copy to:
Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telephone: 203-966-0566
Facsimile: 203-966-0363

Each party shall provide five (5) business days prior notice to the other party of any change in address, phone number or facsimile number.

c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

d. The laws of the State of Texas shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

e. This Agreement and the Transaction Documents(as defined in the Subscription Agreement) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein.

f. This Agreement and the Transaction Documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

h. This Agreement may be executed in two or more identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

j. All consents and other determinations to be made by the Holders pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by Holders holding a majority of the Registrable Securities.

k. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.

IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of the day and year first above written.

VIRTRA SYSTEMS, INC.

By: ____________________________________

Name: L. Kelly Jones
Title: CEO and CFO

DUTCHESS PRIVATE EQUITIES FUND, L.P.

BY ITS GENERAL PARTNER DUTCHESS

CAPITAL MANAGEMENT, LLC

By:__________________________________ Name: Douglas H. Leighton
Title: A Managing Member

INVESTOR:

By: ____________________________________

Name:

EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

Date: __________
[TRANSFER AGENT]

Re: VirTra Systems, Inc.

Ladies and Gentlemen:

We are counsel to VirTra Systems, Inc., a Texas corporation (the "Company"), and have represented the Company in connection with that certain Subscription Agreement (the "Subscription Agreement") entered into by and among the Company and _________________________ (the "Investor") pursuant to which the Company has agreed to issue to the Investor shares of the Company's common stock, $.005 par value per share (the "Common Stock") on the terms and conditions set forth in the Subscription Agreement. Pursuant to the Subscription Agreement, the Company also has entered into a Registration Rights Agreement with the Investor (the "Registration Rights Agreement") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issued or issuable under the Subscription Agreement under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ___, 2001, the Company filed a Registration Statement on Form S- ___ (File No. 333-________) (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names the Investor as a selling shareholder thereunder.

In connection with the foregoing, we advise you that [a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective] [the Registration Statement has become effective] under the 1933 Act at [enter the time of effectiveness] on [enter the date of effectiveness] and to the best of our knowledge, after telephonic inquiry of a member of the SEC’s staff, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement.

Very truly yours,

[Company Counsel]

By: ____________________

cc: [Investor]

EX-10

Exhibit 10.5

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of July __, 2002, by and between VirTra Systems, Inc., a company organized under the laws of state of Texas, with its principal executive office at ___________________(the “Company”), and the undersigned investor (the “Investor”).

WHEREAS, in connection with the Investment Agreement by and between the Company and the Investor of even date herewith (the "Investment Agreement"), the Company has agreed to issue and sell to the Investor (i) an indeterminate number of shares of the Company's common stock, $.005 par value per share (the "Common Stock"), to be purchased pursuant to the terms and subject to the conditions set forth in the Investment Agreement; and

WHEREAS, to induce the Investor to execute and deliver the Investment Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities laws, with respect to the shares of Common Stock issuable pursuant to the Investment Agreement.

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained hereinafter and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows:

1. DEFINITIONS.

As used in this Agreement, the following terms shall have the following meanings:

a. “Execution Date” means the date this Agreement and the Investment Agreement are signed by the Company and the Investor.

b. “Holder” means the undersigned Investor and Dutchess Advisors, Ltd.

c. “Person” means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency.

d. "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a Registration Statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the Registration Statement would be detrimental to the business and affairs of the Company, or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a Registration Statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the Registration Statement would be materially misleading absent the inclusion of such information.

e. “Principal Market” shall mean the National Association of Securities Dealer’s, Inc. OTC electronic bulletin board or if the Common Stock ceases to be traded on the electronic bulletin board, The American Stock Exchange, Inc., the Nasdaq National Market or The Nasdaq SmallCap Market whichever is the principal market on which the Common Stock is listed.

f. “Register,” “Registered,” and “Registration” refer to a registration effected by preparing and filing with the United States Securities and Exchange Commission (the “SEC”) one or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and effectiveness of such Registration Statement(s).

g. “Registrable Securities” means (i) the shares of Common Stock issued or issuable pursuant to the Investment Agreement, and (ii) any shares of capital stock issued or issuable with respect to such shares of Common Stock, if any, as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, which have not been (x) included in a Registration Statement that has been declared effective by the SEC or (y) sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the 1933 Act.

h. “Registration Statement” means a registration statement of the Company filed under the 1933 Act.

All capitalized terms used in this Agreement and not otherwise defined herein shall have the same meaning ascribed to them as in the Investment Agreement.

2. REGISTRATION.

a. Mandatory Registration. The Company shall prepare, and, as soon as practicable file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form SB-2 (or, if such form is unavailable for such a registration, on such other form as is available for such a registration), covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon stock splits, stock dividends or similar transactions. The Company shall initially register for resale 12,500,000 shares of Common Stock which would be issuable on the date preceding the filing of the Registration Statement based on the closing bid price of the Company’s Common Stock on such date and the amount reasonably calculated that represents Common Stock issuable to other parties as set forth in the Investment Agreement. In the event the Company cannot register sufficient shares of Common Stock, due to the remaining number of authorized shares of Common Stock being insufficient, the Company will use its best efforts to register the maximum number of shares it can based on the remaining balance of authorized shares and will use its best efforts to increase the number of its authorized shares as soon as reasonably practicable.

b. The Company shall use its best efforts to have the Registration Statement(s) declared effective by the SEC within one hundred ten (110) calendar days after the Execution Date.

c. The Company agrees not to include any other securities in this Registration Statement without Investor’s prior written consent. Furthermore, the Company agrees that it will not file any other Registration Statement for other securities, until ninety (90) calendar days after the Registration Statement for the Registrable Securities is declared effective.

d. Counsel. Subject to Section 5 hereof, in connection with any offering of the Registrable Securities pursuant to this Section 2, the Holder shall have the right to select one legal counsel to administer, at such Investor’s own expense, its interests in the offering. The Company shall reasonably cooperate with any such counsel.

3. RELATED OBLIGATIONS.

At such time as the Company is obligated to prepare and file a Registration Statement with the SEC pursuant to Section 2(a), the Company will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, with respect thereto, the Company shall have the following obligations:

a. The Company shall use its best efforts to cause such Registration Statement relating to the Registrable Securities to become effective within one hundred ten (110) calendar days after the Execution Date and shall keep such Registration Statement effective until the earlier to occur of (i) the date as of which the Holders may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii) the date on which (A) the Holders shall have sold all the Registrable Securities and (B) the Investor has no right to acquire any additional shares of Common Stock under the Investment Agreement respectively (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall respond to all SEC comments within seven (7) business days of receipt by the Company. If the Company fails to respond within seven (7) business days of receipt of SEC comments, the Company shall pay to the Investor a cash amount within three (3) business days of the end of the month equal to 2% per month, on a pro rata basis, of the amount paid to purchase the Debentures then outstanding, as liquidated damages and not as a penalty; provided that the seven (7) business day period provided herein shall be extended as may be required by delays caused by Holders’ counsel pursuant to paragraph 3g below, and, provided further, that such seven (7) business day period shall be extended five (5) business days for responses to SEC staff accounting comments. The Company shall cause the Registration Statement relating to the Registrable Securities to become effective no later than three (3) business days after notice from the SEC that the Registration Statement may be declared effective.

b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the Investor thereof as set forth in such Registration Statement. In the event the number of shares of Common Stock available under a Registration Statement filed pursuant to this Agreement is at any time insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within thirty (30) calendar days after the necessity therefor arises (based on the then Purchase Price of the Common Stock and other relevant factors on which the Company reasonably elects to rely), assuming the Company has sufficient authorized shares at that time, and if it does not, within thirty (30) calendar days after such shares are authorized. The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof.

c The Company shall furnish to the Holders whose Registrable Securities are included in any Registration Statement and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, the prospectus included in such Registration Statement (including each preliminary prospectus) and, with regards to such Registration Statement(s), any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as the Holders may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as the Holders may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities.

d. The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such states in the United States as any Holder reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify each Holder who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose.

e. As promptly as practicable after becoming aware of such event, the Company shall notify each Holder in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (“Registration Default”) and use all diligent efforts to promptly prepare a supplement or amendment to such Registration Statement and take any other necessary steps to cure the Registration Default, (which, if such Registration Statement is on Form S-3, may consist of a document to be filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act (as defined below) and to be incorporated by reference in the prospectus) to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Holder (or such other number of copies as such Holder may reasonably request). Failure to cure the Registration Default within ten (10) business days shall result in the Company paying liquidated damages of 2.0% of the cost of all Common Stock then held by the Holders for each thirty (30) calendar day period or portion thereof, beginning on the date of suspension. The Company shall also promptly notify each Holder in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to each Holder by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate, (iv) in the event the Registration Statement is no longer effective or, (v) the Registration Statement is stale for a period of more than five (5) Trading Days as a result of the Company’s failure to timely file its financials.

The Company acknowledges that its failure to cure the Registration Default within ten (10) business days will cause the Investor to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty.
It is the intention of the parties that interest payable under any of the terms of this Agreement shall not exceed the maximum amount permitted under any applicable law. If a law, which applies to this Agreement which sets the maximum interest amount, is finally interpreted so that the interest in connection with this Agreement exceeds the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Company which exceed the permitted limits will be refunded to the Company. The Investor may choose to make this refund by reducing the amount that the Company owes under this Agreement or by making a direct payment to the Company. If a refund reduces the amount that the Company owes the Investor, the reduction will be treated as a partial payment. In case any provision of this Agreement is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby.

f. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Holder who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

g. The Company shall permit each Holder and a single firm of counsel, designated by the Holder, to review and comment upon a Registration Statement and all amendments and supplements thereto at least three (3) business days prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. The Company shall not submit to the SEC a request for acceleration of the effectiveness of a Registration Statement or file with the SEC a Registration Statement or any amendment or supplement thereto without the prior approval of such counsel, which approval shall not be unreasonably withheld.

h. At the request of any Holder, the Company shall cause to be furnished to such Holder, on the date of the effectiveness of a Registration Statement, an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement.

i. The Company shall make available for inspection by (i) any Holder and (ii) one firm of attorneys and one firm of accountants or other agents retained by the Holders (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall hold in strict confidence and shall not make any disclosure (except to a Holder) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector has knowledge. Each Holder agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential.

j. The Company shall hold in confidence and not make any disclosure of information concerning a Holder provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning a Holder is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Holder and allow such Holder, at the Holder's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

k. The Company shall use its best efforts to secure designation and quotation of all the Registrable Securities covered by any Registration Statement on the Principal Market. If, despite the Company's best efforts, the Company is unsuccessful in satisfying the preceding sentence, it shall use its best efforts to cause all the Registrable Securities covered by any Registration Statement to be listed on each other national securities exchange and automated quotation system, if any, on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or system. If, despite the Company's best efforts, the Company is unsuccessful in satisfying the two preceding sentences, it will use its best efforts to secure the inclusion for quotation with Pink Sheets LLC. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(k).

l. The Company shall cooperate with the Investor to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Holders may reasonably request.

m. The Company shall provide a transfer agent for all the Registrable Securities not later than the effective date of the first Registration Statement filed pursuant hereto.

n. If requested by the Holders, the Company shall (i) as soon as reasonably practical incorporate in a prospectus supplement or post-effective amendment such information as such Holders reasonably determine should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably requested by such Holders.

o. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

p. The Company shall make generally available to its security holders as soon as reasonably practical, but not later than ninety (90) calendar days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of any Registration Statement.

q. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

r. Within one (1) business day after the Registration Statement which includes Registrable Securities is declared effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities, with copies to the Investor, confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A.

s. At or prior to the date of the first Put Notice (as that term is defined in the Investment Agreement) and at such other times as the Holders may reasonably request, the Company shall cause to be delivered, letters from the Company's independent certified public accountants (i) addressed to the Holders that such accountants are independent public accountants within the meaning of the 1933 Act and the applicable published rules and regulations thereunder, and (ii) in customary form and covering such financial and accounting matters as are customarily covered by letters of independent certified public accountants delivered to underwriters in connection with public offerings.

t. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Holders of Registrable Securities pursuant to a Registration Statement.

4. OBLIGATIONS OF THE HOLDERS.

a. At least five (5) calendar days prior to the first anticipated filing date of a Registration Statement the Company shall notify each Holder in writing of the information the Company requires from each such Holder if such Holder elects to have any of such Holder's Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Holder that such Holder shall furnish in writing to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall reasonably be required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. Each Holder covenants and agrees that, in connection with any sale of Registrable Securities by it pursuant to a Registration Statement, it shall comply with the "Plan of Distribution" section of the current prospectus relating to such Registration Statement.

b. Each Holder, by such Holder's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Holder has notified the Company in writing of such Holder's election to exclude all of such Holder's Registrable Securities from such Registration Statement.

c. Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), such Holder will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or the first sentence of 3(e).

5. EXPENSES OF REGISTRATION.

All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printing and accounting fees, and fees and disbursements of counsel for the Company shall be paid by the Company.

6. INDEMNIFICATION.

In the event any Registrable Securities are included in a Registration Statement under this Agreement:

a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Holder who holds such Registrable Securities, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls, any Holder within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the “1934 Act”), (each, an “Indemnified Person”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, “Claims”), incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Holders and each such controlling person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus were timely made available by the Company pursuant to Section 3(c); (ii) shall not be available to the extent such Claim is based on (a) a failure of the Holder to deliver or to cause to be delivered the prospectus made available by the Company or (b) the Indemnified Person's use of an incorrect prospectus despite being promptly advised in advance by the Company in writing not to use such incorrect prospectus; and (iii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the resale of the Registrable Securities by the Holders pursuant to the Registration Statement.

b. In connection with any Registration Statement in which a Holder is participating, each such Holder agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in connection with such Registration Statement; and, subject to Section 6(c), such Holder will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Holder, which consent shall not be unreasonably withheld; provided, further, however, that the Holder shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the resale of the Registrable Securities by the Holders pursuant to the Registration Statement. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus were corrected on a timely basis in the prospectus, as then amended or supplemented. This indemnification provision shall apply separately to each Investor and liability hereunder shall not be joint and several.

c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such counsel shall be selected by the Holders, if the Holders are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully appraised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim. Following indemnification as provided for hereunder, the indemnifying party shall be surrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred.

e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

7. CONTRIBUTION.

To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities.

8. REPORTS UNDER THE 1934 ACT.

With a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Holders to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to:

a. make and keep public information available, as those terms are understood and defined in Rule 144;

b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 5(c) of the Investment Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

c. furnish to the Investor, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration.

9. NO ASSIGNMENT OF REGISTRATION RIGHTS.

The rights under this Agreement shall not be assignable.

10. AMENDMENT OF REGISTRATION RIGHTS.

Provisions of this Agreement may be amended only with the written consent of the Company and Holders. No such amendment shall be effective to the extent that it applies to less than all of the Holders of the Registrable Securities.

11. MISCELLANEOUS.

a. A Person is deemed to be a Holder of Registrable Securities whenever such Person owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.

b. Any notices other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:

VirTra Systems, Inc.
440 North Center
Arlington, TX 76011
Attention: L. Kelly Jones, CEO and CFO

Telephone: 817-265-0440

Facsimile: 817-265-1440

With a copy to:
Raice Paykin & Krieg LLP
185 Madison Avenue
10^th Floor
New York, New York 10016
Attention: David C. Thomas, Esq.
Telephone: 212-725-4423

Facsimile: 212-684-9022

If to the Investor:

At the address listed in the Questionnaire.

With a copy to:

Joseph B. LaRocco, Esq.

49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telephone No.: 203-966-0566
Telecopier No.: 203-966-0363

Each party shall provide five (5) business days prior notice to the other party of any change in address, phone number or facsimile number.

c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

d. The laws of the State of Texas shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

e. This Agreement and the Transaction Documents (as defined in the Investment Agreement) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein.

f. This Agreement and the Transaction Documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if all the parties had prepared the same.

h. This Agreement may be executed in two or more identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

k. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.

IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of the day and year first above written.

VIRTRA SYSTEMS, INC.

By: ____________________________________

Name: L. Kelly Jones

Title: CEO and CFO

DUTCHESS PRIVATE EQUITIES FUND, L.P.

BY ITS GENERAL PARTNER DUTCHESS

CAPITAL MANAGEMENT, LLC

By:
Name: Douglas H. Leighton

Title: A Managing Member

EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

Date: __________
[TRANSFER AGENT]

Re: VirTra Systems, Inc.

Ladies and Gentlemen:

We are counsel to VirTra Systems, Inc., a Texas corporation (the "Company"), and have represented the Company in connection with that certain Investment Agreement (the "Investment Agreement") entered into by and among the Company and _________________________ (the "Investor") pursuant to which the Company has agreed to issue to the Investor shares of the Company's common stock, $.005 par value per share (the "Common Stock") on the terms and conditions set forth in the Investment Agreement. Pursuant to the Investment Agreement, the Company also has entered into a Registration Rights Agreement with the Investor (the "Registration Rights Agreement") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issued or issuable under the Investment Agreement, under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ___, 2002, the Company filed a Registration Statement on Form S- ___ (File No. 333-________) (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names the Investor as a selling shareholder thereunder.

In connection with the foregoing, we advise you that [a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement] [the Registration Statement has become] effective under the 1933 Act at [enter the time of effectiveness] on [enter the date of effectiveness] and to the best of our knowledge, after telephonic inquiry of a member of the SEC’s staff, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement.

Very truly yours,

[Company Counsel]

By: ____________________

cc: [Investor]

EX-99

Exhibit 99.1

UNIVERSE ARCADE SYSTEM LEASE AGREEMENT

Lease Number: SD-021

THIS AGREEMENT is made and entered into this ___day of ____, 2001 by and between FERRIS PRODUCTIONS, INC., a Delaware Corporation (hereafter “LESSEE”) and ___________ (hereafter “LESSOR”).

Witnesseth:

WHEREAS LESSOR, as owner of _______ (   __    ) units of the Universe Arcade System(s) EQUIPMENT described on Exhibit A, attached hereto and by reference made a part hereof (the “EQUIPMENT”) desires to Lease said EQUIPMENT to LESSEE and LESSEE desires to Lease said EQUIPMENT from LESSOR, all upon the terms and subject to the conditions hereinafter set forth.

NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained and for good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

1) Note:  Lessor Rental checks are sent out by U.S. Mail and are normally sent from FERRIS on the 1st and 15th day of each month.  However, should the 1st or 15th of the month fall on a Saturday or Sunday, the checks would normally go out from FERRIS by the following Monday

1)

LEASE OF EQUIPMENT.  Subject to the conditions herein, LESSOR hereby leases the EQUIPMENT to LESSEE and LESSEE hereby leases the EQUIPMENT from LESSOR.

2)

TERM.  This Lease shall commence (the “Commencement Date”) as of the date of execution hereof and shall remain in full force and effect for an Initial Term of thirty-six months thereafter (The “Initial Term”).  The execution hereof shall be determined by the date on which FERRIS receives the EQUIPMENT and Location Lease.  Upon the expiration of said Initial Term, this Lease shall be automatically renewed, except as otherwise provided herein, for an additional Renewal Term of thirty-six months (the ”Renewal Term”) unless at least ninety (90) days prior to the end of the Initial Term, either party gives written notice to the other that said party elects not to renew the Renewal Term.  The Initial Term and the Renewal Term are hereinafter collectively deemed the “ ;Term” of this Lease.  The monthly Lease payment for the EQUIPMENT during such Renewal Term shall be the then-current rate being paid to other lessors under all new Lease contracts.  Should LESSOR choose to take possession of the EQUIPMENT prior to termination of the Lease, LESSOR may do so with a ninety (90) day written notice.

3)

RENT.   LESSEE shall pay monthly rental to LESSOR, in arrears, for the use of the EQUIPMENT at the rate of $80.00 per month per unit.  The first monthly rental payment shall be due no more than thirty (30) days following the “Commencement Date”.  All subsequent monthly rental payments shall be due on the first  (1^st) or fifteenth (15^th) (based on Commencement Date) of each succeeding calendar month through the term hereof.    

4)

 TITLE.  This Lease creates a Lease of the EQUIPMENT.  Nothing contained herein shall be deemed or construed as enabling LESSEE to acquire any right, title or interest in the EQUIPMENT or location other than that of a bailee for hire, except as set forth in sections 15 and 16 hereof.

5)

NET LEASE.  Except as expressly provided herein, the parties hereto expressly agree to and acknowledge that this is a “Net Lease” requiring LESSEE to bear the entire cost of using the EQUIPMENT through the Term of this Lease.  LESSEE shall be responsible for, and shall pay all expenses of insurance, repair, service and maintenance of the EQUIPMENT and of the location.  LESSEE may, at LESSEE’s expense, contract with third parties to provide such repair, service and maintenance.

6)

LOCATION.  The location of the EQUIPMENT shall be set forth on “Exhibit A,” attached hereto and by reference made a part hereof.  LESSEE shall be responsible for selecting the location and for installation of the EQUIPMENT at the location in good working order. LESSEE has the right and sole authority to move EQUIPMENT to a new location should the original location prove to be unprofitable or prove to be in a high vandalism area.  LESSOR will be notified in the event of site exchange and will receive notification of the address of the new location. However, should the LESSOR decide to take over the operation of his/her EQUIPMENT during, or upon the expiration of the Lease, the LESSOR will be responsible for any and all relocation cost associated with the relocation.

7)

INDEMNIFICATION AND INSURANCE.

a)

LESSEE shall indemnify and hold LESSOR harmless from and against any and all loss, damage, liability and expense (including, without limitation, reasonable attorney’s fees) which LESSOR shall sustain as a result of (i) the loss of or damage to the EQUIPMENT because of fire, theft, collision, lightning, flood, windstorm, or any other casualty at anytime during the Term hereof, or (ii) the death of or injury to any person or damage to any property as a result, in whole or in part, of the use or maintenance of the EQUIPMENT at anytime during the Term of this Lease.

b)

LESSEE’s obligations pursuant to section 7a above shall be deemed satisfied if LESSEE obtains and maintains or requires site owner to obtain and maintains in full force and effect throughout the Term hereof, at the sole cost and expense of LESSEE or site owner, a policy or policies of insurance issued by an insurer reasonably satisfactory to LESSOR, with premium prepaid thereon, insuring LESSEE against the risks and hazards specified in section 7a-1 hereof, with minimum coverage of $100,000 for property damage ($500,000 for the death of or injury to any one person) and $1,000,000 for any one accident or occurrence.

c)

LESSEE’s failure to obtain the insurance coverage or verify site owners coverage specified in section 7b hereof shall not affect LESSEE’s obligations under this Lease.  The loss of, damage to, or destruction of, the EQUIPMENT shall not terminate this Lease nor, to the extent the LESSOR is actually compensated by insurance paid for by LESSEE, as herein provided, relieve LESSEE from LESSEE’s liability hereunder.  Should LESSEE fail to so procure, maintain or validate the insurance required under this section 7, then LESSOR shall have the option, but not the obligation, to procure or maintain such insurance coverage for the account of LESSEE, and in that vent, LESSEE shall reimburse LESSOR within seven (7) days after receipt of any invoice for any payment made therefor by LESSOR.  Failure to so reimburse LESSOR shall be deemed default under the terms of Section 10 hereof.

8)

TAXES AND OTHER CHARGES.  LESSEE shall pay, when due, any and all use taxes, personal property taxes and any and all other taxes which may be imposed by the ownership, possession, use of operation of the EQUIPMENT at any time during the Term hereof or which are levied against or measured by the gross receipts delivered by LESSOR as a result of the payment of rent by LESSEE hereunder.

9)

USE, OPERATION, ALTERATIONS AND ADDITIONS.  The EQUIPMENT shall at all times during the Term hereof be under the sole and absolute control of LESSEE, subject to the rights of LESSOR, in the event of a default by LESSEE as provided herein.  LESSEE shall comply with any and all laws and regulations applicable to the operation of the EQUIPMENT, and shall be solely responsible for the payment of any and all fines or penalties resulting from its failure to comply therewith.  LESSEE shall maintain the EQUIPMENT at the location identified on Exhibit A, attached hereto, at all times throughout the Term hereof.  LESSEE may from time to time add further parts or accessories to the EQUIPMENT, provided any such addition does not materially affect or materially impair the value of the EQUIPMENT.    ;Any such additions shall remain the property of LESSEE and may be removed at any time, provided such removal does not materially impair the value of the EQUIPMENT.

10)

DEFAULT AND REMEDIES

a)

DEFAULT. The occurrence of any one of the following events shall constitute an event of default by LESSEE:

i)

A default by LESSEE in the payment of any amount due hereunder as and when the same shall become due and the continuance of such default for a period of more than twenty (20) days following Maker’s receipt of written notice of such default requiring the same to be cured; or

ii)

A default by LESSEE in the performance of any of its material obligations under this Lease and the continuance of such default for a period of more than thirty (30) days following Maker’s receipt of written notice of such default requiring the same to be cured; provided, however, that if more than thirty (3) days are reasonably required in order to cure any such default, then no default shall be deemed to have occurred so long as the curing of such default is commenced by LESSEE within such thirty (30) day period and LESSEE thereafter diligently prosecutes the curing of such default to completion; or

iii)

Whenever an involuntary petition shall be filed against LESSEE under any bankruptcy or insolvency law or under the reorganization provisions of any law of like import, or a receiver of LESSEE , or for the property of LESSEE, shall be appointed without the acquiescence of LESSEE and such situation under this section 10a-3 shall continue and remain undischarged or unstayed for an aggregate period of thirty (30) days; or

iv)

Whenever LESSEE shall make an assignment of the property of LESSEE  for the benefit of creditors or shall file voluntary petition under any bankruptcy or insolvency law, or whenever any court of competent jurisdiction shall approve a petition filed by LESSEE under the arrangement provisions of the United States Bankruptcy Act or under the provisions of any law of like import; or

v)

The abandonment of the EQUIPMENT by LESSEE or the discontinuance of the operation of such EQUIPMENT by LESSEE.

b)

REMEDIES.  Upon the occurrence of an event to default under section 10.a. above which is continuing and remains uncured, the LESSOR may, at its option, during the continuance of such event of default:

i)

Terminate this Lease by written notice to LESSEE and recover from LESSEE damages incurred by reason of such default, including the reasonable costs of recovering the EQUIPMENT and reasonable attorney’s fees relating thereto, in which event LESSEE shall immediately surrender the EQUIPMENT to LESSOR, and if LESSEE fails to do so, LESSOR may enter upon its location and take possession of the EQUIPMENT; and in that event, any rights to the EQUIPMENT that LESSEE may possess pursuant to this Lease shall automatically terminate; LESSEE shall have no further right to use of the EQUIPMENT; LESSOR may, without demand or legal process, retake and retain the EQUIPMENT; all rights of LESSEE in and to the location of the installed EQUIPMENT shall be deemed automatically assigned to LESSOR; and LESSEE shall have no further rights to such location whether such rights existed during the Term hereof or arose or were to arise following termination or expiration hereof; or

ii)

Without terminating this Lease, enter upon the location thereof and take possession of the EQUIPMENT and thereupon relet the EQUIPMENT, as LESSEE’s agent, at the best price obtainable by reasonable efforts, and in such event, LESSEE shall be liable to LESSOR for any deficiency between (a) the amount of rental due hereunder plus the reasonable cost to LESSOR of recovering and reletting the EQUIPMENT, including reasonable attorney’s fees, and (b) the rental received by LESSOR from such reletting

11)

SURRENDER.  Except as set forth in section 9 hereof, upon the expiration or earlier termination of this Lease LESSEE shall return the EQUIPMENT to LESSOR in good operating condition, normal wear and tear excepted.

12)

RIGHT OF INSPECTION.  LESSOR shall have the right at all times throughout the Term hereof to inspect the EQUIPMENT whenever and wherever the same shall be located.

13)

WARRANTIES AND CLAIMS THEREUNDER.  LESSOR makes no warranty or representation, expressed or implied, with respect to the EQUIPMENT; provided, however, that the EQUIPMENT shall be subject to any standard warranty of the manufacturers of such EQUIPMENT or components thereof.  LESSOR hereby appoints LESSEE as its agent and attorney-in-fact throughout the Term hereof to assert and enforce, at LESSEE’s sole expense, any claims LESSEE may have as owner of the EQUIPMENT against any vendor, manufacturer or supplier with respect thereto.

14)

ASSIGNMENT.  Neither the LESSEE nor any of the rights hereunder shall be assignable by LESSEE without prior written approval of LESSOR, which consent shall not be unreasonably withheld.  LESSOR shall have the right to sell or assign this Lease, including any or all of LESSOR’s right, title and interest in and to the EQUIPMENT and the rent reserved herein.  In the event of such assignment by LESSOR, the assignee thereof shall thereupon acquire all rights and remedies possessed by or available to LESSOR.  Upon receiving proper notice of any such assignment, LESSEE shall thereafter make any and all rental payments as therein directed.

15)

RIGHT OF FIRST REFUSAL.  In the event LESSOR obtains an offer from a third party for the purchase of the EQUIPMENT, or should LESSOR choose to liquidate the EQUIPMENT, then LESSOR shall thereupon provide LESSEE with written notice of the proposed sale and terms thereof.  LESSEE shall thereafter have thirty (30) days from the date of its receipt of such notice in which to give written notice to LESSOR of its election to purchase the EQUIPMENT upon the same terms and conditions as the third-party offer.  If LESSOR does not receive written notice of such election from LESSEE within such thirty (30) day period, then LESSOR shall be free to sell the EQUIPMENT pursuant to such third-party offer.  Should LESSEE notify LESSOR of its election to purchase, then LESSEE shall have one hundred eighty (180) days to close the sale from the date of the original notice.

16)

OPTION TO SELL AGREEMENT.  Should LESSOR choose to sell the EQUIPMENT to the LESSEE at the end of the Term of the Lease, then LESSOR shall have the right to execute the “Option to Sell Agreement” attached hereto and made a part of this Agreement.  (See Exhibit “B”). Please note that LESSOR shall give LESSEE a written notice prior to the requirement to purchase.  LESSEE shall have 180 days from the date of receipt of the written notice to purchase said EQUIPMENT.

17)

PERSONAL PROPERTY.  The EQUIPMENT is, and at all times throughout the Term hereof remains, personal property, even if all or any portion of the EQUIPMENT becomes affixed or attached in any manner whatsoever to any real property.

18)

ACKNOWLEDGMENT OF DISCRETION.  LESSOR represents and warrants that (a) LESSOR is free to enter into agreement with parties other than LESSEE for the economic exploitation of the EQUIPMENT;  (b) LESSOR was not required to enter into this Lease as a condition to purchasing the EQUIPMENT; and (c) LESSOR has freely and voluntarily entered into this Lease and acknowledges that LESSOR is not entering into or executing this Lease in reliance upon any promise, representation or warranty not contained herein.

19)

NOTICES.  Any and all notices required or permitted hereunder shall be deemed to be sent or delivered when personally delivered to the recipient or when mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the intended recipient at the parties’ respective addresses set forth below their signatures herein below.  Any party may change the address to which notices or other communications hereunder are to be delivered by giving the other party notice in the manner set forth herein.  Any notice required to be made within a stated period of time shall be considered timely mailed if deposited before midnight of the last day of the stated time period, and shall be deemed to have been received by the addressee upon personal delivery to said addressee (if person ally delivered) or within forty-eight (48) hours after such notice shall have been mailed by certified or registered mail, return receipt requested, postage prepaid.

20)

GOVERNING LAW.  This Agreement shall in all respects be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Delaware.

21)

SPECIFIC PERFORMANCE.  Each party acknowledges and agrees that the other party would be damaged irreparably if any provision of this Agreement is not performed in accordance with its specific terms or otherwise is breached.  Accordingly, each party agrees that the other party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to specifically enforce this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the parties and the matter, in addition to any other remedy to which it may be entitled, at law or in equity.

22)

SUBMISSION TO JURISDICTION.  Each party submits to the jurisdiction of any state or federal court sitting in Dover, Delaware, in any action or proceeding arising out of or related to this Agreement; agrees that all claims in respect of the action or proceeding may be heard and determined in any such court; and agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court.  Each party waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto.  Each party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law.

23)

ATTORNEYS’ FEES.  The prevailing party in any action brought to enforce or interpret anyone or more of the terms and provisions of this Lease shall be entitled to recover reasonable attorneys’ fees and all costs of such action from the other party.

24)

MISCELLANEOUS. This Agreement shall be binding upon the parties hereto and their heirs, executors, administrators, successors and assigns.  Wherever possible each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision hereof shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Agreement.  No delay or failure on the part of either party in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by either party of any right or remedy preclude any other rig ht or remedy.  This Agreement and the documents referred to herein constitutes the entire agreement between the parties concerning the subject matter hereof, and any other agreements or understandings of any nature with respect to such matters are hereby superseded and revoked.  This Agreement shall not be modified or amended except in writing signed by both parties.  This Agreement may be executed and delivered in any number of counterparts, all of which when executed and delivered shall have the force and effect of an original.  In construing this Agreement, feminine or neuter pronouns shall be substituted for those masculine in form and vice versa in any place where the context so requires, and plural terms shall be substituted for singular and singular for plural in any place where the context so requires.  The headings in this Agreement are inserted for convenience only and are not a part of the Agreement.

#

IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the date first above written.

Check one:       Individual        Partnership           Corporation           Self-Directed IRA          Trust

                          Joint Tenancy with Rights of Survivorship                 Other: __________________

Lessor   

LESSEE (FERRIS PRODUCTIONS, INC.)

By: ____________________________________     By: ____________________________________

Title: ___________________________________    Title: Manager                                                   .

________________________________________    5631 S 24^th St___________________

Street Address

Street Address

________________________________________     Phoenix, AZ 85040______________________

City, State, Zip Code

City, State, Zip Code

________________________________________      (602) 470-1177_________________________

Phone

Phone

________________________________________      _____________________________________

Date

Date

#

The UNIVERSE ARCADE SYSTEM (EQUIPMENT)

(Exhibit  “A”)

The equipment described herein constitutes _____________________(          ) units of operating arcade systems.

System 1

System 6

Location: ______________________

Location: _____________________

    ______________________

    _____________________

    ______________________

    _____________________

System 2

System 7

Location: ______________________

Location: _____________________

    ______________________

    _____________________

    ______________________

    _____________________

System 3

System 8

Location: ______________________

Location: _____________________

    ______________________

    _____________________

    ______________________

    _____________________

System 4

System 9

Location: ______________________

Location: _____________________

    ______________________

    _____________________

    ______________________

    _____________________

System 5

System 10

Location: ______________________

Location: _____________________

    ______________________

    _____________________

    ______________________

    _____________________

#

OPTION TO SELL AGREEMENT

(Exhibit B to Lease Agreement)

THIS AGREEMENT, made and entered into as of the _________ DAY OF ______________, ______

by and between ______________________ (hereinafter referred to as “LESSOR”), and FERRIS PRODUCTIONS, INC., a Delaware Corporation (hereinafter referred to as “LESSEE”).

THE PARTIES HERETO ACKNOWLEGE THAT THIS AGREEMENT INURES TO THE BENEFIT OF LESSOR, AND THAT LESSOR RETAINS SOLE AND COMPLETE DISCRETION IN DETERMINING WHETHER OR NOT TO EXERCISE THE REQUIREMENTS HEREINAFTER SET FORTH.

WITNESSETH:

WHEREAS, LESSOR is the owner of  ___________________ (       )  coin-operated Universe Arcade Game Equipment (the “EQUIPMENT”) pursuant to that certain PURCHASE AGREEMENT dated  ___________________. _____, as reflected on Invoice Number _______related thereto; and

WHEREAS, LESSOR and LESSEE have heretofore entered into that certain LEASE AGREEMENT (the “LEASE AGREEMENT”) Dated ____________________, _____, bearing LEASE number _________, pursuant to which LESSEE has leased the EQUIPMENT from LESSOR; and

WHEREAS, pursuant to the LEASE AGREEMENT, LESSOR is entitled to require LESSEE to purchase the EQUIPMENT at Six Thousand dollars ($6,000.00) upon termination of the LEASE AGREEMENT; and

WHEREAS, the parties have therefore determined that it would be appropriate and in their mutual best interests to enter into this AGREEMENT in order to evidence the rights of LESSOR and the obligations of LESSEE for the sale and purchase of said EQUIPMENT.

NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained and for other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, the parties agree as follows:

1)

AGREEMENT TO PURCHASE EQUIPMENT.  Subject to the terms and conditions set forth herein below, LESSEE agrees to purchase the EQUIPMENT from LESSOR if LESSOR elects to sell such EQUIPMENT.  If LESSOR desires that LESSEE purchase the EQUIPMENT upon expiration of the LEASE AGREEMENT, then LESSOR shall give written notice (and same to be notarized) to LESSEE of such requirement.  Lessee shall have 180 days from the date of receipt of written notice to purchase EQUIPMENT should LESSOR wish to sell.

2)

Time of the Essence.  Time is of the essence of the AGREEMENT.  If LESSOR shall fail to give written notice to LESSEE as set forth in sections 3 and 4 hereof, then and in that event, LESSOR shall no longer be entitled to require LESSEE to purchase the EQUIPMENT, or any portion thereof, and this AGREEMENT shall thereupon terminate and become a month-to-month lease until notice is received by the LESSEE from the LESSOR.

3)

Purchase Price.  The price to be paid by LESSEE to LESSOR for such EQUIPMENT (the “Purchase Price”) shall be Six Thousand and no/100ths Dollars ($6,000.00) per unit.  The Purchase Price shall be payable by the Lessee’s delivery of a check for the aggregate amount thereof to LESSOR at LESSOR’s address set forth hereinbelow.

4)

Notices.  Any and all notices required or permitted hereunder shall be in writing, notarized and sent to the intended recipient by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to LESSOR:

__________________________________________________.

__________________________________________________.

__________________________________________________.

__________________________________________________.

If to LESSEE:

Ferris Productions, Inc.

5631 S. 24^th St.

Phoenix, AZ. 85040

Each such notice shall be effective as of three (3) business days after such notice or communication is deposited in the United States Mail.  Any party may change the address to which notices or other communications hereunder are to be delivered by giving the other party notice in the manner set forth herein.  Any notice required to be made within a stated period of time shall be considered timely mailed if deposited before midnight of the last day of the stated period.

5)

Governing Law.  This AGREEMENT shall in all respects be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Delaware.

6)

Construction.  The parties have participated jointly in the negotiation of this AGREEMENT. In the event an ambiguity or question of intent or interpretation arises, this AGREEMENT shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this AGREEMENT.  Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise.

7)

Arbitration of Disputes.  Any and all disputes, controversies or claims arising under this AGREEMENT shall be resolved by binding arbitration, which shall be held in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and the arbitration award may be entered as a final judgment in any court having jurisdiction thereof.  Any dispute as to whether an issue is to be resolved by arbitration shall be submitted as part of the arbitration proceeding.  As part of the arbitration award, the prevailing party shall be entitled to recover all costs incurred in connection therewith (including, but not limited to, attorney’s fees and expenses).

8)

MISCELLANEOUS.  This AGREEMENT shall be binding upon the parties hereto and their heirs, executors, administrators, successors and assigns.  Wherever possible each provision of this AGREEMENT shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision hereof shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this AGREEMENT.  No delay or failure on the part of either party in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by either party of any right or remedy preclude any oth er right or remedy.  This AGREEMENT and the documents referred to herein constitute the entire AGREEMENT between the parties concerning the subject matter hereof, and any other agreements or understandings of any nature with respect to such matters are hereby superseded and revoked. This AGREEMENT shall not be modified or amended except in writing signed by both parties. This AGREEMENT may be executed and delivered in any number of counterparts, including facsimile counterparts, all of which when executed and delivered shall have the force and effect of an original.  In construing this AGREEMENT, feminine or neuter pronouns shall be substituted for those masculine in form and vice versa in any place where the context so requires, and plural terms shall be substituted for singular and singular for plural in any place where the context so requires.  The headings in this AGREEMENT are inserted for convenience only and are not a part of the AGREEMENT.

IN WITNESS WHEREOF, the parties have caused this AGREEMENT to be executed on each behalf by its duly authorized officer signatory under seal, all as of the day and year first above written.

LESSEE:  (FERRIS PRODUCTIONS, INC.):

LESSOR:

By: _________________________________

By: ________________________________

Its _________________________________

Its _________________________________

UNIVERSE ARCADE SYSTEM

BILL of SALE

This Bill of Sale is made, executed and delivered this, the _________day of   ____________19___, by ________________________________________ ("Grantor"), to ­­­­­­­­­­­___________________________ _______________________________________  ("Grantee").

For and in consideration of the payment of ten dollars ($10.00) and other good and valuable consideration to Grantor in hand paid by Grantee at or before the execution and delivery hereof, the receipt and sufficiency whereof are hereby acknowledged, Grantor has conveyed, granted, bargained, sold, transferred, assigned, delivered and confirmed, and by this Bill of Sale does convey, grant, bargain, sell, transfer, assign, deliver and confirm unto Grantee, its successors and assigns, forever, all of that certain equipment consisting of coin- operated Universe Arcade System) (hereinafter referred to as the "Equipment") as more particularly set forth on Exhibit A, attached hereto and by reference made a part hereof.

To have and to hold all of said Equipment hereby assigned, transferred and conveyed unto Grantee, its successors and assigns, forever.

Grantor covenants and agrees with Grantee to warrant and defend title to the Equipment sold to Grantee against all and every persons whomsoever, and warrants that the title transferred is good and its transfer rightful.

Grantor hereby warrants that the Equipment being sold hereby is in working order and will be free of any material defect for the period of sixty (60) days following the date hereof. Each item of Equipment is free from defects (patent and latent), has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear) and is suitable for the purposes for which it presently is used.

And, for the consideration aforesaid, Grantor, by this Bill of Sale, does covenant with Grantee, its successors and assigns, that Grantor will do, execute and deliver, or will cause to be done, executed and delivered, all such further acts, transfers, assignments and conveyances for the better assuring, conveying and confirming unto Grantee, its successors and assigns, all the Equipment hereby assigned, transferred and conveyed as Grantee, its successors or assigns, shall reasonably require.

This Bill of Sale and the covenants and agreement herein shall be binding upon Grantor, its successors and assigns, and shall inure to the benefit of Grantee, its successors and assigns.

In witness whereof, the parties have caused this Bill of Sale to be executed on each behalf by its duly authorized officer signatory under seal, all as of the day and year first above written.

Grantor: _________________________________  Grantee: ___________________________________

By ___________________________________        By    ______________________________________

______________________________________        _________________________________________

Its

Its

#

EX-99

Exhibit 99.2

COMMERCIAL LEASE AGREEMENT

This Commercial Lease Agreement ("Lease") is made and effective August 4, 2000, by and between Ferris Holdings, L.L.C., an Arizona Limited Liability Company ("Landlord") and Ferris Productions, Inc., a Delaware Corporation ("Tenant").

Landlord is the owner of land and improvements commonly known and numbered as 5631 S. 24th St., Phoenix, AZ 85040 and legally described as follows (the "Building"): 18,000 Sq. Ft. free-standing building and all associated land.

Landlord makes available for lease a portion of the Building designated as 5631 S. 24th St. (the "Leased Premises").

Landlord desires to lease the Leased Premises to Tenant, and Tenant desires to lease the Leased Premises from Landlord for the term, at the rental and upon the covenants, conditions and provisions herein set forth.

THEREFORE, in consideration of the mutual promises herein, contained and other good and valuable consideration, it is agreed:

1. Term.
A. Landlord hereby leases the Leased Premises to Tenant, and Tenant hereby leases the same from Landlord, for an "Initial Term" beginning August 4, 2000 and ending February 4, 2026. Landlord shall use its best efforts to give Tenant possession as nearly as possible at the beginning of the Lease term. If Landlord is unable to timely provide the Leased Premises, rent shall abate for the period of delay. Tenant shall make no other claim against Landlord for any such delay.

B. Tenant may renew the Lease for one extended term of one year. Tenant shall exercise such renewal option, if at all, by giving written notice to Landlord not less than ninety (90) days prior to the expiration of the Initial Term. The renewal term shall be at the rental set forth below and otherwise upon the same convenants, conditions and provisions as provided in this Lease.

2. Rental.
Tenant will provide the funds for the deposit on the Building and all fees associated with obtaining the Building. In exchange for this, Tenant will receive rental rates ‘at cost’ from Landlord. ‘At cost’ rental rates means that Tenant shall pay to Landlord during the Initial Term rental fees equal to all expenses relating to the building, including, but not limited to: mortgage, taxes, fees, maintenance, and improvements. Payments will be 12 per year, unless otherwise agreed. Each installment payment shall be due in advance on the first day of each calendar month during the lease term to Landlord at 1941 S. Brighton, Mesa, AZ 85208 or at such other place designated by written notice from Landlord or Tenant. The rental payment amount for any partial calendar months included in the lease term shall be prorated on a daily basis. Tenant shall also pay to Landlord a "Security Deposit" in the amount of $500.

3. Use
The Leased Premises may be used and occupied by Tenant for any lawful purpose which complies with applicable zoning ordinances. Notwithstanding the forgoing, Tenant shall not use the Leased Premises for the purposes of storing, manufacturing or selling any explosives, flammables or other inherently dangerous substance, chemical, thing or device.

4. Sublease.
Tenant shall have the right to sublease up to, but not exceeding, 49% of the Leased Premises, with Landlord's consent, such consent shall not to be unreasonably withheld or delayed. If Tenant does sublease, Landlord must approve the lease agreement for sublease.

5. Repairs.
During the Lease term, Tenant shall make, at Tenant's expense, all necessary repairs to the Leased Premises. Repairs shall include such items as routine repairs of floors, walls, ceilings, and other parts of the Leased Premises damaged or worn through normal occupancy, including major mechanical systems or the roof, subject to the obligations of the parties otherwise set forth in this Lease.

6. Alterations and Improvements.
Tenant, at Tenant's expense, shall have the right following Landlord's consent to remodel, redecorate, and make additions, improvements and replacements of and to all or any part of the Leased Premises from time to time as Tenant may deem desirable, provided the same are made in a workmanlike manner and utilizing good quality materials. Tenant shall have the right to place and install personal property, trade fixtures, equipment and other temporary installations in and upon the Leased Premises, and fasten the same to the premises. All personal property, equipment, machinery, trade fixtures and temporary installations, whether acquired by Tenant at the commencement of the Lease term or placed or installed on the Leased Premises by Tenant thereafter, shall remain Tenant's property free and clear of any claim by Landlord. Tenant shall have the right to remove the same at any time during the term of this Lease provided that all damage to the Leased Premises caused by such removal shall be repaired by Tenant at Tenant's expense.

7. Property Taxes.
Tenant shall pay, prior to delinquency, all general real estate taxes and installments of special assessments coming due during the Lease term on the Leased Premises, and all personal property taxes with respect to Tenant's personal property, if any, on the Leased Premises.

8. Insurance.
A. If the Leased Premises or any other party of the Building is damaged by fire or other casualty resulting from any act or negligence of Tenant or any of Tenant's agents, employees or invitees, rent shall not be diminished or abated while such damages are under repair, and Tenant shall be responsible for the costs of repair not covered by insurance.

B. Landlord shall maintain fire and extended coverage insurance on the Building and the Leased Premises in such amounts as Landlord shall deem appropriate. Tenant shall be responsible, at its expense, for fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Leased Premises.

C. Tenant and Landlord shall, each at its own expense, maintain a policy or policies of comprehensive general liability insurance with respect to the respective activities of each in the Building with the premiums thereon fully paid on or before due date, issued by and binding upon some insurance company approved by Landlord, such insurance to afford minimum protection of not less than $1,000,000 combined single limit coverage of bodily injury, property damage or combination thereof. Landlord shall be listed as an additional insured on Tenant's policy or policies of comprehensive general liability insurance, and Tenant shall provide Landlord with current Certificates of Insurance evidencing Tenant's compliance with this Paragraph. Tenant shall obtain the agreement of Tenant's insurers to notify Landlord that a policy is due to expire at least (10) days prior to such expiration. Landlord shall not be required to maintain insurance against thefts within the Leased Premises or the Building.

9. Utilities.
Tenant shall pay all charges for water, sewer, gas, electricity, telephone and other services and utilities used by Tenant on the Leased Premises during the term of this Lease unless otherwise expressly agreed in writing by Landlord. Tenant acknowledges that the Leased Premises are designed to provide standard office use electrical facilities and standard office lighting. Tenant shall not use any equipment or devices that utilizes excessive electrical energy or which may, in Landlord's reasonable opinion, overload the wiring or interfere with electrical services to other tenants.

10. Signs.
Following Landlord's consent, Tenant shall have the right to place on the Leased Premises, at locations selected by Tenant, any signs which are permitted by applicable zoning ordinances and private restrictions. Landlord may refuse consent to any proposed signage that is in Landlord's opinion too large, deceptive, unattractive or otherwise inconsistent with or inappropriate to the Leased Premises or use of any other tenant. Landlord shall assist and cooperate with Tenant in obtaining any necessary permission from governmental authorities or adjoining owners and occupants for Tenant to place or construct the foregoing signs. Tenant shall repair all damage to the Leased Premises resulting from the removal of signs installed by Tenant.

11. Entry.
Landlord shall have the right to enter upon the Leased Premises at reasonable hours to inspect the same, provided Landlord shall not thereby unreasonably interfere with Tenant's business on the Leased Premises.

12. Parking.
During the term of this Lease, Tenant shall have the non-exclusive use in common with Landlord, other tenants of the Building, their guests and invitees, of the non-reserved common automobile parking areas, driveways, and footways, subject to rules and regulations for the use thereof as prescribed from time to time by Landlord. Landlord reserves the right to designate parking areas within the Building or in reasonable proximity thereto, for Tenant and Tenant's agents and employees. Tenant shall provide Landlord with a list of all license numbers for the cars owned by Tenant, its agents and employees.

13. Building Rules.
Tenant will comply with the rules of the Building adopted and altered by Landlord from time to time and will cause all of its agents, employees, invitees and visitors to do so; all changes to such rules will be sent by Landlord to Tenant in writing. The initial rules for the Building are attached hereto as Exhibit "A" and incorporated herein for all purposes.

14. Damage and Destruction.
Subject to Section 8 A. above, if the Leased Premises or any part thereof or any appurtenance thereto is so damaged by fire, casualty or structural defects that the same cannot be used for Tenant's purposes, then Tenant shall have the right within ninety (90) days following damage to elect by notice to Landlord to terminate this Lease as of the date of such damage. In the event of minor damage to any part of the Leased Premises, and if such damage does not render the Leased Premises unusable for Tenant's purposes, Landlord shall promptly repair such damage at the cost of the Landlord. In making the repairs called for in this paragraph, Landlord shall not be liable for any delays resulting from strikes, governmental restrictions, inability to obtain necessary materials or labor or other matters which are beyond the reasonable control of Landlord. Tenant shall be relieved from paying rent and other charges during any portion of the Lease term that the Leased Premises are inoperable or unfit for occupancy, or use, in whole or in part, for Tenant's purposes. Rentals and other charges paid in advance for any such periods shall be credited on the next ensuing payments, if any, but if no further payments are to be made, any such advance payments shall be refunded to Tenant. The provisions of this paragraph extend not only to the matters aforesaid, but also to any occurrence which is beyond Tenant's reasonable control and which renders the Leased Premises, or any appurtenance thereto, inoperable or unfit for occupancy or use, in whole or in part, for Tenant's purposes.

15. Default.
If default shall at any time be made by Tenant in the payment of rent when due to Landlord as herein provided, and if said default shall continue for fifteen (15) days after written notice thereof shall have been given to Tenant by Landlord, or if default shall be made in any of the other covenants or conditions to be kept, observed and performed by Tenant, and such default shall continue for thirty (30) days after notice thereof in writing to Tenant by Landlord without correction thereof then having been commenced and thereafter diligently prosecuted, Landlord may declare the term of this Lease ended and terminated by giving Tenant written notice of such intention, and if possession of the Leased Premises is not surrendered, Landlord may reenter said premises. Landlord shall have, in addition to the remedy above provided, any other right or remedy available to Landlord on account of any Tenant default, either in law or equity. Landlord shall use reasonable efforts to mitigate its damages.

16. Quiet Possession.
Landlord covenants and warrants that upon performance by Tenant of its obligations hereunder, Landlord will keep and maintain Tenant in exclusive, quiet, peaceable and undisturbed and uninterrupted possession of the Leased Premises during the term of this Lease.

17. Condemnation.
If any legally, constituted authority condemns the Building or such part thereof which shall make the Leased Premises unsuitable for leasing, this Lease shall cease when the public authority takes possession, and Landlord and Tenant shall account for rental as of that date. Such termination shall be without prejudice to the rights of either party to recover compensation from the condemning authority for any loss or damage caused by the condemnation. Neither party shall have any rights in or to any award made to the other by the condemning authority.

18. Subordination.
Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust or other lien presently existing or hereafter arising upon the Leased Premises, or upon the Building and to any renewals, refinancing and extensions thereof, but Tenant agrees that any such mortgagee shall have the right at any time to subordinate such mortgage, deed of trust or other lien to this Lease on such terms and subject to such conditions as such mortgagee may deem appropriate in its discretion. Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any mortgage, deed of trust or other lien now existing or hereafter placed upon the Leased Premises of the Building, and Tenant agrees upon demand to execute such further instruments subordinating this Lease or attorning to the holder of any such liens as Landlord may request. In the event that Tenant should fail to execute any instrument of subordination herein required to be executed by Tenant promptly as requested, Tenant hereby irrevocably constitutes Landlord as its attorney-in-fact to execute such instrument in Tenant's name, place and stead, it being agreed that such power is one coupled with an interest. Tenant agrees that it will from time to time upon request by Landlord execute and deliver to such persons as Landlord shall request a statement in recordable form certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as so modified), stating the dates to which rent and other charges payable under this Lease have been paid, stating that Landlord is not in default hereunder (or if Tenant alleges a default stating the nature of such alleged default) and further stating such other matters as Landlord shall reasonably require.


19. Security Deposit.
The Security Deposit shall be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this Lease, it being expressly understood that the Security Deposit shall not be considered an advance payment of rental or a measure of Landlord's damages in case of default by Tenant. Unless otherwise provided by mandatory non-waivable law or regulation, Landlord may commingle the Security Deposit with Landlord's other funds. Landlord may, from time to time, without prejudice to any other remedy, use the Security Deposit to the extent necessary to make good any arrearages of rent or to satisfy any other covenant or obligation of Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, the balance of the Security Deposit remaining after any such application shall be returned by Landlord to Tenant. If Landlord transfers its interest in the Premises during the term of this Lease, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit.


20. Notice.
Any notice required or permitted under this Lease shall be deemed sufficiently given or served if sent by United States certified mail, return receipt requested, addressed as follows:

If to Landlord to:

Ferris Holdings, L.L.C.
1941 S. Brighton
Mesa, AZ 85208

If to Tenant to:

Ferris Productions, Inc.
4844 S. 40th St.
Phoenix, AZ, 85040

Landlord and Tenant shall each have the right from time to time to change the place notice is to be given under this paragraph by written notice thereof to the other party.

21. Brokers.
Tenant represents that Tenant was not shown the Premises by any real estate broker or agent and that Tenant has not otherwise engaged in, any activity which could form the basis for a claim for real estate commission, brokerage fee, finder's fee or other similar charge, in connection with this Lease.

22. Waiver.
No waiver of any default of Landlord or Tenant hereunder shall be implied from any omission to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated. One or more waivers by Landlord or Tenant shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition.

23. Memorandum of Lease.
The parties hereto contemplate that this Lease should not and shall not be filed for record, but in lieu thereof, at the request of either party, Landlord and Tenant shall execute a Memorandum of Lease to be recorded for the purpose of giving record notice of the appropriate provisions of this Lease.

24. Headings.

The headings used in this Lease are for convenience of the parties only and shall not be considered in interpreting the meaning of any provision of this Lease.

25. Successors.
The provisions of this Lease shall extend to and be binding upon Landlord and Tenant and their respective legal representatives, successors and assigns.

26. Consent.
Landlord shall not unreasonably withhold or delay its consent with respect to any matter for which Landlord's consent is required or desirable under this Lease.

27. Performance.
If there is a default with respect to any of Landlord's covenants, warranties or representations under this Lease, and if the default continues more than fifteen (15) days after notice in writing from Tenant to Landlord specifying the default, Tenant may, at its option and without affecting any other remedy hereunder, cure such default and deduct the cost thereof from the next accruing installment or installments of rent payable hereunder until Tenant shall have been fully reimbursed for such expenditures, together with interest thereon at a rate equal to the lessor of twelve percent (12%) per annum or the then highest lawful rate. If this Lease terminates prior to Tenant's receiving full reimbursement, Landlord shall pay the unreimbursed balance plus accrued interest to Tenant on demand.

28. Compliance with Law.
Tenant shall comply with all laws, orders, ordinances and other public requirements now or hereafter pertaining to Tenant's use of the Leased Premises. Landlord shall comply with all laws, orders, ordinances and other public requirements now or hereafter affecting the Leased Premises.

29. Final Agreement.
This Agreement terminates and supersedes all prior understandings or agreements on the subject matter hereof. This Agreement may be modified only by a further writing that is duly executed by both parties.

IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written.


Ferris Holdings, L.L.C. Ferris Productions, Inc.



By: ______________________________ By: ______________________________
Robert D. Ferris Bob Ferris
Manager President