SB-2

As filed with the Securities and Exchange Commission on January 22, 2007

Registration No. 33-______

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)

2500 CityWest Boulevard, Suite 300

Houston, Texas 77042

(832) 242-1100

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING

AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

2500 CityWest Boulevard, Suite 300

Houston, Texas 77042

(832) 242-1100

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

J. David Rogers

2500 CityWest Boulevard, Suite 700

Houston, Texas 77042

(281)-493-3849

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING

AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:

DAVID C. THOMAS, ESQ.

Pryor, Cashman, Sherman, & Flynn LLP

410 Park Avenue, 10th floor

New York, New York 10022

(212) 421-4100

(212) 798-6925 fax

COUNSEL TO ISSUER

Approximate date of commencement of proposed sale to public: as soon as practicable after the registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   [X]

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)	18,500,000	$0.04	$740,000	$79.18
Common Stock, $.005 Par Value (3)	15,583,741	$0.04	$623,350	$66.70
Total	34,083,741			$145.88

(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 $0.04 per share, which was the average of the bid and ask prices for our common stock as reported on the OTC Bulletin Board on January 15, 2007, rounded to two decimal places.

(2) Consists of up to 18,500,000 shares which may be issued to holders of our convertible subordinated debentures issued on February 25, 2005.

(3) Consists of 15,583,741shares 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.

2500 CityWest Boulevard, Suite 300,

Houston, Texas 77042

(832) 242-1100

34,083,741 Shares of Common Stock

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

This prospectus relates to the sale by the selling shareholders of up to 34,083,741 shares 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,

·

15,583,741 shares are presently outstanding; and

·

up to 18,500,000 shares are issuable to Dutchess Private Equities Fund Ltd., as holder of our convertible subordinated debenture issued on August 1, 2005.

We will receive no proceeds from the sale of.the shares by the selling shareholders.  

Our common stock is quoted on the OTC Electronic Bulletin Board under the symbol “VTSI.”  On January 15, 2007, the last reported sale price of the common stock on the OTC Bulletin Board was $0.04 per share.

Investing in the common stock involves a high degree of risk. The opinion of our independent auditor for the year ended December 31, 2005 expressed substantial doubt as to our ability to continue as a going concern.   You should not invest in the common stock unless you can afford to lose your entire investment.  See "Risk Factors" on page 5.

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 January 22, 2007.

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:

·

we have had significant operating losses since starting business and we expect to continue losing money for some time;

·

we expect competition from companies that are much larger and better financed than we are;

·

we cannot be sure our products will be accepted in the marketplace; and

·

we are in default under several of our equipment lease financing agreements, and are subject to an IRS tax lien for unpaid payroll taxes.

Dutchess Private Equities Fund Ltd. is the successor to Dutchess Private Equity Fund, L.P. and Dutchess Private Equity Fund II, L.P., the entities to which we originally issued our convertible debentures. In this prospectus, we refer to VirTra Systems, Inc. as "we" or "VirTra Systems," and to Dutchess Private Equities Fund Ltd. and its predecessors 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.  Our revenues for the fiscal year ended December 31, 2005 were $977,358, and our net loss was $1,995,056. Our revenue for the nine months ended September 30, 2006 was $1,255,827, and our loss for that period was $414,133.  As of September 30, 2006, our liquidity position was extremely precarious.  We had current liabilities of $3,536,551 and we had only $390,018 in current assets available to meet those liabilities.

You should read the entire prospectus carefully, including the "Risk Factors" section.

Our Business

Our principal business began in 1993 with the organization of Ferris Productions, Inc.  Ferris designed, developed, distributed, and operated virtual reality products for the entertainment, simulation, promotion, and education markets.  “Virtual reality” is a generic term associated with computer systems that create a real-time visual/audio/haptic (touch and feel) experience.  Virtual reality immerses participants into a three-dimensional real-time synthetic environment generated or controlled by one (or several) computer(s).  In September of 2001, Ferris merged into GameCom, Inc., a publicly held Texas company whose principal business at the time was the development and marketing of an internet-enabled video game system.  Our historic areas of application have included the entertainment/amusement, advertising/promotion, and training/simulation markets.

Our “immersive 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 filmed or computer-generated imagery, and allow the participant to interact with what he or she sees using simple controls and body motions.

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Virtual reality products have traditionally employed 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.

We maintain our corporate office at 2500 CityWest Boulevard, Suite 300, Houston, Texas 77042, and our telephone number is (832) 242-1100.  We also maintain engineering, technical, and production offices, and a demonstration facility, at 1406 West 14^th Street, Tempe, Arizona 85281, with a phone number of (480) 968-1488.

The Offering

This prospectus relates to 18,500,000 shares of our common stock that we have reserved for possible issuance to Dutchess as holders of three-year eight percent convertible debentures in the principal amount of $367,606.  It also covers the sale of shares acquired by the other investors identified above as a result of earlier private placement transactions.

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 $0.33 or 80 percent of the lowest closing bid price for our common stock during the 15 full trading days prior to the dates the holders give us their notices of conversion

The selling shareholders are:

Shareholder	Number of Shares
Dutchess Private Equities Fund Ltd.	18,500,000
B. Fred Adam	449,640
Robert Adam	449,640
Bernard (Biff) Adam, III	604,320
Albert Braden	250,000
Philip Burns	1,515,152
Donald Fincher	899,280
Pearl Fincher	899,280
Ira Hochroth	576,923
Judy Holt	250,000
Charles Jud	1,500,000
Michael Jud	1,500,000
Michael & Jerlyn Jud	750,000
Gabrielle Lumi	375,000
Arthur & Edith Luskin	303,030
Douglas MacPherson	242,424
Joanne MacPherson	121,212
Tom Meneley	1,798,560
Shelly Meyers	1,500,000
Hall Whitley, III	899,280
Total	34,083,741

Key Facts

Common Stock Offered	Up to 34,083,741shares by selling shareholders. (1)
Offering Price	Prevailing market prices.

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Common Stock Outstanding Before This Offering	96,732,599
Risk Factors	The securities offered involve a high degree of risk.  See "Risk Factors."
OTC Bulletin Board Common Stock Symbol	“VTSI”

 (1) Includes

·

up to 18,500,000 shares that we may issue to Dutchess as the holder of our convertible subordinated debentures upon conversion of those debentures; and

·

15,583,741 shares that we previously issued to accredited investors and 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,		Nine Months Ended September 30,
	2005	2004	2006	2005
Revenue	$977,358	$1,328,180	$1,255,827	$457,883
Loss from operations	(1,598,487)	(2,352,535)	(636,443)	(1,078,068)
Net income (loss)	(1,995,056)	1,566,091	(414,133)	(1,115,287)
Income (loss) per common share (basic)	(0.03)	0.03	0.00	0.02
Weighted average number of common shares outstanding	62,221,809	51,675,342	88,237,504	61,326,894

Balance Sheet Data:
	September 30, 2006
Working capital (deficit)	$(3,138,533)
Total assets	651,415
Total liabilities	3,538,410
Shareholders' equity (deficit)	(2,886,994)

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

We expect sales of our advertising and promotion virtual reality products to be strongly affected by general business trends. A decline in business activity could reduce our margins and our prospects of becoming profitable

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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 or promotion.  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 law enforcement and defense-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. Our patents and patent applications offer only limited protection from competition from these other companies.

Although we have received a patent, have an exclusive license on a patent, and have several patent applications pending, covering our most valuable virtual reality technology in the training/simulation market, that patent, the license, and the other patents if 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.   That competition could exert downward pressure on the price we could charge for our products, making it more difficult for us to become profitable.

Our operating results may fluctuate significantly and may be difficult to predict. Failure to meet the expectations of investors could cause our stock price to decline.

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;

·

military and law enforcement budgets and budgeting cycles, which may fluctuate to the effects of a wartime economy;

·

the announcement or introduction of new and/or competing products in our markets; 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 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 military and law-enforcement personnel. Reductions or slowdowns in funding could reduce our ability to meet our obligations as they come due.

The major application of our new line of training simulators is for situational awareness and firearms training for law enforcement and military personnel.  We have unveiled these simulators only within the past 40 months, and have begun penetrating the market with sales to foreign and domestic law enforcement agencies ($387,004 and $298,500, respectively), the U.S. Air Force ($526,628), the U.S. Army ($365,769), and a classified agency within the U.S. Department of Defense ($455,261).  We have received purchase orders for more contracts, but not all of these contracted sales have yet been booked as accounting revenue, as the income may not have been fully earned. Fourteen  of these  simulator units have been fully installed, forty have been shipped or are awaiting delivery, while others are in various stages of production and contracting.   

We currently have other additional legally-binding purchase orders outstanding.  In our business, the concept of "firm orders" is not completely meaningful. Frequently we receive an oral commitment to purchase units subject to the availability of the required funding. When the funding is received by the agency it places a purchase order and

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we deliver against that purchase order. For example, we have received an oral commitment for a large order from one branch of the military, subject to passage of the supplemental appropriation recently approved by Congress, and funding being available under that appropriation.  Based upon our continuing dialogue with, and oral commitments from, representatives from that branch, we expect purchase orders for that large order in the near future, but, as of the date of this prospectus, we have not received it. We cannot give assurance that interest in these simulators will be long-lived, that funds will be budgeted to acquire more of our products for that purpose, or that we will be selected to supply additional training simulators.  In addition, it is not uncommon for expected contracts for which we have incurred significant marketing costs to be delayed until the required funds have been appropriated .  Delays in funding can severely reduce our ability to meet our obligations as they come due.  

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

We estimate our current "burn rate" -- the amount necessary to sustain our operations -- at approximately $120,000 per month, or $1,440,000 per year. 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 company.  We expect that the majority of these funds will come from institutional financing calling for advances against the proceeds of purchase order contracts we receive. However, if we are unable to obtain contract financing, we will need to seek financing from other sources.  If we raise funds through other sources, such as convertible preferred stock or debentures 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 ter ms, 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.

Our past inability to pay our debts as they come due may make it difficult or impossible to obtain a bank loan in the absence of security arrangements and/or personal guarantees from management.

Our history of non-payment may make it difficult for us to get future bank financing for our operations on an unsecured basis or without personal guarantees from our officers. While we believe that financing of our expected purchase orders will be available on a secured basis, we cannot give any assurance that this is the case. We may not be able to borrow enough to carry out our business plan if institutional financing is not available.

We expect our stock price to be volatile. As a result, investors could suffer greater market losses in a down market than they might experience with a more stable stock. Volatility in our stock may also increase the risk of having to defend a securities class action, which could be expensive and divert management's attention from managing our business.

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 training/simulation and advertising promotion fields.

·

sales of common stock we have made to finance operations.

The stock markets generally, and the OTC 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 company.  In

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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.

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

To date, we have incurred significant losses. At December 31, 2005, our accumulated deficit was $13,748,872 and our stockholders’ deficit was $3,663,169.  At September 30, 2006, our accumulated deficit was $14,163,005 and our stockholders’ deficit was $2,886,994.

For the year ended December 31, 2005, we lost $1,995,056.  For the nine month period ended the September 30, 2006, we had a net loss of $414,133.  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 $2,500,000 annually.

We depend heavily on the continued service of our chief executive officer and our president. Loss of the services of either of them could adversely affect our prospects.

We place substantial reliance upon the efforts and abilities of Major General Perry V. Dalby (USA-Retired), our chief executive officer, and on the technical capabilities of Bob Ferris, our president.  The loss of General Dalby or Mr. Ferris' services could have a serious adverse effect on our business, operations, revenues, or prospects.  We have an employment agreement with General Dalby which expires in 2008, and prohibits him from competing with us for a period of two years after the contract terminates. We do not currently have an employment agreement with Mr. Ferris, nor do we maintain any key man insurance on his or General Dalby’s life, and we do not intend to maintain any key man insurance for the immediate future.

We are in default on certain equipment leases and shareholder promissory notes. If these leaseholders and note holders are successful in suing us we may have to curtail our operations, making it difficult to reach a profitable level of operations.

We previously operated virtual reality entertainment centers in a number of theme parks.  We leased some of the equipment needed to operate these entertainment centers from approximately 140 leaseholders.  In October of 2001 we told all of the leaseholders that we were suspending payments on their leases.  Further, we previously had entered into promissory notes with approximately 14 shareholders.  We were successful with a debt-to-equity conversion plan in December of 2004 with the holders of approximately 90% of the combined leaseholders/noteholders converting lease obligation to common stock. However, we remain in default with the remainder -- 19 unconverted leaseholder investments in default as of December 31 2006, representing $257,000 in principal, and $187,065 in accrued interest, and we have a judgment against us from a noteholder, representing an additional $121,386 in principal amount and interest.

We owe the IRS $759,971 in payroll tax liabilities, which could lead to a seizure of our assets by the IRS.

As of September 30, 2006, we had $893,903 accrued for various payroll tax liabilities.  In May 2006, we received notices from the IRS of tax liens that have been filed related to these accrued amounts, and of their intent to levy. A seizure of some of our assets by the IRS could make it difficult or impossible for us to complete some of our existing contracts, resulting in substantial losses. On November 5, 2006, the IRS appropriated $142,750 in receipts due us from a customer, resulting in delays in delivery to other customers.

It is difficult to predict the impact of our proposed marketing efforts. If these efforts are unsuccessful we may not earn enough revenue to become profitable.

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Our success will depend on adequate marketing resources.  Our marketing plan includes attending trade shows and making private demonstrations, advertising and promotional materials, advertising campaigns in both print and broadcast media, cooperative marketing arrangements with the advertising industry, and other complimentary training/simulation and advertising/promotion-related operations.  We cannot give any assurance that these marketing efforts will be successful. If they are not, revenues may be insufficient to cover our fixed costs and we may not become profitable.

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. As a result, investors will have only a limited voice in determining our future.

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.  However, the sales of common stock during 2006 have significantly diluted the ownership held by the officers and directors of the company.

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. As a result, investors may find it difficult to sell any significant amounts of our stock.

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 the major source of our operational funding over the next 36 months will be short-term, non-bank instutition financing based on anticipated large military contracts.  We also intend to require substantial up-front payments in our contracts for delivery of training simulators and custom advertising/promotional virtual reality applications. However, we may need additional financing to fully implement our business plan.  We cannot give any assurance that this additional financing could be obtained on attractive terms, or at all. 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. If we are unable to continue improving our products to meet competitive conditions our revenues may suffer.

Both virtual reality technology, and technologies in the training/simulation and advertising/promotion markets, changes 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. Failure to continue improving our product lines could lead to lost revenue as customers selected more technologically advanced offerings from our competitors.

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

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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 trading of securities listed on an exchange such as AMEX or Nasdaq Small Cap, we intend to try to list our shares on one of those exchanges in the future but that won’t be possible until we reach a certain size, and that could take several years.. However, we cannot give any assurance that an application for listing on either of such exchanges 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 regulations. These regulations could make it more difficult for you to sell shares you acquire in the offering.

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.

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

In addition to the 750,000 warrants held by Dutchess and the 496,703 contested warrants held by Swartz, our directors and officers hold options to buy our shares, as indicated above.  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 96,732,599 shares of common stock outstanding as of December 31 2006, 21,438,061 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 upon conversion of the convertible debentures, 75,294,538 shares of common stock would be freely tradable without restriction, unless held by our affiliates.

If all shares covered by this prospectus are resold in the public market, there will be an additional 18,500,000 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, although amounts converted are limited to a percentage of prior period trading activity

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. As a result, the price of our common stock may decline as the debenture holders sell their shares.

The common stock we issue upon conversion of our convertible debentures will be issued at values at least 20 percent lower than the lowest closing bid price for our common stock during the 15 trading days before the date we get notice of a conversion.  These discounted conversion prices and sales could cause the price of our common stock to decline.

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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 covered by this prospectus, which means that up to 34,083,741 shares of our common stock, the number of shares being registered in this offering, may be sold.  Those sales may cause our stock price to decline.

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.

Selling Shareholders

The following table presents information regarding the selling shareholders.  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 Sold in Offering	Percentage of Outstanding Shares Beneficially Owned After Offering
Dutchess Private Equities Fund II, L.P. (1)	19,750,000	20.4%	18,500,000	1.3%
B. Fred Adam	449,640	0.5%	449,640	-
Robert Adam	449,640	0.5%	449,640	-
Bernard (Biff) Adam, III	604,320	0.6%	604,320	-
Albert Braden	250,000	0.3%	250,000	-
Philip Burns	1,515,152	1.6%	1,515,152	-
Donald Fincher	899,280	0.9%	899,280	-
Pearl Fincher	899,280	0.9%	899,280	-
Ira Hochroth	776,923	0.8%	776,923	-
Judy Holt	250,000	0.3%	250,000	-
Charles Jud	1,500,000	1.6%	1,500,000	-
Michael Jud	1,500,000	1.6%	1,500,000	-
Michael & Jerlyn Jud	750,000	0.8%	750,000	-
Gabrielle Lumi	375,000	0.4%	375,000	-
Arthur & Edith Luskin	803,030	0.8%	803,030	-
Douglas MacPherson	242,424	0.3%	242,424	-
Joanne MacPherson	121,212	0.1%	121,212	-
Tom Meneley	1,798,560	1.9%	1,798,560	-
Shelly Meyers	1,500,000	1.6%	1,500,000	-
Hall Whitley, III	899,280	0.9%	899,280	-

(1) Includes 1,250,000 shares issuable on exercise of warrants and 18,500,000 shares issuable upon conversion of principal, interest and penalties on our 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

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shares held prior to the offering by holders of convertible subordinated debentures, we have assumed that the applicable conversion price will be $0.032, based on the priceof our common stock on January 15, 2007.   The conversion price may be lower than that assumed price.  As a result, the numbers of shares shown in this table may not correspond to those shown under the caption "The Offering." Although we have included in the shares beneficially owned by Duchess before the offering all shares that Duchess has a right to acquire within 60 days, the terms of the underlying instruments preclude Dutchess from converting debentures or exercising warrants if the conversion or exercise would cause Duchess to own more than 4.99% of our outstanding common stock.

Michael A. Novielli and Douglas H. Leighton serve as directors of Dutchess Private Equities Fund Ltd.

Use of Proceeds

We will not receive any proceeds from the sale of the shares by the selling security holders.

Capitalization

The following table shows our total capitalization as of September 30, 2006.  

Common stock, $0.005 par value; 100,000,000 shares authorized, 90,597,461 issued and outstanding	$       452,987
Additional paid-in capital	10,693,024
Accumulated deficit	($14,163,005)
Common stock committed for issuance	$130,000
Total capitalization	($ 2,886,994)

Plan of Distribution

Registration Rights

We granted registration rights to Dutchess as the holders of our convertible subordinated debentures for the shares they may receive if they convert the debentures.   

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' 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 our registration rights agreement, other related agreements, or the registration statement.

Net Proceeds

We cannot predict the total amount of proceeds we will raise in this transaction. However, we expect to incur expenses of approximately $16,000 consisting primarily of professional fees incurred in connection with registering 34,883,741 shares in this offering.

Manner of Sale

The selling shareholders have each told us they intend to sell the common stock covered by this prospectus from time to time on the OTC Bulletin Board 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.

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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 $16,000.  We will not receive any proceeds from the sale of any of the shares of common stock by the selling shareholders. We may, however, receive proceeds from the sale of common stock under the warrants.

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.  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 amendm ent to the accompanying registration statement must be filed with the Securities and Exchange Commission.

Price Range of Common Stock

Our common stock is quoted under the symbol "VTSI" on the OTC Electronic Bulletin Board.  The following table sets forth the high and low bid prices for shares of our common stock for 2004, 2005 and the first, second, third and fourth quarters of 2006 through January 15, 2007, as reported by the OTC Electronic Bulletin Board. Quotations reflect inter dealer prices, without retail markup, mark down, or commission, and may not represent actual transactions.

YEAR	PERIOD	HIGH	LOW
2004
	First Quarter	0.35	0.20
	Second Quarter	0.43	0.24
	Third Quarter	0.42	0.28
	Fourth Quarter	0.46	0.28
2005
	First Quarter	0.43	0.22
	Second Quarter	0.30	0.13
	Third Quarter	0.24	0.11
	Fourth Quarter	0.20	0.10
2006
	First Quarter	0.15	0.08
	Second Quarter	0.10	0.03
	Third Quarter	0.08	0.02
	Fourth Quarter	0.12	0.03
2007	First Quarter (through 1/15/07)	0.05	0.04

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As of December 31, 2006, we had 96,732,599shares of common stock outstanding, held by 220 shareholders of record.

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:

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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

·

the person, or his/her 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 three different issuers, and

·

transactions in penny stocks by broker-dealers whose income from penny stock activities does not exceed five percent of their total income during certain defined periods.

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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 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 Securities and Exchange 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, be 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 those financial statements.

Overview

Our principal business began in 1993 with the organization of Ferris Productions, Inc.  Ferris designed, developed, distributed, and operated virtual reality products for the entertainment, simulation, promotion, and education markets.  In September of 2001, Ferris merged into GameCom, Inc., a publicly held Texas company whose principal business at the time was the development and marketing of an internet-enabled video game system. We subsequently adopted our present name. Prior to the merger of Ferris and GameCom, both companies had incurred substantial debt, much of which was eliminated in December of 2004 in a debt for equity conversion.  However, there can be no assurances that we will be able to successfully implement our expansion plans.  As we enter the training/simulation market, 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.  

Critical Accounting Policies

Use of Estimates

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

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Revenue Recognition

Revenue from custom application contracts are recognized on a percentage-of-completion basis, measured by the percentage of costs incurred to date to total estimated costs for each contract.  Contract costs include all direct material and labor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs.  General and administrative costs are charged to expense as incurred.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.  Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, and are recognized in the period in which the revisions are determined.  An amount equal to contract costs attributable to claims is included in operations when realization is probable and the amount can be reliably estimated.

Costs and estimated earnings in excess of billings on uncompleted contracts represent revenue recognized in excess of amounts billed.  Billings in excess of costs and estimated earnings on uncompleted contracts represent amounts billed in excess of revenue recognized.

Stock-Based Compensation

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

Results of Operations

Fiscal year ended December 31, 2005 compared to fiscal year ended December 31, 2004.

Total revenue for the year ended December 31, 2005 was $977,358, compared to total revenue of $1,328,180 for  the year ended December 31, 2004.  This decrease of $350,822, or 26%, resulted primarily the timing of several IVR® simulator sales which were delivered in the spring of 2006.

Cost of sales and services decreased $196,689, or 23%, to $663,376, for the year ended December 31, 2005, from $860,065 for the year ended December 31, 2004.  This decrease is relatively proportionate to the change in revenue.

General and administrative expenses decreased by $859,107, or 31%, to $1,961,543 for the year ended December 31, 2005, from $2,820,650 for the year ended December 31, 2004. The decrease is primarily due to no incentive compensation being granted to senior management in 2005 while approximately $600,000 was granted in 2004.  In addition, we accrued $280,000 for the potential settlement of the Legg Mason lawsuit in 2004, and there was no similar expense in 2005.  In fact, the lawsuit was settled for a $50,000 cash payment in 2005, and we accordingly recorded a gain on settlement of $230,000.

Interest expense and finance charges decreased by $18,099, or 2%, to $939,813 for the year ended December 31, 2005, from $957,912 for the year ended December 31, 2004.   

During 2004, we presented an exchange offer to the holders of certain of our notes payable and obligations under product financing arrangements, whereby the debtholders were allowed to convert their principal and accrued interest to our common stock under one of three options.  Under Option A, the debtholder could receive common stock equal to 0.6 shares per dollar of principal amount he or she was owed, and was not required to lock up any of the shares he or she received in the exchange.  Under Option B, each debtholder could receive common stock equal to 0.9 shares per dollar of principal amount he or she was owed, but could not sell any of the shares for a period of six months, after which the shares could be sold in six equal monthly installments.   During the years ended December 31, 2005 and 2004, we issued 393,400 and 5,303,258 shares, respectively, of our common stock in exchange for the following: (i) $0 a nd $183,500 in principal and $0 and $49,069 of accrued interest, respectively, on our notes payable, (ii) $0 and $615,531 in principal and $0 and $155,475 of accrued interest, respectively, on our notes payable to stockholders, and (iii) $159,782 and $5,792,176 of principal and interest, respectively, outstanding on our obligations under product financing arrangements.  As a result of this debt exchange, we recorded $221,720

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and $4,621,415 of forgiveness of debt income in the statement of operations for the years ended December 31, 2005 and 2004, respectively.

In addition to the forgiveness of debt income resulting from the debt exchange agreements, we also wrote off various notes payable and certain other notes payable to stockholders that were settled through a lawsuit settlement.  Included in forgiveness of debt income in the statement of operations for the year ended December 31, 2005 and 2004 is $294,500 and $301,085, respectively, related to these settlements.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

The Company narrowed its net loss by over 62.8% compared to the nine months ending September 30, 2005 primarily from increased revenues and higher margins on products and services sold.

Revenues from our Immersadome product line achieved new highs with jobs awarded from Case Western University and a civilian contractor to the United States Navy. The Case-Western project was originally conceived as an advertising/promotion application for the Company’s Immersa-dome products. However in a very innovative fashion, the speech pathology application turned out to be an application for the Company’s flagship IVR technology; the first of its kind outside the military and law enforcement arenas, and an opportunity for VirTra Systems to exploit applications in the medical services field.  Total revenue for the quarter was $1,255,827, an increase of 79.2% from the first nine months of last year. The Company’s gross margin rose to 63.2% from last year’s 36.3% for the same period.

General and administrative expense increased by $97,937, or 7.4% to $1,430,549 for the nine months ended September 30, 2006. As mentioned earlier, nearly $73,000 of that increment was a non-recurring expense associated with the sale of the real estate in Phoenix. The Company maintains tight controls on personnel additions and has become less reliant upon outside consulting, legal and other professional fees.  Overall interest expense and finance charges fell to $510,258 for the nine months ended September 30, 2006, compared to $571,496 for the corresponding period of 2005. The result of improved margins and comparatively flat expenses resulted in a loss from operation of $636,443 compared to $1,078,068 in the first nine months of 2005.

VirTra Systems had other income of $222,269 in the first nine months of this year, compared to a loss of $37,219. The gain on the sale of assets and income from debt forgiveness totaled  $731,855. Overall, the company recorded a net loss of $414,133 from the year earlier loss of $1,115,287. 

Liquidity and Plan of Operations

As of September 30, 2006, our liquidity position was extremely precarious.  We had current liabilities of $3,536,551, including $437,213 in unconverted obligations under the lease financing for the old Ferris Productions virtual reality systems, $925,249 in accounts payable, and accrued liabilities of $1,983,222. As of September 30, 2006, there was only $309,018. of current assets available to meet those liabilities.

Historically, we have met our capital requirements, first by acquiring needed equipment under the Ferris non-cancelable leasing arrangements, and more recently through capital contributions, loans from principal shareholders and officers, certain private placement offerings, through our previous equity line financing with Dutchess and through our current convertible debentures with Dutchess.

For the nine months ended September 30, 2006, our net loss was $414,133.  After taking into account the non-cash items included in that loss, our cash requirements for operations were $712,851.  In addition, we made capital expenditures of $11,906 and repaid notes in the amount of $70,128.  To cover these cash requirements, the company sold additional common stock to raise $599,784, used a portion of the proceeds of sale of its Phoenix production facility and borrowed $108,298. We began the third quarter with a new Immersa-Dome order from the Navy, to be built for August delivery. We ended the quarter with work in progress for the United States Marine Corps,  and we have firm orders in hand for deliveries to Ti Training, Lonexi (Mexico), Raytheon, Raytheon, the United States Marshall Service and further work with the Marines.

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The opinion of our independent auditor for the year ended December 31, 2005 expressed substantial doubt as to our ability to continue as a going concern. Despite expense reductions that the Company is presently initiating, we will need substantial additional capital or new lucrative custom application projects to become profitable. In 2005, we completed two private placements with Dutchess for $1,250,000 in convertible debentures.  Management believes that a continuation of sales growth, purchase order financing to sustain the production and additional sales of common stock will carry the Company through the next twelve months.

Business

Business Overview

Our principal business began in 1993 with the organization of Ferris Productions, Inc.  Ferris designed, developed, distributed, and operated virtual reality products for the entertainment, simulation, promotion, and education markets.  “Virtual reality” is a generic term associated with computer systems that create a real-time visual/audio/haptic (touch and feel) experience.  Virtual reality immerses participants into a three-dimensional real-time synthetic environment generated or controlled by one (or several) computer(s).  In September of 2001, Ferris merged into GameCom, Inc., a publicly held Texas company whose principal business at the time was the development and marketing of an internet-enabled video game system.  Our historic areas of application have included the entertainment/amusement, advertising/promotion, and training/simulation markets.

Our “immersive 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 filmed or computer-generated imagery, and allow the participant to interact with what he or she sees using simple controls and body motions. Virtual reality products have traditionally employed 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.

We maintain our corporate office at 2500 CityWest Boulevard, Suite 300, Houston, Texas 77042, and our telephone number is (832) 242-1100.  We also maintain engineering, technical, and production offices, and a demonstration facility, at 5631 South 24^th Street, Phoenix, Arizona 85040, with a phone number of (602) 470-1177.

Entertainment/Amusement

The entertainment/amusement market was the original market for our products. Our “immersive virtual reality™” devices were 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 were developed using our 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 installed and operated 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.  

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These VR Zones were where we developed, and proved the durabilty of, our core, 360-degree virtual reality technology.  They were operated by our employees on a revenue-share basis with the theme park locations.  We sold our VR Zones and effectively left this market in the spring of 2003, in order to more fully focus on the advertising/promotional and training/simulation markets. We expect to take the Immersa-Dome to the home entertainment market once we can obtain greater cost efficiencies through larger volume production of these products.

Advertising/Promotion

We entered the advertising/promotion market, our second, with our June 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:

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a virtual reality bi-plane experience for Red Baron® Pizza, in June 2001.

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a virtual reality ski jump promotional program for Chevrolet in conjunction with its “Olympic Torch City Celebration Tour™,” in August 2001.

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an interactive promotional project for Shell Oil Product’s Pennzoil® division’s “Vroom Tour™”, which featured Jay Leno “inside” an automobile engine demonstrating how oil functions inside an automobile engine, and ended with the visitor driving Pennzoil’s Formula One car around the Las Vegas Motor Speedway at speeds in excess of 220 miles per hour, in March 2003.

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a 50-seat, 3-D immersive theater for Red Baron® Pizza’s “3-D Flying Adventure™,” which featured special glasses, Dolby® 5.1 sound, and special effects that literally “jump” off the screen, in March 2003

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a virtual reality recruitment tool for the United States Army, in which participants “ride” in an Army Black Hawk helicopter performing an exciting rescue mission, in October 2003.

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a 3-D immersive theater project for Sea-Doo®, using our 3-D technology for 2-D to 3-D video conversion and 3-D computer animation, for 1) a motion simulator utilizing polarized glasses, 2) a theater-style presentation utilizing anaglyph (cyan-blue) glasses, and 3) a web-suitable version utilizing 3-D anaglyph glasses, all in connection with Bombardier's launch of its new 2004 Sea-Doo® 3D™ personal watercraft.

2004 advertising/promotion projects included a new 3-D immersive theater project in April for Sea-Doo® using our 3-D technology for 2-D to 3-D video conversion and 3-D computer animation, for 1) a motion simulator utilizing polarized glasses, 2) a theater-style presentation utilizing anaglyph (cyan-blue) glasses, and 3) a web-suitable version utilizing 3-D anaglyph glasses, all in connection with Bombardier's launch of its new 2004 Sea-Doo® 3D™ personal watercraft.

The year 2004 also saw our completion of a strategic move from headset-based to projection-based technology, evidenced by the development and launch of our patented Immersa-Dome™, featuring a domed-shaped screen which surrounds the seated viewer and delivers a high-definition resolution virtual reality experience.  

The May 3, 2004, launch of the Immersa-Dome product was rapidly followed by several new projects:

·

a mobile promotional experience for Buick's new Terraza™ and LaCrosse™ vehicles, first announced in May 2004, Using four Immersa-Dome units installed in two of Buick's event-marketing trailers. This was our second collaboration with Buick's event marketing agency, Momentum Detroit.

·

a sale in October 2004 of three Immersa-Domes to the United States Army Recruiting Command in Fort Knox, Kentucky, for installation in mobile recruiting trailers traveling the United States to major events, high schools, and universities in connection with the Army's recruiting efforts.

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·

the installation of three Immersa-Domes at the new Red Baron® Museum in Marshall, Minnesota, providing the visual experience of flying an acrobatic bi-plane with the Red Baron® Pizza Squadron™ in an 180-degree multisensory experience announced in November 2004.

Over the last year, as a result of our recent Immersa-Dome mobile promotional tour, we have several proposals currently under submission to a number of advertising/promotional agencies, Fortune 500 companies, and governmental agencies in conjunction with pending advertising/promotional campaigns. We also sold 8 Immersa-Domes to a civilian contractor to the United States Navy, for recruiting purposes.

The Company’s biggest advance occurred when,, in collaboration with the Case Western Reserve University, we sold an IVR system with content modified as an instructional speech pathology tool students with speech disorders. This opens a whole new field for the company’s products.  It is possible that the technology can be adapted to the smaller Immersa-Domes to broaden the available market to smaller clinics and practices though additional engineering efforts will be needed to establish that this is practical.

Training/Simulation

In 2004, we unveiled our IVR™ line of projection-based training simulators for judgmental use-of-force, situational awareness, combat-readiness, and tactical judgment objectives.  The two IVR product lines provide the law enforcement, military, and security markets with 360-degree immersive training environments.

Our IVR HD™ series, designed primarily for law enforcement objectives, was completed in January of 2004, and was publicly debuted to the domestic law enforcement market in late March of 2004, at the industry’s Trexpo West trade show in Long Beach, California.

Our military-oriented IVR 4G™ system, designed to train soldiers for “fourth generation” warfare, was debuted at the industry-leading I/ITSEC trade show in Orlando, Florida in December of 2004.  “ Fourth generation” warfare, as discussed in the October, 1988 Marine Corps Gazette, is characterized by transnational groups without territorially-based armies, engaging in highly irregular practices such as guerilla warfare, terrorist tactics, and low-intensity, close quarter conflict, enabling groups that are weaker militarily to defeat larger, stronger forces.  Fourth-generation battlefields may include the whole of the enemy's society, where small, well-trained, highly maneuverable forces may tend to dominate.

Our sales representation agent in Mexico brought us multiple orders in 2006. We received a multi-unit order from the United States Marine Corps that has been largely delivered. A strategic partnership with an enterprise devoted to marketing to the domestic law enforcement community commenced with an order for ten units. Presently, the company is building its first system for delivery to the United States Marshalls Service.

We announced our initial sale in this market in September of 2003, and, as of December 14, 2006, we had sold 54 systems, all variations of the IVR series, to the United States Air Force, the United States Army, a classified Department of Defense customer, and state police and security organizations in Mexico and India. We have recently received several oral confidential purchase commitments (which are not binding), and we have several additional confidential proposals currently under review.

Virtual Reality Products

Our “immersive virtual reality™” products include:

Training/Simulation Products

The IVR HD™ and IVR 4G series, designed for law enforcement and military use, respectively, are projection-based, multi-screened, high-definition resolution, combat-readiness and judgmental use-of-force firearms training simulators.  The IVR™ series simulators use company-produced high-definition filmed content as well as our Hybrid-CGI™ content.  Our Hybrid-CGI software combines film content with computer-generated images, allowing users to create their own customized 360-degree training scenarios by combining “green-screen” video, panoramic photorealistic images, computer-generated images, and 3-D sound.  “Green-screen” filming is the technique of filming actors and other visual elements in the foreground against an evenly-colored green background, and

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subsequently extracting the actors and other visual elements and placing them onto a new panoramic background specifically suited to the user’s needs and locale.  

The IVR systems use off-the-shelf computer equipment, extremely-accurate laser-based weapons tracking, 360-degree video and audio, and ultra-high resolution interactive graphics. The systems deliver both photorealistic and computer-generated imagery -based video for training scenarios. The systems support one to six users, and have the option to be reconfigured into a 20-lane, military-approved, virtual “shooting range” for realistic marksmanship training.  

Trainees step into the simulator, and then interact with a training scenario selected by the instructor, using their weapon of choice. The training scenarios teach combat-readiness, situational awareness, fourth-generation warfare tactics, and judgmental use-of-force with both lethal and non-lethal weapons currently used by military, law enforcement, and security agencies.

The IVR 4G military series of simulator products are offered in four different configurations. We have indicated the base price of each unit as listed on our current GSA schedules. However, these prices are before any "add-ons," which are separately negotiated and in most cases add significantly to the indicated prices.

·

the IVR 4G-base™ is a single-screen model, and its compact size offers portability and supports one to four trainees – price: custom model, price feature dependant.  

·

the IVR 4G-180™ offers an 180-degree field-of-view for more realistic combat training and marksmanship. It supports one to four trainees – price: $116,950 each.

·

the IVR 4G-300™ delivers 300-degree field-of-view for more realistic combat scenarios and marksmanship training, and supports one to five trainees – price: $136,950 each.

·

the IVR 4G-360™ offers a 360-degree field-of-view for combat and marksmanship training, and supports one to six trainees – price: custom model, price feature dependant.

·

The IVR HD law enforcement series is offered in four different configurations.  We have indicated the base price of each unit as listed on our current GSA schedules. However, these prices are before any "add-ons," which are separately negotiated and in most cases add significantly to the indicated prices.

·

the IVR  HD-base™ is a single-screen model, offering portability, and supports one to four trainees – price: $39,950 each.

·

the IVR  HD-180™ offers an 180-degree field-of-view for more realistic training and target tracking. It supports one to four trainees – price: $89,950 each.

·

the IVR HD-300™ delivers 300-degree use-of-force scenarios, and supports one to five trainees – price: $104,950 each.

·

the IVR-360™ HD offers 360-degree firearms training, and supports one to six trainees – price: custom model, price feature dependant. 

We have begun penetrating the market with contracted sales to foreign and domestic law enforcement agencies ($378,004 and $298,500, respectively), the U.S. Air Force ($526,628), the U.S. Army ($365,769), and a classified agency within the U.S. Department of Defense ($455,261).  Not all of these contracted sales have yet been booked as accounting revenue, as the income has not been fully earned.  Fourteen of these simulator units have been fully installed and forty have been shipped or are awaiting delivery. Although we have a number of oral commitments in various phases of contracting, we currently have no other additional legally-binding purchase orders outstanding.  We cannot give assurance that interest in these simulators will be long-lived, that funds will be budgeted to acquire more of our products for that purpose, or that we will be selected to supply additional training simulators.  In addition, it is not uncommon for expected contracts for which we have incurred significant marketing costs to be

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delayed until the required funds have been appropriated.  Delays in funding can severely reduce our ability to meet our obligations as they come due.

Except for large multi-system sales, generally sales in the training/simulation market are not made from a centralized procurement agency providing for long-term commitments.  In most cases, the chief training officer of a local law enforcement agency or military base makes the decision to purchase these simulators, obtains required approval from his or her “chain of command,” and, when budgeted funds become available, sends us a purchase order for the required number of units.  Generally, these simulators do not require long lead-times to produce, and are delivered relatively shortly after receipt of the purchase orders.  For these reasons, we often experience large fluctuations in our revenue from quarter to quarter, and the concepts of firm committed contracts and back-log have little relevance in this market.

We also have developed and market proprietary training accessories for use with both our IVR product lines, as well as those manufactured by third-parties:

·

the wireless Threat-Fire™ belt permits the simulator's instructor to deliver an electric "stun" to the trainee, simulating the sensation of being shot, thus enhancing the multi-directional experience of our IVR simulators by increasing the seriousness and stress of training scenarios – price: $2,500 each.  

·

our Hybrid-CGI™ scenario creation software integrates "green-screen" video, panoramic photorealistic images, computer-generated images, and 3-D sound, decreasing both cost and time of scenario production.    Our Hybrid-CGI software offers the end-user more custom scenario options than traditional scenario production methods and other forms of training software – price: custom product, price feature dependant.

·

a wireless/tetherless “drop-in” recoil conversion kit, which transforms a live weapon into an accurate and safe training weapon. It features 1) a laser-based tracking mechanism, 2) self-contained, tetherless pneumatic recoil, and 3) instructor-controlled weapon “malfunction” capability to simulate a jammed weapon in the field. The system provides no possibility of chambering a live bullet while in training mode – M-16 version price: $5,280 each, otherwise, custom product, price feature dependant.  .

·

laser-based pneumatic recoil conversion kits for most military and law enforcement handguns, assault rifles, and shotguns – price range: $3,500 to $5,350 each .

·

less-lethal, laser-based training tools, including Taser® (price: $3,850 each) and canister OC pepper spray (price: $2,100 each).

·

TMaR (Trainee Monitor and Recording) debriefing product, which records and plays back the trainee’s actions in the simulator, allowing systematic review of the trainee’s performance – price: $5,250 each).  

Advertising/Promotional Products

We have indicated the base price of each unit as listed on our current GSA schedules. However, these prices are before any "add-ons," which are separately negotiated and in most cases add significantly to the indicated prices.

·

the Immersa-Dome™ is a patented projection-based virtual reality system, which uses a domed-shaped screen to surround the viewer. The Immersa-Dome offers photorealistic environments with 180-degree field-of-view and high-definition resolution. The system is composed of the dome’s base, the viewer’s seat, and a separate projector/mirror stand – price: $22,000 each.

·

the 3-D Multisensory Theater™ is a portable-seat, high-capacity (50-100 viewers) 3-D theater with special effects packages, including fog, wind, and simulated lighting, among others. This theater system features 3-D, high-resolution imagery on a large projected screen. Participants wear polarized glasses, which facilitate 3-D depth in the screen images. This system also features time-triggered smells, wind simulation, and a Dolby® 5.1 sound system. The 3-D Multisensory Theater uses a silver screen and two projectors. Three-dimensional filming techniques are used and processed to finalize the 3-D experience. Computer-generated

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3-D imagery is an alternative development method to 3-D filming – price: custom product, price feature dependant.  

·

the 360-degree headset-based virtual reality system delivers photorealistic content. In addition, the user, while seated, is tracked in 360 degrees. The multisensory system incorporates off-the-shelf computer equipment, gyroscopic head-tracking, stereo sound, wind simulation, and smell. The system comes standard for one user – price: $21,000 each.

Dependence on Limited Number of Customers

Because we have a small revenue base, each order for training/simulation or advertising/promotional products is likely to represent a significant part of our revenue for a particular year. The success of our training/simulation business is heavily dependent upon continued purchases of these products by domestic military and law enforcement agencies. During the year ended December 31, 2005, law enforcement agencies in Mexico (more than one jurisdiction) accounted for approximately 18.6% of our total revenue.  The U.S. Army accounted for approximately 23.6% of revenue, Impact Unlimited was 10.9% of revenue, and two metropolitan police departments represented 12.9% and 10.2% of revenue respectively. No other customer accounted for as much as 10% of revenue in 2005. Since, except for large, multi-system sales, the decision to purchase our training/simulation units is generally made locally by a particular chief training officer, a de termination by a particular training officer not to purchase our training/simulation products would have less impact than if decisions on such purchases were made centrally.

Competition

Competition within each of our markets is intense.  

There are several large competitors in the general field of high-tech simulation including, for example, L3 Communications, Inc., a company reportedly doing in excess of $5 billion in annual business with the United States government in this market. L3 has so far focused on other types of simulators (such as aircraft motion simulators) and to-date we have never directly competed against L3, and may never compete with them regarding our IVR simulators. Other companies have made essentially the same single-screen style simulator for the past 15 years or longer.

As our virtual reality experiences are usually custom applications, and we deal primarily with advertising agencies, or directly with the client, it is difficult to quantify the competition.  Sometimes companies are able to penetrate one or two particular high-tech promotions.  With over 12 years in the marketplace, we currently are not aware of any other virtual reality-based advertising/promotion company with similar products similar to ours.    

In late 2005, we began collaborating with the Case Western Reserve University on a project that engaged our Immersadome technology to use virtual reality in speech pathology training; both for aspiring clinicians and as a treatment modality as well. We delivered such a unit this year. With success, this could be a new market segment the company can penetrate.

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.

Advanced Interactive Systems, Inc. (“AIS”)--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. Its systems have historically been based using single screen technology.

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Firearms Training Systems, Inc. (“FATS”)--claims to have over 4,000 training systems installed worldwide by military, law enforcement, and commercial customers. FATS is a full service training/simulation company that also uses video scenarios and single-screen technology with an optional video-training scenario authoring system. AIS and FATS are similar in many respects, although FATS has been in the market longer.  In August, 2006, FATS entered into a definitive agreement to merge with the USA subsidiary of  Meggit PLC. The Meggitt group designs and makes high performance components and systems for aerospace, aerial and ground targetry, countermeasures and ammunition-handling. The group's and defense with capabilities in sensors, engine condition monitoring, avionics, air data systems, fire-proof cabling, ignition, environmental and fluid control, brakes and wheels and anti-skid sy stemsspecialist capability is also deployed in the medical, mainstream industrial, test-engineering and transportation markets. At the end of its 2005 fiscal year, Meggitt PLC reported revenues of approximately $1.16 billion.

L3 Communications, Inc.--a supplier of intelligence, surveillance and reconnaissance 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 U.S. government intelligence agencies, aerospace prime contractors, 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. L3 is a large 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. L3 systems consist of computer generated graphics, and currently do not use video or film for its content, to the best of our knowledge, nor does it produce complete 360-degree projected or head-mount display systems. Due to the size and strength of L3 within the defense industry and other governmental agencies, it could become a very formidable competitor if it chose to enter the 360-degree, photorealistic, virtual reality simulation market.

IES Interactive Training, Inc. (IES)--a supplier of basic simulation equipment to law enforcement. Having fielded several hundred single screen systems in the law enforcement with little emphasis on military, it is in the competitive landscape. Our recent patent application may hamper or halt potential plans by IES or others to compete with our IVR multi-screen systems.

Cubic Defense Applications–performing in a wide range of industries, including military simulation, Cubic currently produces a product which is mainly a marksmanship training system, with limited combat training capabilities. Due to its size and strength, Cubic could become a formidable competitor if it chose to focus on firearms training.  

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

Marketing

Marketing within the training/simulation market is conducted primarily through trade shows, trade journal advertisements, search engine strategies, and one-on-one demonstrations.  We  completed and publicly unveiled the IVR HD™ series of law enforcement-focused advanced training simulators at the Trexpo West trade show in March of 2004, and we publicly unveiled the military-oriented IVR 4G™ fourth generation warfare simulators at the I/ITSEC trade show in December of 2004.  We have demonstrated the IVR simulators to high-level officers in the United States military, the Department of Defense, as well as to municipal, state, and federal agencies both domestically and internationally.

Marketing within the advertising/promotional market is conducted primarily by web-based search engine strategies and by the face-to-face sales efforts of our vice-president of advertising and promotion.  Our Immersa-Dome demonstration unit uses high-definition content from our projects for Pennzoil, Buick, Red Baron® Pizza, Chevrolet, the U.S. Army and, most recently, the United States Navy.  Marketing within this industry is conducted primarily by one-on-one appointments and demonstrations of our technology to agencies and qualified corporations.  We also attend industry tradeshows to generate leads and to garner further market exposure.

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Employees

At December 31 2006, we employed 16 persons. We have also engaged an outside company to perform all of our accounting and reporting needs. None of our employees are members of a union, and we consider relations with our employees to be satisfactory.

Trademarks/Patents

We have obtained a patent for our Universe Control Board™, and various federal trademarks.  We have also filed for federal registration of our “Immersive Virtual Reality™” and “IVR™” trademarks. We received approval for the IVR™® in the second quarter of 2006.

In November, 2005, we filed for a patent on our IVR™ series of advanced training simulators, seeking a patent for our “multiple screen simulation system and method for situational response training.”

On May 3, 2004, we announced that we had obtained an exclusive license to the patented technology behind the Immersa-Dome.

On December 3, 2004, in advance of industry demonstration at the industry-leading Interservice/Industry Training and Simulation Education Conference in Orlando, Florida, we submitted three separate patent applications for innovations in the field of firearms training.  These included: 

·

the Threat-Fire™ Belt,

·

our Hybrid-CGI™ software, and

·

a "drop-in" kit and magazine for wireless recoil in real weapons.

The Threat-Fire Belt permits the simulator's instructor to deliver an electric "stun" to the trainee, simulating the sensation of being shot, thus enhancing the multi-directional experience associated with our IVR simulators.

The Hybrid-CGI software integrates "green-screen" video, panoramic images, computer-generated images, and 3-D sound.  “Green-screen” filming is the technique of filming actors and other visual elements in the foreground against an evenly-colored green background, and subsequently extracting the actors and other visual elements and placing them onto a new panoramic background specifically suited to the user’s needs and locale. Hybrid-CGI software decreases both cost and time of scenario production, and provides more scenario options to the end user than traditional production methods.

The "drop-in" kit and magazine is non-permanent, and delivers wireless recoil to a real weapon.  The magazine is refillable, and the aiming laser features hyper-accurate collinear placement for both immersive combat training and marksmanship qualification.  Use of untethered training weaponry is highly desirable in firearms simulators.

There can be no assurance that patents or trademarks will issue on these applications, or that, if issued, they will be sufficiently broad to provide meaningful protection.

Research and Development

Because of the constant rapid changes in technology in our business, we must carry on research and development on a continuing basis in order to remain competitive. During the years ended December 31, 2005 and 2004, we spent $181,499 and $198,092, respectively, on research and development activities.

Property

Our executive offices occupy a 600 square foot leased facility at 2500 City West Blvd.,Suite 300, Houston, Texas,

Our production offices were located in an 8,000 square foot leased facility at 1406 W. 14^th St. in Tempe, Arizona.

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We believe that both facilities are suitable and adequate for all uses of them at the present time.

Management

Directors and Executive Officers

The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person, and the date such person became our director or executive officer.

Name	Age	Positions	Date became director or executive officer
Perry V. Dalby	62	Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer	June 1, 2006
Bob Ferris	34	President and Director	September 21, 2001
H. Frank Stanley	44	Director	August 2, 2006
Thomas J. Cloud	43	Director	December 19, 2006

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.  Some 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.  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.

We do not have a separate audit committee.

Major General Perry V. Dalby (retired) retired from the U.S. Army in May of 2004 after 37 years of military service. He holds the Distinguished Service Medal, Legion of Merit, Distinguished Flying Cross, Bronze Star (two clusters), and the Purple Heart. General Dalby had served on our advisory board of directors since January of 2005.  

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.  

H. Frank Stanley was appointed as a director on August 2, 2006. Mr. Stanley retired as a major in military intelligence from the U.S. Army after serving for over 20 years. He is presently employed by Cushman-Wakefield in Houston. Mr. Stanley has a bachelor’s degree in criminal justice from Sam Houston State University.

Thomas J. Cloud was appointed as a director on December 19, 2006. Mr. Cloud has served as President, CEO, and Director, of Supreme Holdings, Inc. since May of 2002.  Supreme Holdings, Inc. provides professional business services and solutions primarily to small and medium-sized businesses.  Its shares are traded on the NASDAQ Bulletin Board under the symbol SUHO.  From 1997 to 2001, Mr. Cloud served as founder, President and CEO of Oxford Financial Group, a boutique stock brokerage firm with headquarters in Houston, Texas.  He holds a BA in Public Speaking and Debate from South Texas State University.

Disclosure of Commission Position on Indemnification for Securities Act Liabilities

Our 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 we must indemnify and advance or reimburse reasonable expenses incurred by our directors, officers, employees, or agents, to the fullest extent that we may grant indemnification to a director under the Texas Business Corporations Act, and may indemnify the persons above to such further extent as permitted by law.  Insofar as these provisions permit indemnification for liabilities arising under the Securities Act of 1933 to our directors, officers, and

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controlling persons, or insofar as indemnification under that Act is otherwise permitted, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

Significant Employees

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

Tom Milks, age 44, joined VirTra Systems in August of 2002, and currently serves as our vice-president of advertising and promotion sales, and is responsible for sales and marketing of the company’s promotional virtual reality products.  Before joining our company, he was hired in 2000 as the Western United States regional manager for BitFlash, a graphic technology company, based in Ottawa, Ontario, Canada. Previously, Mr. Milks ran the North American operations office of Virtuality, a virtual reality company.  

Steve Haag, age 47, joined VirTra Systems in 2000, and currently serves as our vice-president of investor relations. Before joining our company, he was employed from 1999 until 2000 as vice-president of business development and web services at Connect Computer Group, Inc., which was largely responsible for the development of our kiosk and computer systems. Mr. Haag received his bachelors degree in psychology, with a minor in organizational behavior, from Webster University in 1993, and his masters degree in education from the University of Missouri-St. Louis in 1995.  

Matt Burlend, age 32, joined VirTra Systems (then Ferris Productions) in 1999, and currently serves as vice-president of production and senior engineer, currently responsible for hardware design and manufacture of the company’s training and promotional products.  Prior to his employment with the former Ferris Productions and VirTra Systems, Mr. Burlend was employed from 1996 until 1999 at Panduit Corporation, a designer of automated production equipment, as a machine design engineer responsible for design of automated cable-tie machinery.  Mr. Burlend holds a mechanical engineering degree from Olivet Nazarene University.

Executive Compensation

Summary Compensation Table

This summary compensation table shows certain compensation information for services rendered in all capacities during each of the prior three fiscal years.

Name and Principal Position	Year	Salary	Restricted Stock Awards	Securities Underlying Options/SARs
L. Kelly Jones, chief executive officer and chairman of the board of directors	2005	$180,000	--	-
	2004	$105,000	$310,000	$0.00 (1)
	2003	$20,000	-	-
Bob Ferris, president and director	2005	$120,000	-	-
	2004	$90,000	-	$0.00 (2)
	2003	$60,000	-	-
L. Andrew Wells, director	2005	-	--	-
	2004	-	$310,000
	2003	-	-

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Kimberly Biggs, secretary and treasurer	2005	$26,250
	2004	$30,000	-
	2003	$16,500	-
				$0.00 (3)
Michael Kitchen, former executive vice-president of training and simulation sales	2005	$129,000		-
	2004	$99,000	-	$4,000 (4)
	2003	$33,000	-

(1)  These options, incentive in nature, provide that Mr. Jones may purchase (i) 2,000,000 common shares at a strike price of $0.31, subject to the condition precedent that we successfully convert 85% of our leaseholder/shareholder promissory note indebtedness to equity upon terms acceptable to our board of directors, (ii) 1,000,000 common shares at a strike price of $0.31, subject to the condition precedent that the we experience our first profitable quarter, and (iii) 1,000,000 common shares at par value, subject to the condition precedent that the company experience a positive shareholders’ equity, such options to vest ratably in the four successive quarters after such event.  These incentive stock options were granted to Mr. Jones by our board of directors (Mr. Jones abstaining) on November 1, 2004.  The options contained in subparagraphs (i) and (ii) vested as of December 31, 2004.

(2)  These options, incentive in nature, provide that Mr. Ferris may purchase 1,000,000 common shares at a strike price of $0,31, subject to the condition precedent that we experience our first profitable quarter.  These incentive options were granted to Mr. Ferris by our board of directors (Mr. Ferris abstaining) on November 1, 2004.  The options vested as of December 31, 2004.

(3)  These options were issued under the 2000 Incentive Stock Option Plan, discussed below.

(4) These options, incentive in nature and executed in connection with his employment contract, provide that Mr. Kitchen may purchase 1,000,000 common shares over a three-year period at a strike price of $0.10, subject to certain sales goals being achieved over that time period.  As of December 31, 2004, options to purchase 200,000 shares of common stock became vested and exercisable,  These options expire five years from the date they become vested.

Dalby Employment Agreement

We have an employment agreement with General Dalby which expires in June of 2008. Under that employment agreement General Dalby is entitled to a salary of $150,000 per year, and to receive compensation of $10,000 per quarter while a member of the Board of Directors. Both the salary and the compensation for serving as a director may be paid in stock, cash or stock options. In addition to the salary and director's fees provided for in the agreement, if we report a profitable year of at least $100,000 in net profit, the General is to receive 7.5% of net profit in the form of cash or stock. Further, he is entitled to stock options under which he may purchase up to 2,000,000 shares of our common stock at a price of $0.035 per share upon achievement of the following goals:

·

500,000 shares if our stock price averages $.10 or higher for one quarter

·

an additional 500,000 shares if the stock price averages $.25 or higher for one quarter

·

an additional 500,000 shares if the stock price averages $.50 or higher for one quarter, and

·

an additional 500,000 shares if the stock price averages $1 or higher for one quarter.

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 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 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 ten years from the date of grant or five years from the date of grant in the case of incentive stock options granted to a holder of ten percent 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 outstand ing 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 were 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 propo rtionately 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 ten years from its effective date unless terminated earlier by the board of directors or the shareholders.  Proceeds of the sale of shares subject t o 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 February of 2005, options for 1,700,000 shares under the plan, at an option price of $0.30, were granted to our vice-president of production and senior engineer; our vice-president of advertising/promotion; our vice-president of investor relations; our director of training; our corporate secretary; our senior engineer; our senior graphics designer; our videographer; and our graphic artist.

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 sets forth certain information known to VirTra Systems about the beneficial ownership of our common stock as of December 31 2006, by

·

all persons known to us to beneficially own five percent (5%) or more of either class of our common stock,

·

each director,

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·

the executive officers named in the Executive Compensation section of our most recent Form 10K,

·

one additional most highly paid executive officer having annual compensation in excess of $100,000; but, who was not serving as director as of the fiscal year ended December 31, 2005.

Beneficial Owner	Status	Shares	(1)	Percent
L. Kelly Jones	Former CEO and Director	6,953,452		7.0%
440 North Center
Arlington, Texas 76011			(2)
Bob Ferris	President and Director	6,048,414		6.2%
1941 South Brighton Circle
Mesa, Arizona 85208			(3)
L. Andrew Wells	Former Director	3,524,205		3.6%
1011 Compass Cove Circle
Spring, Texas 77379
Perry V. Dalby**	CEO and Director	307,334		*
Kimberly Biggs
440 North Center
Arlington, Texas 76011	Former Board Secretary	42,460		*
David Rogers**	Former Chief Financial Officer	-		*
Michael Kitchen**	Former Executive Vice-president and Director	200,000	(4)	*
Thomas J. Cloud**	Director	-		*
Totals		17,075,865		16.9%

* Less than 1%

**Except as indicated, the address of each of these shareholders is that of the Company.

(1)

The percentage of shares beneficially owned is based on 96,732,599 shares of common stock outstanding as of December 31 2006. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days after December 31 2006 are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.

(2)

Includes 3,953,452 shares and options to purchase 3,000,000 shares that are currently exercisable or will become exercisable within 60 days of December 31 2006.

(3)

Includes 5,048,414 shares and options to purchase 1,000,000 shares that are currently exercisable or will become exercisable within 60 days of December 31 2006.

(4)

Consists of options to purchase 200,000 shares that are currently exercisable or will become exercisable within 60 days of December 31 2006

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Certain Transactions

Mr. Jones, our previous chief executive officer, is also president of Jones & Cannon, a Texas professional corporation, which has provided legal services to us and which rented our executive offices to us. That firm claims that we currently owe them more than $416,856 for legal services rendered.  Jones & Cannon had also been providing the limited amount of executive office space we required, and some clerical and other services required for our operations. The space and services were provided without charge until June 5, 2000, under an oral agreement with Mr. Jones. Jones & Cannon claims that after June 5, 2000 we were to pay them rent of $1,500 per month, and that we currently owe them $80,250 in past due rent. See “Legal Proceedings” below.

Mr. Ferris, our president, is the owner of Ferris Holdings, L.L.C., which was the landlord on the lease for our engineering, technical, and production facilities in Phoenix, Arizona. On September 15, 2006, we sold the land and building for $1,210,430.

Legal Proceedings

On February 6, 2004, suit was filed against us in County Court at Law No. 4 of Harris County, Texas, in cause number 810288, styled Barbara Nedry v. VirTra Systems, Inc., seeking payment of the principal sum of $6,000, plus accrued interest, in equipment leases allegedly entered into by Ms. Nedry with the former Ferris Productions, Inc. in 2001.  We have contested the allegations.  The case remains  in the pre-trial discovery phase.

On August 28, 2006, Jones & Cannon, P.C., of Arlington, Texas, filed a lawsuit, in the 352nd Judicial District Court of Tarrant County, for fees and other charges that Jones & Cannon alleges are owed to it, in the amount of $508,326.55. This suit is for fees and charges Jones & Cannon claims to have accrued during the time that Kelly Jones, its lead partner, served as CEO of Virtra Systems, Inc. The current management and board of directors disagree with the merits of this case and intend to contest these matters vigorously. The matter is in the pre-trial discovery phase.

Description of Securities

Our articles of incorporation authorize us to issue 500 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  December 31 2006, 96,732,599 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 l evel of news coverage we receive.

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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.

Warrants

There are outstanding warrants in favor of Dutchess to purchase 1,250,000 shares of our common stock. The warrants for 500,000 shares have a strike price of $0.19 per share, warrants for 750,000 shares have a strike price of $0.33 per share. The warrants for 750,000 shares were issued to the debenture holders on February 25, 2005, and they expire on February 25, 2008.  The warrants for 500,000 shares were issued to the debenture holder on August 1, 2005, and they expire on August 1, 2008.  

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.

Those warrants provide for downward adjustment in the exercise price based on the market prices for our stock during a period prior to exercise. Swartz attempted to exercise 496,703 warrants on October 23, 2003, at a time when the adjusted exercise price would allegedly have been $0.05 per share.  We are contesting those warrants, and have refused to issue the shares.  We drew down only $17,751 during an entire lifetime of that line of credit.  We believe the number of warrants, coupled with the low exercise price, was so disproportionate to the benefit received under the line of credit as to constitute a failure of consideration. We are currently in a dialogue with Swartz in which we are seeking an amicable resolution of the dispute that would result in issuance of a substantially smaller number of shares.

We also have outstanding to Market Byte, LLC warrants to purchase 500,000 shares of our common stock, with 125,000 warrants each having strike prices of $0.24, $0.30, $0.35, and $0.40, respectively.  These warrants expire on August 8, 2010.

Convertible Debentures

On February 25, 2005 we issued to Dutchess $500,000 worth of convertible debentures, and we issued another $250,000 worth of convertible debentures to Dutchess on April 6, 2005. The February tranche has been repaid.  These debentures:

·

are subordinate as to any amounts we may borrow from banks or similar financial institutions,

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·

pay an eight percent cumulative interest, payable monthly, in cash or in common stock of the company at the debenture holder’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) $0.33, (b) 80 % of lowest closing bid price as reported by Bloomberg  during the 15 full trading days prior to the date of conversion; 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.

On August 1, 2005 we issued to Dutchess $500,000 worth of convertible debentures, of which $367,606 in principal remains outstanding. These debentures:

·

are subordinate as to any amounts we may borrow from banks or similar financial institutions,

·

pay an eight percent cumulative interest, payable monthly, in cash or in common stock of the company at the debenture holder’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) $0.19, (b) 80% of lowest closing bid price as reported by Bloomberg, during the 15 full trading days prior to the date of conversion,

·

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.

Up to 18,500,000 shares of common stock covered by this prospectus are registered to possibly underlie the $367,606 worth of convertible debentures plus accrued interest and penalties.  Because of the uncertainty of the future market price of our common stock, it is possible that:

·

fewer than 18,500,000 shares would be issuable should the convertible debentures be converted; and  

·

more than 18,500,000 shares would be issuable should the lowest closing bid price of our common stock be less than $0.04 per share during the 15 trading days prior to conversion of the convertible debentures.

Should fewer than 18,500,000 shares be required, we will deregister the unneeded shares.  Should more than 18,500,000 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 incorporation 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

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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

·

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,

·

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 Pryor Cashman Sherman & Flynn LLP, New York, New York.

Experts

Our balance sheet as of December 31, 2005, and the statements of our operations, shareholders' equity, and cash flows for the years ended December 31, 2005 and 2004, 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.  

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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 registrati on 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.

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Financial Statements

Report of I ndependent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

VirTra Systems, Inc.

We have audited the accompanying balance sheet of VirTra Systems, Inc. (the “Company”) as of December 31, 2005, and the related statements of operations, stockholders’ deficit and cash flows for the years ended December 31, 2005 and 2004.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates 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 VirTra Systems, Inc. as of December 31, 2005, and the results of its operations and its cash flows for the years ended December 31, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America.

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, 2005 is in a negative working capital position and a stockholders’ deficit position.  These factors raise substantial doubt about the Company’s 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.

As discussed in Note 3 to the financial statements, in 2004 the Company changed its method of accounting for variable interest entities.

/s/ Ham Langston & Brezina, L.L.P.

Houston, Texas

April 17, 2006

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VIRTRA SYSTEMS, INC.

BALANCE SHEET

September 30, 2006 (unaudited) and December 31, 2005 (audited)

__________

	September 30,	December 31,
	2006	2005
ASSETS
Current assets:
Cash and cash equivalents	$      20,650	$         764
Accounts receivable	184,539	184,904
Costs and estimated earnings in excess of billings on uncompleted contracts	192,829	0
Total current assets	398,018	185,668
Property and equipment, net	121,706	951,630
Capitalized development cost, net	81,765	130,815
Other assets, net	49,926	0
Total assets	$651,415	$1,268,113

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Notes payable	$     4,716	$1,095,899
Obligations under product financing arrangements	437,213	494,372
Convertible debentures, net of discounts of $312,228 and $299,170	99,249	474,876
Accounts payable	925,249	1,232,779
Accrued liabilities	1,983,222	1,327,702
Advances held on deposit	4,650	183,650
Billings in excess of costs and estimated earnings on uncompleted contracts	-	84,650
Payable to related party	82,252	35,495
Total current liabilities	3,536,551	4,929,423
Redeemable common stock, 406,458 shares at $.005 par value	1,859	1,859
Total liabilities	3,538,410	4,931,282
Commitments and contingencies
Stockholders’ deficit:
Common stock, $.005 par value, 100,000,000 shares authorized, 90,597,461 and 65,983,600 shares issued and outstanding	452,987	329,918
Additional paid-in capital	10,693,024	9,755,785
Accumulated deficit	(14,163,005)	(13,748,872 )
Total stockholders’ deficit	(2,886,994)	(3,663,169)
Total liabilities and stockholders’ deficit	$651,416	$1,268,113

See accompanying notes to financial statements.

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VIRTRA SYSTEMS, INC.

STATEMENT OF OPERATIONS

for the nine months ended September 30, 2006 and 2005 (unaudited) and for the years ended December 31, 2005 and 2004 (audited)

__________

	Nine Months Ended September 30,		Years Ended December 31,
	2006	2005	2005	2004
Revenue:
Custom applications:
Training/simulation	$   809,187	457,883	$    714,435	$   986,816
Advertising/promotion	448,043	167,969	167,969	296,864
Warranty and other revenue	(1,403)	74,851	94,954	44,500
Total revenue	1,255,827	700,703	977,358	1,328,180
Cost of sales and services	461,681	446,159	663,376	860,065
Gross margin	794,146	254,544	313,982	468,115
Gain on legal settlement	-	-	230,000	-
General and administrative expenses	1,430,549	1,332,612	(2,137,469)	(2,820,650)
Loss from operations	(636,443)	(1,078,068)	(1,593,487)	(2,352,535)
Other income (expenses):
Interest income	72	57	66	16
Interest expense and finance charges	(510,258)	(571,496)	(939,813)	(957,912)
Gain on sale of fixed assets	519,073	18,000
Forgiveness of debt	212,782	-	516,220	4,922,500
Other income	600	516,220	21,958	500
Total other income (expenses)	222,269	(37,219)	(401,569)	3,965,104
Net income (loss) before effect of accounting change	$ (414,133)	$ (1,115,287)	(1,995,056)	1,612,569
Cumulative effect of accounting change	-	-	-	(46,478)
Net income (loss)	$ (414,133)	$ (1,115,287)	$ (1,995,056)	$ 1,566,091
Weighted average shares outstanding - basic	88,237,504	61,326,894	62,221,809	51,675,342
Weighted average shares outstanding - diluted	88,237,504	61,326,894	62,221,809	52,450,576
Basic net income (loss) per share:
Net income (loss) per share before accounting change	$       (0.00 )	$       (0.02 )	$        (0.03)	$           0.03
Cumulative effect of accounting change	-	-	-	(0.00)
Net income (loss) per share	$       (0.00 )	$       (0.02 )	$        (0.03)	$           0.03

See accompanying notes to financial statements.

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VIRTRA SYSTEMS, INC.

STATEMENT OF CASH FLOWS

for the nine months ended September 30, 2006 and 2005 (unaudited) and for the years ended December 31, 2005 and 2004 (audited)

__________

	Nine Months Ended		Years ended December 31
	September 30,
	2006	2005	2005	2004
Cash flows from operating activities:
Net income (loss)	($414,133)	($1,115,287)	($1,995,056)	$1,566,091
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	103,817	122,110	163,231	100,465
Accrued cost of product financing arrangements and amortization of debt  issuance costs	76,607	-	-	656,019
Cummulative effect of accounting change	-	-	-	46,478
Forgiveness of debt income	(212,782)	(516,220)	(516,220)	(4,922,500)
Gain on sale of assets	(519,073)	(18,000)	(18,000)	(500)
Bad Debt Expense	31,805	-	175,926	148,821
Stock issued and options issued as compensation for services	30,216	155,001	155,720	633,900
Gain on settlement of litigation	-	-	(230,000)	-
Stock warrants issued as financing costs	-	139,225		-
Effect of beneficial conversion feature	(13,058)	150,000	406,348	-
Changes in operating assets and liabilities:
Accounts receivable and other	(32,316)	(96,850)	(175,474)	80,423
Billings in excess of costs and estimated earnings	(277,479)	(176,356)	(39,446)	24,770
Accounts payable	(482,530)	(17,058)	224,190	219,360
Accrued liabilities and other	1,053,235	59,718	373,722	568,590
Product finance obligations	(57,160)	27,641	55,974	-
Net cash used in operating activities	(712,851)	(1,286,076)	($1,419,085)	(878,083)
Cash flows from investing activities:
Proceeds from sale of assets	106,689	18,000	18,000	500
Capital expenditures	(11,906)	(5,845)	(14,536)	(83,754)
Increase in capitalized development costs	-	-	-	(196,223)
Common stock redeemed	-	-	(173)	(339)
Net cash provided by (used in) investing activities	94,783	12,155	3,291	(279,816)
Cash flows from financing activities:
Proceeds from issuance of notes payable and other advances	108,298	20,640	405,640	277,500
Proceeds from common stock sold	599,784	76,142	76,143	1,238,421
Payments on notes payable and other advances	(70,128)	(214,915)	(475,791)	(278,326)
Proceeds from convertible debentures	-	(1,250,000)	1,250,000
Increase (decrease) in product finance obligations	-	-	-	-

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Net cash provided by financing activities	637,954	1,131,867	1,255,992	1,237,595
Net increase (decrease) in cash and cash equivalents	19,886	(142,054)	(159,802)	79,696
Cash and cash equivalents at beginning of period	764	160,566	160,566	80,870
Cash and cash equivalents at end of period	$80,008	$18,512	$764	$160,566
Supplemental idclosure of cash flow information
Cash paid for interest expense	$        -	$        -	$90,743	$36,407
Cash paid for income taxes	$        -	$        -	$        -	$        -
Non-cash investing and financing activities:
Interest paid	$        -	$25,561	$        -	$        -
Income taxes paid	$        -	$        -	$        -	$        -
Common stock issued upon conversion of debentures	$182,604	$-	$475,954	$        -
Effect of beneficial conversion feature and debt sicount on convertible debentures	$        -	$        -	$705,518	$        -
Common stock issued as settlement of accounts payable				$48,526
Addition to note payable for late payment penalty	$        -	$        -	$        -	$6,938
Common stock issue in exchange for notes payable, obligations under product financing arrangements and accrued interest payable	$        -	$        -	$159,782	$2,174,336
Cancellation of redeemable common stock	$        -	$        -	$           -	$         83

See accompanying notes to financial statements.

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VIRTRA SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

for the nine months ended September 30, 2006

__________

			Common	Additional Paid-In
	Common Stock		Stock		Accumulated
	Shares	Amount	Committed	Capital	Deficit	Total
Balance at December 31, 2005	65,983,600	$329,918	$                -	$9,755,785	($13,748,872)	($3,663,169)
Other common stock issued for cash	15,583,741	77,919		521,865		599,784
Common stock issued upon conversion of debentures	8,425,800	42,129		388,179		430,308
Common Stock Issued for Services	604,320	3,022		27,194		30,216
Common stock committed for issuance			130,000	-	-	130,000
Net loss	-	-	-	-	$  (414,133)	$  (414,133)
Balance at September 30, 2006	90,597,461	$ 452,987	$    130,000	$  10,693,024	($14,163,005)	($2,886,994)

See accompanying notes to financial statements.

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VIRTRA SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

__________

1.

Background and Summary of Significant Accounting Policies

Background

GameCom, Inc. (“GameCom”), a Texas corporation, was founded in 1996.  Effective September 21, 2001 GameCom merged with Ferris Productions, Inc. (“Ferris”) (together “the Company”) and the Company changed its name to VirTra Systems, Inc. (“VirTra”).  The Company is headquartered in Arlington, Texas, with a production facility located in Phoenix, Arizona.  The Company develops, manufactures and operates technically advanced personal computer and non-personal computer based products including virtual reality (“VR”) products for the training/simulation and advertising/promotion markets.

Use of Estimates

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

Revenue Recognition

Revenue from custom application contracts are recognized on a percentage-of-completion basis, measured by the percentage of costs incurred to date to total estimated costs for each contract.  Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs.  General and administrative costs are charged to expense as incurred.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.  Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.  An amount equal to contract costs attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.

Costs and estimated earnings in excess of billings on uncompleted contracts represent revenue recognized in excess of amounts billed.  Billings in excess of costs and estimated earnings on uncompleted contracts represent amounts billed in excess of revenue recognized.

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.  Collateral is generally not required for credit granted.  During the years ended December 31, 2005 and 2004 the Company had  three customers representing 36% and 85% of its custom application revenue, respectively.  Included in accounts receivable at December 31, 2005 is $58,404 or 32% due from one of these three customers.

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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.

Capitalized Development Costs

Capitalized development costs  consist of direct costs incurred in developing proprietary technology exclusively used in its 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, 2005, accumulated amortization of these intangible assets is $65,408.  During the years ended December 31, 2005 and 2004, the Company recorded amortization expense of $65,408 and $0, respectively.  During the year ended December 31, 2005 the Company did not capitalize any additional development costs.

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 is 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.

Income (Loss) Per Share

Basic income (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period.  Diluted income (loss) per share is calculated by adjusting the outstanding shares by common equivalent shares from common stock options and warrants.

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”. Under APB 25, because the exercise price of the Company’s employee stock options is greater than or equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized.

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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 2004:  risk free interest rate of 4%; no dividend yield; weighted average volatility factor of the expected market price of the Company’s common stock of 71%; and a weighted average expected life of the options and warrants 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.  There were no stock options or warrants granted to employees during 2005. The Company’s proforma informa tion is as follows:

	2005	2004
Net income (loss) before accounting change as reported	$(1,995,056)	$1,612,569
Net income (loss) before accounting change–proforma	$(1,995,056)	$  837,769
Basic income (loss) per share-as reported	$      (0.03)	$         0.03
Basic income (loss) per share-proforma	$      (0.03)	$         0.02
Diluted income (loss) per share-as reported	$      (0.03)	$         0.03
Diluted income (loss) per share-proforma	$      (0.03)	$         0.02

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.

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.

Reclassification

Certain amounts reported in the prior period financial statements have been reclassified to the current period presentation.

Recently Issued Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”.  In December 2003, the FASB issued a revision to FIN 46 (FIN 46R).  FIN 46R clarifies the application of ARB No. 51, “Consolidated Financial Statements”, to certain entities in which equity

43

investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders.  FIN 46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity.  The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.  Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions.  FIN 46R deferred the effective date of the Interpretation for public companies that are small busin ess issuers to the end of the first reporting period ending after December 15, 2004, except that all public companies must, at a minimum, apply the unmodified provisions of the Interpretation to entities that were previously considered “special-purpose entities” in practice and under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. FIN 46R requires entities to either (a) record the effects prospectively with a cumulative effect adjustment as of the date on which FIN 46R is first applied, or (b) restate previously issued financial statements for the years with a cumulative effect adjustment as of the beginning of the first year being restated.  The Company did not have any special purpose entities but does have an entity that qualifies as a variable interest entity under FIN 46R (See Note 3).

In December 2004, FASB issued SFAS No. 123R, “Share Based Payments”.  The statement requires public companies to measure the cost of employee services in exchange for an award of equity instruments to be based on the grant-date fair value of the award as determined by using an option-pricing model.  This statement eliminates the alternative to use APB No. 25’s intrinsic value method of accounting that was provided in Statement No. 123 as originally issued.  The statement also clarifies and expands Statement No. 123’s guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods.  For entities that file as a small business issuer, the effective date of this statement is the beginning of the first interim or annual reporting period that begins after December 15, 2005.  The Company adopted SFAS No. 123R effective January 1, 2006, using the modified prospective method.  This method applies the fair value based method to new awards and to awards modified, repurchased or cancelled after the required effective date.  Also, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the service is rendered on or after the required effective date.  Any options issued subsequent to January 1, 2006 will be accounted for under SFAS No. 123R.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”.  The new Statement amends ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material.  This Statement requires that those items be recognized as current period charges and requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities.  This Statement is effective for fiscal years beginning after June 15, 2005.  The adoption of this statement on January 1, 2006, did not have a material impact on the Company’s financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29”.  SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.  SFAS No. 153 is to be applied prospectively for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.  The adoption of this statement on January 1, 2006, did not have a material impact on the Company’s financial condition or results of operations.

In May 2005, the FASB issued SFAS no. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”.  In addition to replacing  APB Opinion No. 20 and FASB Statement No. 3, it changes the requirements for the accounting for and reporting a change in accounting principle.  This Statement applies to all voluntary changes in accounting principle.  It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  This Statement is effective for fiscal years

44

beginning after December 15, 2005.  The adoption of this statement on January 1, 2006 did not have a material impact on the Company’s financial position or results of operations.

2.

Going Concern Considerations

During the years ended December 31, 2005 and 2004, the Company has defaulted on its notes payable and obligations under product financing arrangements, has continued to accumulate payables to its vendors and has experienced negative financial results as follows:

	2005	2004
Net income (loss)	$(1,995,056)	$1,566,091
Negative cash flows from operations	$(1,419,085)	$(878,083)
Negative working capital	$(4,743,755)	$(4,470,338)
Accumulated deficit	$(13,748,872)	$(11,753,816)
Stockholders’ deficit	$(3,663,169)	$(3,241,230)

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

The Company’s 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  various government authorities 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:

The Company’s 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.

Accounting Change

On December 31, 2004, the Company adopted FASB Interpretation No. 46R (FIN 46R), “Consolidation of Variable Interest Entities (Revised)”.  This accounting change added assets and liabilities to the balance sheet as of that date resulting from the consolidation of Ferris Holdings, L.L.C., which was previously not included in the financial statements.  Ferris Holdings, L.L.C. is an entity 100% owned by an officer/director

45

of the Company.  This entity’s only asset is the land and building in Phoenix, Arizona that is currently leased by the Company.  Since the Company also guarantees performance on the entities’ debt related to this property, the Company has an implicit variable interest in this entity.  This accounting change resulted in $827,263 of additional property and equipment, net of accumulated depreciation, a $67,885 reduction in note receivable from a related party, and $805,856 of additional notes payable, but did not require an adjustment to earnings and is not expected to affect future earnings or cash flows.  The accounting change did result in a loss of $(46,478), which is reported as a “Cumulative effect of accounting change” in the accompanying statement of operations.

4.

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, 2005 all accounts receivable are considered collectible and the allowance for doubtful accounts is $0.

5.

Custom Application Contracts

Costs, estimated earnings and billings on uncompleted custom application contracts at December 31, 2005 are summarized below.  

Costs incurred on uncompleted contracts	$   69,269
Estimated earnings	114,939
	184,208
Billings to date	(268,858)
	$   (84,650)

These amounts are included in the accompanying balance sheet under the following captions:

Costs and estimated earnings in excess of billings on uncompleted contracts	$              -
Billings in excess of costs and estimated earnings on uncompleted contracts	$    84,650

6.

Property and Equipment

Property and equipment consisted of the following at December 31, 2005:

Land	$  140,000
Building	774,705
Computer equipment	330,222
Office furniture and equipment	196,413
	1,441,340
Less: accumulated depreciation	(489,710)
Property and equipment, net	$     951,630

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Depreciation expense for the years ended December 31, 2005 and 2004 was $97,823 and $82,332, respectively.

7.

Notes Payable

Notes payable consist of the following at December 31, 2005:

Note payable to a bank, bearing interest at 7.75% per year and due in monthly payments of $8,520 including interest, through May 31, 2006, at which time the monthly payment amount will increase as agreed upon with the bank at that time.  This note is collateralized by land and a building.	$773,933
Notes payable to a bank, bearing interest at 7.5% per year and due in monthly payments of $9,750, including interest, through May 31, 2006, at which time the monthly payment amount will increase as agreed upon with the bank at that time.  These notes are collateralized  by certain equipment, licensing rights and by the  personal guarantees of officers/stockholders of the  Company.	255,466
Notes payable to third party entities and individuals, who did not elect to exchange the debt for common stock (See Note 9), bearing interest at a stated rate of 10% payable semi-  annually with principal due three years after issuance  of the note, which ranged from October 2001 to March  2002.  These notes are not collateralized.  In connection with the funding of these notes, the former 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%.  No interest or  principal has been paid on these notes during the year  ended December 31, 2005.	66,500
Total notes payable	$1,095,899

Certain notes payable to banks contain various financial and non-financial covenants, which require the Company, among other things, to maintain certain levels of stockholders’ equity and to comply with certain financial ratios.  The Company was in violation of these covenants as of December 31, 2005 and the banks could demand full payment of all principal and interest.

8.

Obligations Under Product Financing Arrangements

In financing the production of its arcade equipment, the Company had entered into agreements whereby an entity or individual advanced funds to the Company to produce specific arcade equipment.  Under this arrangement, the Company had agreed to make monthly payments for a specified amount for three years, with an automatic renewal for an additional three years unless cancelled in writing, from the origination date as specified in the agreement.  In addition, the entity or individual advancing the funds had 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 had incurred debt issuance costs of approximately 21% of the total obligation.  These costs were amortized over a three year period using the interest method resulting in an effective annual interest rate of approximately 29% on these obligations.

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As of December 31, 2005, the Company was in default on its remaining obligations under the product financing arrangements (See Note 9) totaling $494,372, which included accrued interest.  The Company has not made any interest payments on these obligations since September 2001 and has received notices from various individuals and entities demanding buyouts of these obligations.

9.

Debt Exchange Agreement

During 2004, the Company presented an exchange offer to the holders of certain of its notes payable and obligations under product financing arrangements whereby the debt holders were allowed to convert the principal and accrued interest related to its debt to common stock of the Company under one of three options.  Under Option A, the debt holder could receive common stock equal to 0.6 shares per dollar of principal amount he or she was owed, and was not required to lock up any of the shares he or she receives in the exchange.  Under Option B, each debt holder could receive common stock equal to 0.9 shares per dollar of principal amount he or she was owed, but could not sell any of the shares for a period of six months, after which the shares could be sold in six equal monthly installments.  Under Option C, each debt holder could receive common stock equal to 1.2 shares per dollar of principal amount he or she was owed, but could not sell any of the shares for a period of one year, after which the shares could be sold in six equal monthly installments. During the years ended December 31, 2005 and 2004, the Company issued 393,400 and 5,303,258 shares of its common stock in exchange for the following: (i) $0 and $183,500 in principal and $0 and $49,069 of accrued interest, respectively on its notes payable (ii) $0 and $615,531 in principal and $0 and $155,475 of accrued interest, respectively on its notes payable to stockholders and (iii) $159,782 and $5,792,176 of principal and interest, respectively, outstanding on its obligations under product financing arrangements.  As a result of this debt exchange, the Company recorded $221,720 and $4,621,415 of forgiveness of debt income in the statement of operations for the years ended December 31, 2005 and 2004, respectively.

10.

Forgiveness of Debt

In addition to the forgiveness of debt income resulting from the Debt Exchange Agreement (See Note 9), the Company also wrote off various notes payable and certain other notes payable to stockholders that were settled through a lawsuit settlement.  Included in forgiveness of debt income in the statement of operations for the year ended December 31, 2005 and 2004 is $294,500 and $301,085, respectively, related to these settlements.

11.

Accrued Liabilities

Included in accrued liabilities as of December 31, 2005 is as follows:

Accrued payroll tax, including penalties and interest	$    810,188
Accrued property tax	55,133
Accrued interest payable	322,279
Deferred revenue	97,095
Accrued commissions payable	33,258
Other	9,749
	$1,327,702

12.         Convertible Debentures

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During February 2005 and August 2005 the Company issued $750,000 and $500,000, respectively, in convertible debentures.  The debentures bear interest at 8% per year payable in cash or registered common stock at the Company’s option.  The debentures mature in February and August 2008 and are convertible, at the option of the holder, to shares of the company’s common stock at a conversion price per share equal to the lower of (i) 80% of the lowest closing bid price for the common stock for the fifteen days prior to the conversion date; or (ii) 125% of the volume weighted average price on the closing date.

In addition the Company issued to the holders of the convertible debentures warrants to purchase 750,000 and 500,000 shares of the Company’s common stock (See Note 15).  In accordance with generally accepted accounting principles, the Company allocates the proceeds received from debt or convertible debt with detachable warrants or shares of common stock using the relative fair value of the individual elements at the time of issuance. Using the Black-Scholes valuation model, the Company has determined the aggregate value of the 750,000 warrants to be $117,427 (approximately $0.16 per warrant) and the value of the 500,000 warrants to be $48,655 (approximately $0.10 per warrant). The amount allocated to the warrants as debt discount has been recognized as additional interest expense over the period from the date of issuance of the note to the earlier of the conversion date or the stated maturity date. During the year ended December 31, 2005, the Company recognized $94,253 in interest expense related to the accretion of the debt discount recorded on these convertible debentures. As of December 31, 2005, the remaining balance of the debt discount was $71,829.

In accordance with generally accepted accounting principles, in the event the conversion price on debentures is less than the Company’s stock price on the date of issuance, the difference is considered to be a beneficial conversion feature and is amortized as interest expense over the period from the date of issuance to the earlier of the conversion date or the stated maturity date. The Company has calculated the aggregate beneficial conversion feature of these convertible debentures to be $398,677 on the $750,000 debentures and $140,760 on the $500,000 debentures. During the year ended December 31, 2005, the Company recognized $312,095 in interest expense related to the amortization of the beneficial conversion feature recorded on these convertible debentures.  As of December 31, 2005 the remaining balance of the beneficial conversion feature was $227,341.

13.

Income Taxes

The Company has incurred losses since its inception and, therefore, has not been subject to federal income taxes.  As of December 31, 2005, the Company had net operating loss (“NOL”) carryforwards for income tax purposes of approximately $11,375,000 which expire in various tax years through 2025.  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, 2005 are as follows:

Deferred tax assets:
Net operating losses	$3,868,243
Intangible assets	18,493
Valuation allowance	(3,863,327)
Total deferred tax assets	23,409
Deferred tax liabilities:

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Property and equipment	(23,409)
Total deferred tax liability	(23,409)
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, 2005 and 2004 is as follows:

	2005		2004
	Amount	%	Amount	%
Provision (benefit) for income tax at federal
statutory rate	$(678,319)	(34.0)	$   548,273	34.0
Increase (decrease) in valuation allowance	562,758	28.2	(860,556)	(53.4)
Non-deductible interest and financing costs	138,158	6.9		-
Non-deductible compensation expense	52,945	2.6	215,526	13.4
Non-deductible lawsuit (gain) loss	(78,200)	(3.9)	95,200	5.9
Other	2,658	0.2	1,557	0.1
	$           -	0.0	$               -	0.0

14.

Redeemable Common Stock

In 1997 the Company entered into an agreement to redeem 1,505,399 shares of common stock from certain stockholders at par value of $.005 per share with the consideration for such redemption to be paid pro-rata to such stockholders by March 31, 1998.  During 2000 the Company and stockholders released 727,108 shares of common stock from the redemption requirement and 287,531 shares were redeemed.  During 2004 the Company released an additional 16,559 shares of common stock from the redemption requirement and 67,743 shares of common stock were redeemed. During 2005, the Company redeemed 34,624 shares of common stock. As of December 31, 2005, 371,834 shares remain to be redeemed at the option of the Company.

15.

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 September 2001 the Company’s stockholders amended the 2000 Incentive Stock Option Plan (the “Plan”).  The stockholders 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 years ended December 31, 2005 and 2004, no options have been granted to employees under this Plan.  As of December 31, 2005, options to purchase 100,000 shares of common stock are outstanding under the Plan.

Effective September 1, 2003, the Company granted stock options to purchase 1,000,000 shares of common stock at $0.10 per share to an employee.  Options to purchase 200,000 shares are considered vested and exercisable upon the employee generating $600,000 of revenue for the Company during the first year of employment.  Options to purchase 300,000 shares are considered vested and exercisable upon the employee generating $1,200,000 of revenue for the Company during the second year of employment.  Options to purchase 500,000 shares are considered vested and exercisable upon the employee generating $1,500,000 of revenue for the Company during the third year of employment.  These options expire at the end of each

50

respective year if the revenue amounts are not achieved. As of December 31, 2004 options to purchase 200,000 shares of common stock became vested and exercisable resulting in compensation expense of $4,000.  As of December 31, 2005 options to purchase 300,000 shares of common stock expired as the revenue target was not met.  These options expire five years from the date they become vested.

Effective November 1, 2004, the Company granted options to purchase 4,000,000 shares of common stock to its CEO.  These options become vested and exercisable as follows:  (i) 2,000,000 shares at an exercise price of $0.31 per share upon 85% conversion of debt to equity related to the Debt Exchange Agreement (See Note 9); (ii) 1,000,000 shares at an exercise price of $0.31 per share upon the Company’s first profitable quarter; and (iii) 1,000,000 shares at an exercise price of $0.005 per share upon the Company achieving positive stockholders’ equity. As of December 31, 2004, options to purchase 3,000,000 shares of common stock at an exercise price of $0.31 per share, which approximated fair value at the grant date, became vested and exercisable.  During the year ended December 31, 2005 no additional options became vested and exercisable.  These options expire on October 31, 2009.

Effective November 1, 2004, the Company granted options to purchase 1,000,000 shares of common stock to its President with an exercise price of $0.31 per share, which approximated fair market value at the grant date.  These options became vested and exercisable upon the Company’s first profitable quarter.  As of December 31, 2004, these options were fully vested and exercisable and expire on October 31, 2009.

A summary of the Company’s stock option activity and related information for the years ended December 31, 2005 and 2004 follows:

	Number of Shares Under Options	Weighted-Average Exercise Price
Outstanding – December 31, 2003	4,173,000	$0.12
Granted	5,000,000	$0.25
Exercised	-	-
Forfeited/cancelled	(3,073,000)	$0.005
Outstanding – December 31, 2004	6,100,000	$0.22
Granted	-	-
Exercised	-	-
Forfeited/cancelled	(300,000)	$0.10
Outstanding – December 31, 2005	5,800,000	$0.23
Exercisable – December 31, 2005	4,300,000	$0.30

Following is a summary of outstanding stock options at December 31, 2005:

Number of Shares	Vested	Expiration  Date	Weighted Average Exercise Price
100,000	100,000	2012	$0.21
700,000	200,000	2009	$0.10
1,000,000	-	2009	$0.005
4,000,000	4,000,000	2009	$0.31
5,800,000	4,300,000

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In July 2002, the Company entered into an agreement for up to a maximum $5,000,000 sale of its common stock to Dutchess Private Equities Fund, LP (“Dutchess”).  Under this investment agreement the Company has the right to issue a “put notice” to Dutchess to purchase the Company’s common stock.  Put notices cannot be issued more frequently than every seven days.  The required purchase price is equal to 92% of the average of the four lowest closing bid prices of the common stock during the five-day period immediately following the issuance of the put notice.  Each individual put notice is subject to a maximum amount equal to 175% of the daily average volume of the common stock for the 40 trading days before the issuance of the put notice multiplied by the average of the closing bid prices of the common stock for the three trading days immediately preceding the put notice date.  Regardless of the amount stated in a put notice, the maximum amount that Dutchess is required to purchase is the lesser of the amount stated in the put notice or an amount equal to 20% of the aggregate trading volume of the common stock during the five days immediately following the date of the put notice times 92% of the average of the four lowest closing bid prices of the common stock during this five-day period.  During the year ended December 31, 2005 and 2004 the Company received $76,142 and $1,238,421, respectively of net proceeds from the issuance of 246,352 and 4,294,707 shares, respectively,  of its common stock related to this agreement.

In February 2005, the Company entered into a new investment agreement with Dutchess for up to a maximum $6,000,000 sale of its common stock.  Under this investment agreement the Company has the right to issue a “put notice” to Dutchess to purchase the Company’s common stock.  Put notices cannot be issued more frequently than every seven days.  The required purchase price is equal to 92% of the average of the four lowest closing bid prices of the common stock during the five-day period immediately following the issuance of the put notice.  Each individual put notice is subject to a maximum amount equal to 175% of the daily average volume of the common stock for the 40 trading days before the issuance of the put notice multiplied by the average of the closing bid prices of the common stock for the three trading days immediately preceding the put notice date.  Regardless of the amount stated in a put no tice, the maximum amount that Dutchess is required to purchase is the lesser of the amount stated in the put notice or an amount equal to 20% of the aggregate trading volume of the common stock during the five days immediately following the date of the put notice times 92% of the average of the four lowest closing bid prices of the common stock during this five-day period.  During the year ended December 31, 2005, no shares of common stock were issued under this agreement.

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

	Number of Shares	Weighted Average Exercise Price
Outstanding at December 31, 2003	996,703	$0.38
Granted	-	-
Exercised	-	-
Forfeited	-	-
Outstanding at December 31, 2004	996,703	$0.38
Granted	1,750,000	$0.29
Exercised	-	-
Forfeited	-	-
Outstanding at December 31, 2005	2,746,703	$0.29

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In connection with the issuance of Convertible Debentures in 2005 (see note 12) the Company issued stock warrants to purchase 500,000 shares of the Company’s common stock at $0.33, 250,000 shares of the Company’s common stock at the lowest market price five days prior to funding and 500,000 shares of the Company’s common stock at $0.19 per share.  These warrants are exercisable over a 5 year period.

During August of 2005, the Company issued stock warrants to a consultant to purchase 500,000 shares of the Company’s common stock at prices ranging from $0.25 to $0.40 per share.  These warrants vest upon grant and are exercisable over a three-year period.  Using the Black-Scholes Option Pricing Model with the following assumptions:  (i) volatility of 71%, and (ii) interest rate of 3.5%, the value of the warrants were estimated to be $40,251 which was recorded as selling, general and administrative expense in the statement of operations for the year ended December 31, 2005.

16.

Net Income (Loss) Per Share

Basic earnings per share is calculated using the weighted average shares of common stock outstanding during the periods.  Diluted earnings per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method for convertible preferred stock, convertible secured debentures and convertible secured promissory notes, and the treasury stock method for options and warrants.

For the year ended December 31, 2004, potentially dilutive securities, which consist of warrants to purchase 500,000 shares of common stock at an exercise price of $0.71 per share were not included in the computation of diluted net income per share because such inclusion would be antidilutive. For the year ended December 31, 2005, all of the outstanding stock options and warrants were not included in the computation of diluted net income (loss) per share since such inclusion would be antidilutive.

The following table sets for the computation of basic and diluted net income (loss) per share for the years ended December 31, 2005 and 2004:

	2005	2004
Numerator:
Net income (loss) before accounting change	$(1,995,056)	$1,612,569
Denominator:
Denominator for basic calculation weighted average shares	62,221,809	51,675,342
Dilutive common stock equivalents:
Stock options	-	341,246
Stock warrants	-	433,988
Denominator for diluted calculation weighted average shares	62,221,809	52,450,576
Net income (loss) per share:
Basic net income (loss) per share	$       (0.03)	$        0.03
Diluted net income (loss) per share	$       (0.03)	$        0.03

17.

Commitments and Contingencies

Lease Obligations

The Company rents office space in Arlington, Texas on a month-to-month basis at $1,500 per month from an officer and stockholder of the Company.  No payments were made during the years ended December 31, 2005 and 2004.  Included in accounts payable at December 31, 2005 is $75,750 owed to the officer and

53

stockholder for this rent.  Included in the statement of operations for the years ended December 31, 2005 and 2004 is rent expense of $18,000 each year related to this lease.

Employment Contract

Effective September 1, 2003, the Company entered into a contract with an employee whereby the employee is to receive a base salary and a four percent cash commission on all sales originated by the employee.  In addition, the employee is entitled to receive options to purchase 1,000,000 shares of the Company’s common stock with an exercise price of $0.10 per share, if certain sales targets are achieved for each of the next three years.  If the sales targets are not achieved, the stock options will not be exercisable.  As of December 31, 2004 the sales target in the first year was achieved, therefore, options to purchase 200,000 shares of common stock became exercisable.  During December 31, 2005 the sales target in the second year was not achieved, therefore, options to purchase 300,000 shares of common stock were cancelled (See Note 15).

Litigation

On May 8, 2003, the Company filed a declaratory judgment lawsuit in the 348^th state district court of Tarrant County, Texas against Legg Mason Wood Walker Incorporated and the Depository & Clearing Corporation.  In this suit, the Company refers to the district court’s prior ruling that the Company’s cancellation of shares of the common stock formerly in the name of William E. K. Hathaway II c/o Olympic Holdings, L.L.C. was proper, and in this suit the Company seeks a further judicial determination that Hathaway’s subsequent endorsement of his certificate to these companies was ineffective, as the certificate was no longer genuine and could not be registered, and, further due to other alleged irregularities, resulting in the Company having no liability to these companies.  The Company subsequently dismissed Depository & Clearing Corporation from the lawsuit without prejudice.  On July 2, 2003 , Legg Mason counterclaimed against the Company for $277,855, representing the costs Legg Mason endured when required to purchase 700,000 shares of the Company’s stock on the open market to cover its short position resulting from the Company’s transfer agent’s confiscation of the certificate originally issued to Mr. Hathaway.  On March 16, 2005, the court granted Legg Mason’s motion for summary judgment, and entered judgment in favor of Legg Mason against the Company for $277,855. As of December 31, 2004 the Company had recorded $280,000 in accrued liabilities related to this case. During 2005 this lawsuit was settled for a $50,000 cash payment and the Company recorded a gain on settlement related of this case of $230,000.

The Company is also involved in litigation related to its delinquent repayment of certain of its obligations under product financing arrangements, notes payable to stockholder and accounts payable to vendors.  Management believes that such litigation will not have a material impact on the Company’s financial position, results of operations or cash flows as the amounts owed to these individuals and entities have been accrued in the accompanying balance sheet.  

The Company is currently a party to certain other 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.

18.

Related Party Transactions

During November 2004, the Company issued 1,000,000 shares of common stock to its CEO and 1,000,000 shares of common stock to a member of its board of directors for services provided to the Company during 2004.  Based on the fair market value of the common stock at the date of issuance, the Company recorded $620,000 of compensation expense in its statement of operations for the year ended December 31, 2004.

Included in accounts payable in the December 31, 2005 balance sheet is $403,898 and $75,750 payable to a firm which is owned by an officer/stockholder of the Company for legal services and office rent, respectively (See Note 17).

54

19.

Subsequent Events

On January 10, 2006 the Company entered into an agreement to merge with a newly-formed entity, Virtra Merger Corporation, which in anticipation of the merger, is to acquire Altatron International, Inc., Chrysalis Manufacturing Corporation and Dynalist Manufacturing.

The Companies are currently in the due diligence phase, however, there can be no assurance that the acquisition will be consummated.

55

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 34,083,741 Shares of Common Stock

TABLE OF CONTENTS Prospectus Summary 2 Risk Factors 4 Selling Shareholders 10 Use of Proceeds 11 Capitalization 11 Plan of Distribution 11 Price Range of Common Stock 12 Dividend Policy 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Business 17 Management 25 Certain Transactions 30 Legal Proceedings 30 Description of Securities 30 Legal Matters 33 Experts 33 Where You Can Find More Information 34 Financial Statements 35

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

56

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	$    148
Legal fees	5,000
Accounting fees	5,000
Miscellaneous	5,000
Total	$15,148

ITEM 26. Recent Sales of Unregistered Securities

The following is a list of our securities that have been sold or issued by us during the past three years.

On December, 2004, we accepted promissory notes and financing equipment leases tendered under the terms of an exchange offer, obligating us to issue 5,303,258 shares of our common stock in exchange for cancellation of $799,031 in principal and $204,544 of interest on our outstanding promissory notes, and $3,852,000 in principal and $1,940,176 of interest on our outstanding financing equipment leases issued in 1997 through 2001.  These shares were issued in reliance upon Section 3(a)(9) of the Act as an exchange with existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

In January of 2005, we issued 100,000 restricted shares of our common stock to Major General Perry V. Dalby, in connection with consulting services rendered.  Management believes that the fair market value of the shares was approximately $20,000.  These shares were issued in reliance upon section 4(2) of the Act and the accredited investor exemption contained in section 4(6) of the Act.

Between September, 2003 and January, 2005, we issued an aggregate of 13,926,195 shares to Dutchess, estimated by management to be worth approximately $2,598,119, under the terms of our previous equity line of credit dated July 11, 2002, and upon conversion of debentures issued in connection with that equity line.  These shares were issued in reliance on Section 4(2) under the Act as a transaction by the issuer not involving a public offering.  Their sale by Dutchess was registered on the SB-2 registration statement filed on August 12, 2002.

In February of 2005, we issued 75,000 restricted shares of our common stock, with piggy-back rights, to Gary Cella in connection with management services to be provided.  Management believes that the fair market value of the shares is approximately $12,375.  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 April of 2005, we issued 89,286 restricted shares of our common stock to Major General Perry V. Dalby in connection with consulting services provided.  We believe that the fair market value of the shares is 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.

On March 17, 2006, we issued 604,320 shares of our common stock to Adam Bernard, III as a fee for consulting services. The 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.

During the period from March 15, 2006 through November 28, 2006, we sold an aggregate of 16,583,741 shares to 19 accredited investors. The 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.

ITEM 27. Exhibits

EXHIBIT

DESCRIPTION

NO

57

 (3.1)

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

(3.2)

Articles of Amendment to Articles of Incorporation of GameCom, Inc. dated April 30, 2002 effecting change in corporate name, incorporated by reference from Exhibit 3.6 to the registrant’s Registration Statement on Form SB-2 filed on August 13, 2002

(3.3)

Articles of Amendment to Articles of Incorporation of VirTra Systems, Inc. dated June 25, 2002 increasing authorized shares, incorporated by reference from Exhibit 3.7 to the registrant’s Registration Statement on Form SB-2 filed on August 13, 2002.

(3.4)

Articles of Amendment to Articles of Incorporation of VirTra Systems, Inc. dated November 28, 2006 increasing authorized shares.

(3.5)

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 Warrant issued to Dutchess as commitment warrant, incorporated by reference from Exhibit 4.4 to the registrant’s Registration Statement on Form SB-2 filed on August 13, 2002

(4.2)

Form of Warrant issued to Dutchess as purchase warrant, incorporated by reference from Exhibit 4.5 to the registrant’s Registration Statement on Form SB-2 filed on August 13, 2002

(4.3)

Form of Warrant issued to Dutchess and other debenture holders on July 11, 2002 incorporated by reference from Exhibit 4.6 to the registrant’s Registration Statement on Form SB-2 filed on August 13, 2002.

(4.4)  

Form of Convertible Debenture issued to Dutchess, incorporated by reference from Exhibit 10.3 to Report on Form 8-K filed March 2, 2005

(4.5)

Form of Warrant issued to Dutchess, incorporated by reference from Exhibit 10.4 to Report on Form 8-K filed March 2, 2005

 (5.1)

Legal opinion of Pryor Cashman Sherman & Flynn LLP

(10.1)

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

(10.3 )

Debenture Subscription Agreement dated February 25, 2005 with Dutchess, incorporated by reference from Exhibit 10.2 to Report on Form 8-K filed March 2, 2005

(10.4)

Employment Agreement dated June 20, 2006 with Perry V. Dalby.

(23.1)

Consent of Pryor Cashman Sherman & Flynn LLP (contained in Exhibit 5)

(23.2)

Consent of Ham, Langston & Brezina, LLP*

(24.1)

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

(99.1)

Sample form of equipment lease for equipment used in amusement and theme parks, incorporated by reference from Exhibit 99.1 to the registrant’s Registration Statement on Form SB-2 filed on August 13, 2002.

(99.2)

Lease for Arizona facility.

58

*

To be filed by amendment

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 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 approp riate 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 amendment to be signed on its behalf by the undersigned in the City of Arlington, Texas on  January 22, 2007.

VirTra Systems, Inc.

By:

/s/ Perry V. Dalby                        

Perry V. Dalby, Chief Executive Officer

59

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Perry V. Dalby, 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 h ereof

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/ Perry V. Dalby                         Perry V. Dalby,	Chief Executive Officer, Chairman of the Board of Directors, Chief Financial Officer and Chief Accounting Officer	January 22, 2007
/s/ Bob Ferris                  Bob Ferris	President and Director	January 22, 2007
/s/ H. Frank Stanley       H. Frank Stanley	Director	January 22, 2007
Thomas J. Cloud	Director	January 22, 2007

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EX-3

Exhibit 3.4

ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF

VIRTRA SYSTEMS, INC.

The undersigned, chief executive officer of Virtra Systems, Inc., a Texas Corporation, certifies as follows.

1.

The name of the corporation is Virtra Systems, Inc.

2.

Paragraph A of Article Four of the Articles of Incorporation, which paragraph sets forth the number of shares which the corporation is authorized to issue, is amended to read as follows:

A.

Authorized Capital Stock. The aggregate number of shares of all classes of stock the Company shall have authority to issue is 502,000,000 consisting of and divided into:

i.

one class of 500,000,000 shares of Common Stock, par value $0.005 per share (the 'Common Stock'); and

ii.

one class of 2,000,000 shares of Preferred Stock, par value $0.005 (the 'Preferred Stock'), which may be divided into and issued in one or more series, as hereinafter provided."

3.

The shareholders of the corporation adopted the amendment on November 27, 2006.

4.

The amendment has been approved in the manner required by the Business Corporation Act and the constituent documents of the corporation

Dated: November 27, 2006

_______________________________

Perry V. Dalby, chief executive officer

EX-5

Exhibit 5

January 17, 2007

VirTra Systems, Inc.

2500 CityWest Boulevard, Suite 300

Houston, Texas 77042

Re:    VirTra Systems, Inc. Registration on Form SB-2

Gentlemen:

We have acted as your counsel in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") of a Registration Statement on Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). You are a Texas corporation, and the Registration Statement covers the sale of up to 34,083,741 shares of your common stock, par value $.005 per share (the "Shares"), to be offered for sale by selling shareholders identified in the Registration Statement.

We have examined copies,  certified or otherwise identified to our satisfaction, of such of your records, certificates of your officers and of public officials and such other documents as we have deemed relevant and necessary as the basis for the opinion set forth below. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies.

Based upon our examination, subject to the assumptions stated and relying on statements of fact contained in the documents that we have examined, we are of the opinion that the Shares being offered for sale by the selling stockholders are duly authorized, and will be, when issued in the manner described in the Registration Statement, legally and validly issued, fully paid and non-assessable.

We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm appearing under the caption "Legal Matters" in the prospectus that forms a part of the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the General Rules and Regulations of the Commission.

We are admitted to the Bar in the State of New York and we express no opinion as to the laws of any other jurisdiction, except the Texas Business Corporation Act and the laws of the United States of America.

Very truly yours,

/s/ Pryor Cashman Sherman & Flynn LLP

EX-10

EMPLOYMENT AGREEMENT

This Employment Agreement (“Agreement”) is made and entered into as of June 20, 2006 by and between VirTra Systems, Inc., a Texas corporation (“VirTra”), and Mr. Perry Dalby (“Employee”), with respect to the following facts:

A.

Chrysalis (d/b/a Altatron EMS) performs contract manufacturing services (pcb and boxbuild) in the electronics industry.

B.

VirTra Systems, Inc. develops and constructs situational awareness firearms training simulators.

C.

VirTra has entered into a certain Agreement of Merger dated January 2006 with Chrysalis, a Texas corporation (“Chrysalis”) whereby Chrysalis intends to merge with and into VirTra Systems (the “Merger”).

D.

VirTra desires to retain employee as the Chief Executive Officer of VirTra and then upon consummation of the Merger to appoint Employee as the combined surviving public entity’s Chief Executive Officer.  For purposes of this Agreement, the surviving public entity in such merger is referred to as the “Merger Survivor”.

In consideration of the covenants and conditions herein contained, and for good and valuable consideration, the parties hereto agree as follows:

1.

Appointment and Employment.  Employee hereby agrees to provide to VirTra, Employee’s services as Chief Executive Officer.  In connection with and upon consummation of the Merger, Employee shall be appointed as the Merger Survivor’s Chief Executive Officer and this Agreement shall be assigned to and assumed by the Merger Survivor.

2.

Term.  The term of this Agreement shall commence on July 1st, 2006 and shall continue for a period of two (2) years unless otherwise terminated as set forth herein (the “Term”).  Upon expiration of the initial term, this Agreement shall automatically renew for successive one year periods unless sooner terminated by either party.

3.

Compensation.  In full consideration for the undertakings of and the services to be rendered by Employee to VirTra, VirTra agrees to pay Employee, and Employee agrees to accept, the following:

(a) Stock:  Employee is entitled to 1,000,000 shares of Company stock at a strike price of $.035 in consideration of past performance and as a signing bonus.

(b) Salary:  $150,000 per year, payable in company stock or cash and provided in equal installments twice a month on the regular paydays of VirTra.  If paid in stock, the stock price will be computed as the average daily close stock price over the days of the pay period.

(c) Board of Directors:  Employee will be added to the Board of Directors of Company within 30 days from the first day of employment with Company.  Employee will receive compensation of $10,000 per quarter while a member of the Board of Directors, to be paid in stock, cash, or stock options.

(d) Bonus Program:  Employee to receive the following bonus programs.

(i) Profitability: If the Company reports a profitable year of at least $100,000 in net profit, Employee would receive 7.5% of net profit in the form of cash or stock.

(ii) Stock Options: VirTra’ Board of Directors will grant to Employee stock options to purchase up to 2,000,000 shares of stock at a strike price of $.035 per share with the following trigger points:  500,000 shares if the stock price averages $.10 or higher for one quarter, 500,000 shares if the stock price averages $.25 of higher for one quarter, 500,000 shares if the stock price averages $.50 or higher for one quarter, and 500,000 shares if the stock price averages $1 of higher for one quarter.

4.

Benefits.  Employee will be entitled to all rights and benefits for which Employee is otherwise eligible under any health insurance plans, vacation policies, sick leave policies, profit sharing plans that VirTra provides or during the Term of this Agreement may provide to its employees or officers in comparable positions.  During the Term, Employee shall receive three weeks accrued vacation per year and all of the benefits provided for in this Section 4 shall commence as of Employee’s commencement of employment.

5.

Reimbursement of Business Expenses.  VirTra will, upon submission of appropriate documentation, within 15 days reimburse employee for reasonable expenses (including travel, entertainment, business meetings, telephone and similar items) incurred by Employee during the term of this Agreement.

6.

Termination of Employment and Severance Benefits.

(a)

Termination of Employment.  Employee’s employment and this  Agreement may be terminated upon the occurrence of any of the following events:

(i)

VirTra’s determination in good faith that it is terminating Employee for Cause (as defined in Section 7(a) below) (“Termination for Cause”);

(ii)

VirTra’s determination that it is terminating Employee without Cause, which determination may be made by VirTra at any time at VirTra’s sole discretion, for any or no reason (“Termination Without Cause”);

(iii)

 The effective date of a written notice sent to VirTra from Employee stating that Employee is electing to terminate his or her employment with VirTra (“Voluntary Termination”);

(iv)

A change in Employee’s status such that a Constructive Termination (as defined in Section 7(b) below) has occurred; or

(v)

As a result of Employee’s death or Disability (as defined in Section 7(c) below).

(b)  

Severance Benefits.  Employee will be entitled to receive severance benefits upon termination of employment only as set forth in this Section 6(b):

(i)

Voluntary Termination.  If Employee’s employment terminates by Voluntary Termination, then Employee will not be entitled to receive payment of any severance benefits.  Employee will receive payment(s) for all salary as of the date of Employee’s termination of employment and Employee’s benefits will be continued under VirTra’ then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination and in accordance with applicable law.

(ii)

Involuntary Termination during Original Term.  Subject to Sections 7 and 8 below, if Employee’s employment is terminated under Section 6(a)(ii) or 6(a)(iv) above (such termination, an “Involuntary Termination”), Employee will be entitled to receive payment of severance benefits only as set forth in this Section 6(b)(ii).

(A)

Salary Continuance.  If Employee experiences an Involuntary Termination, Employee will be entitled to receive an amount equal to his or her regular monthly salary (subject to any applicable tax withholding) as of the time of termination for two (2) months following such termination.  

(B)

Pro-Rated Quarterly Bonus.  Employee will also be entitled to receive payment within 30 days of the date of termination of the pro-rated portion of any target quarterly bonus accrued to Employee through such date of termination, as determined by the Board of Directors based on the specific corporate or individual performance targets for such quarter or year to date activity.

(C)

Other Benefits.  Health insurance benefits with the same coverage provided to Employee prior to the termination (e.g. medical, dental, optical, mental health) and in all other respects significantly comparable to those in place immediately prior to the termination will be provided at VirTra’ cost over the Applicable Severance Period.

(iii)

Termination for Cause.  If Employee’s employment is terminated for Cause, then Employee will not be entitled to receive payment of any severance benefits.  Employee will receive payment(s) for all salary and unpaid vacation accrued as of the date of Employee’s termination of employment and Employee’s benefits will be continued under VirTra’ then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination and in accordance with applicable law.

(iv)

Termination by Reason of Death or Disability.  In the event that Employee’s employment with VirTra terminates as a result of Employee’s death or Disability (as defined in Section 6(c) below), Employee or Employee’s estate or representative will receive all salary and unpaid vacation accrued as of the date of Employee’s death or Disability and any other benefits payable under VirTra’ then existing benefit plans and policies in accordance with such plans and policies in effect on the date of death or Disability and in accordance with applicable law.  In addition, Employee’s estate or representative will receive the pro-rated portion of any target quarterly bonus accrued to Employee through such date of termination, as determined by the Board of Directors based on the specific corporate or individual performance targets for such quarter.

1.

Definitions.  For purposes of this Agreement, the following definitions will apply:

(a)

“Cause” for Employee’s termination will exist if VirTra terminates Employee’s employment for any of the following reasons:  (i) Employee’s willful failure substantially to perform his or her duties hereunder (other than any such failure due to Employee’s physical or mental illness), and such willful failure is not remedied within 30 business days after written notice from the Chairman of the Board or Director, which written notice shall state that failure to remedy such conduct may result in Termination for Cause, (ii) Employee’s engaging in willful and serious misconduct that has caused material adverse injury to VirTra, or (iii) Employee’s conviction of or entering a plea of guilty or nolo contender to a crime that constitutes a felony.

(b)

“Constructive Termination” will be deemed to occur if Employee voluntarily resigns within 90 days following (i)  a material reduction in Employee’s job responsibilities, (ii) VirTra requires Employee to relocate to a facility or location more than 30 miles from original location for Employee, (iii) a reduction in Employee’s then-current base salary, or (iv) if the Merger is not consummated and Employee is not appointed as Chief Executive Officer of the Merger Survivor within six months of the date of this Agreement.

(c)

“Disability” will mean that Employee has been unable to perform his or her duties hereunder as the result of his or her incapacity due to physical or mental illness, and after its commencement such inability, which continues for at least 120 consecutive calendar days or 150 calendar days during any consecutive twelve-month period, is determined to be total and permanent by a physician selected by VirTra and its insurers and acceptable to Employee or to Employee’s legal representative (with such agreement on acceptability not to be unreasonably withheld).

2.

Change of Control.  

(a)

If a Change of Control (as defined below) occurs and, within two years of the date of such Change of Control, Employee’s employment is terminated, or Employee resigns for good reason (as defined below), then (A) VirTra shall continue to pay Employee’s annual base salary as set forth in Section 3(a) for a period of 2 months, and (B) all of Employee’s stock options will vest to the extent any options are then unvested.  If Employee dies during the 12-month period during which payments are to be made under this Section 8, VirTra agrees that it shall pay any payments remaining unpaid under this Section 8 as a death benefit to Employee’s estate in the same manner as Employee would have been paid.    Such payments will be made in one lump sum payment within two weeks of the date of termination of Employee’s employment, subject to the applicabl e rules and regulations of Section 409A of the Internal Revenue Code and any regulations promulgated thereunder.

(b)

In the event this Agreement is terminated by Employee after a Change of Control for other than good reason, then, at the time the termination is effective, all benefits and payments provided for hereunder shall terminate, and, without limiting the foregoing, Employee shall not be entitled to any severance or other payments other than for salary and other compensation earned by Employee through the effective date of such termination.

(c)

A “Change of Control” shall be deemed to occur if (i) any person, corporation, partnership, trust, association, enterprise (each a “Person”) or group of Persons acting in concert as a partnership or other group (a “Group of Persons”), shall become the beneficial owner, whether as a result of a tender or exchange offer, open market purchase, privately negotiated purchases or otherwise, directly or indirectly, of outstanding capital stock of VirTra possessing at least 50% of the voting power (for the election of directors) of the outstanding capital stock of VirTra, or (ii) there shall be a sale of all or substantially of VirTra’ assets or VirTra shall merge or consolidate with another corporation and the stockholders of VirTra immediately prior to such transaction do not own, immediately after such transaction, stock of the purchasing or surviving corporation in the transaction (or of the parent corporation of the purchasing or surviving corporation) possessing more than 50% of the voting power (for the election of directors) of the outstanding capital stock of that corporation, which ownership shall be measured without regard to any stock ownership of the purchasing, surviving or parent corporation by the stockholders of VirTra before the transaction or (iii) a majority of the Board of Directors of VirTra shall be replaced, over a two-year period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors then still in office who were either members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved.  Employee’s resignation would be with “good reason” if after a Change of Control any event described in Section 7(b) as Constructive Termination occurs.

3.

Notices.  Any notice required or permitted to be given under this Agreement shall be sufficient if in writing, and if sent by regular, first-class mail or by certified or registered mail or facsimile as follows:

To Employee:

Perry Dalby

To VirTra:

VirTra Systems, Inc.

2500 City West Blvd., Suite 300

Houston, Texas 77042

Attn:  David Rogers, CFO

Facsimile: __________________

or other such address as either party shall specify in a notice to the other.  Employee shall promptly notify VirTra in writing of any change of Employee’s address.  Notice shall be deemed given on the earlier of the date of actual receipt by the party to whom it is addressed or the date it is placed, postage prepaid, in a depository for U.S. mail or delivered to toll prepaid to a telegraph office.

4.

Noncompetition.  Employee agrees, acknowledges, and confesses that subsequent employment in the same or similar position or capacity by one of Employer‘s competitors would likely result in the inevitable disclosure of Employer‘s Confidential Business Information and Proprietary Subject Matter, resulting in immediate and irreparable harm for which Employer has no adequate remedy at law.  Employee further acknowledges that Employer‘s Confidential Business Information and Proprietary Subject Matter could and likely would actually be used by Employee to his or her subsequent employer’s competitive advantage and to Employer‘s competitive disadvantage.  Upon Employee’s voluntary resignation or Employer’s termination of Employee’s employment with Employer for cause, for whatever reason and whether voluntary or involuntary, Employee sha ll not, for a period of two years after the date of such termination, directly or indirectly, enter into or engage in competition with Employer in the 360-degree virtual reality situational awareness and judgmental use-of-force training/simulation business within the existing market area of Employer, which is expressly agreed upon by Employer and Employee to be worldwide. Any period of time during which Employee is in violation of this agreement, if any, shall not be counted in calculating the two-year period provided for in this Agreement.  Employee and Employer recognize and acknowledge that the situational awareness and judgmental use-of-force training/simulation business in which Employer is engaged has a limited market, and that Employer’s products are marketed internationally to relatively few customers, and therefore Employee and Employer understand and recognize the need of Employer to protect the proprietary nature of its Confidential Business Information and Proprietary Subject Matter on an international scale.  This non-competition agreement shall apply to Employee, whether as an individual, partner, joint venturer, consultant, employee, or agent for any person, firm, or corporation, or as an officer, director, or shareholder of any corporation.

11.

Successor of VirTra to Assume.  VirTra will require any successor, including Merger Survivor, (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or the assets of VirTra, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that VirTra would be required to perform this Agreement if no such succession had taken place.  As used in this Section, “VirTra” shall mean VirTra as hereinbefore defined and any successor to its business and/or assets which executes and delivers this Agreement as provided for in this Section, or which otherwise becomes bound by all of the terms and provisions of this Agreement by operation of law.

12.

Law Governing.  This Agreement shall be deemed to be entered into and performed in Texas, and shall, in all respects, be interpreted in accordance with and governed by the laws of Texas and the parties agree that they will be subject to the jurisdiction of the courts of Harris County, Texas.

13.

Waiver.  The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition.

14.

Severability.  In the event that any provision shall be held to be invalid or unenforceable for any reason whatsoever, it is agreed such invalidity or unenforceability shall not affect any other provision of this Agreement and the remaining covenants, restrictions and provisions hereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable.

14.

Entire Agreement.  This instrument constitutes the entire agreement between VirTra and the Employee relating to the Employee’s employment by VirTra and supersedes any prior agreements, promises and understandings.

15.

Amendment.  This Agreement may only be amended by an agreement in writing signed by the VirTra and the Employee.

16.

Attorneys’ Fees.  If any legal action or proceeding is brought to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees in addition to any other relief to which that party may be entitled.

IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date first above written.

VirTra Systems, Inc.

By:

_____________________________

Bob Ferris

CEO/President

EMPLOYEE:

___________________________________

Mr. Perry Dalby

2

EX-99

P40 1 72020-1

STANDARD INDUSTRIAL LEASE
(Arizona - gross lease)

This lease is made as of August 31, 2006, by and between Park 40, a General Partnership, ("Lessor"), and Virtra Systems, Inc., a Texas corporation qualified to do business in Arizona, ("Lessee"), who agree as follows:

1. PREMISES. Lessor leases to Lessee and Lessee accepts and leases from Lessor those certain premises Ieing approximately 8,000 square feet in area, commonly known as 1406 West 14¹" Street, Suite 101, Tempe, Arizona 85281 and depicted on Schedule 1 to this Lease (the "premises"). In addition to and together with the premises, Lessor grants to Lessee the non-exclusive right to utilize the sidewalks and parking areas adjacent to the premises for ingress and egress and for the parking of passenger and light truck motor vehicles during regular business hours. Lessor reserves the right to use the exterior walls and roof of the premises, as well as the floor and plenum in, above and below the premises for the repair, maintenance, use and replacement of pipes, ducts, utility lines and systems, structural elements se rving the property and for such other purposes as Lessor reasonably deems necessary. In exercising its rights reserved in this paragraph 1, Lessor shall use commercially reasonable efforts to not unreasonably interfere with the conduct by Lessee of its business at the premises.

2. TERM.

2.1 Term. The term shall be for a period of thirty seven (37) months, and shall commence October 1, 2006, and shall expire October 31, 2009 unless extended or sooner terminated pursuant to any provision hereof. At the expiration or earlier termination of this lease, all items of rent, taxes, insurance, utilities and other matters shall be adjusted and prorated as of the date of termination and Lessee shall pay to Lessor such sums as shall be required to accomplish such proration.

2.2 Delay in Possession. If for any reason Lessor cannot deliver possession of the premises by the date specified for the commencement of the term, Lessor shall not be liable for any damage caused for failing to deliver possession, and this lease shall be void or voidable. Notwithstanding the foregoing, Lessor will provide keys to Lessee on or before the commencement date of the Lease, although not all refurbishing by Lessor may be complete. Additionally, under no circumstances will Lessor provide keys to Lessee without the receipt of Lessee's general liability insurance naming Lessor as additional insurer.

2.3 Early Possession. Intentionally deleted. 2.4 Option to Extend Term.

(a)

Subject to the conditions hereinafter in this paragraph set forth, Lessee is given the option to extend the initial thirty seven (37) month term of this lease for a further period of three (3) years (the "extended term") upon the same terms and conditions as are herein contained with respect to the initial term, except that the rent shall be adjusted as herein set forth in paragraph 4.2 and Lessee shall have no further option to extend the term of this lease.

(b)

The right to exercise such option is subject to each and all of the following conditions:

(1)

Lessee shall give written notice to Lessor of the exercise of the option (the "option notice") at least ninety (90) days prior to the expiration of the initial thirty seven (37) month term;

(2)

The lease is in full force and effect at the time of giving the option notice, as well as at the commencement of the extended term; and

(3)

Lessee is not in default at the time of giving the option notice or at the commencement of the extended term.

3. ACCEPTANCE OF THE PREMISES.

3.1 Condition of Premises. Lessee's taking possession of the premises shall constitute Lessee's acknowledgment that the premises are in good condition, that Lessee's contemplated use of the premises as described in paragraph 7.1 is permitted under applicable governmental restrictions and under any recorded covenants, conditions and restrictions for the property of which the premises is part, that the type.

location and capacities of the utilities serving or available to the premises are sufficient for Lessee's purposes and except as otherwise provided in paragraph 3.2, Lessee is accepting the premises in its "as is" condition including, but not limited to all offices, air conditioning equipment, heating equipment, plumbing equipment, floor coverings, lighting fixtures and other electrical apparatus. Lessee acknowledges that prior to the execution of this lease, Lessor afforded to Lessee the opportunity to inspect the premises, to confirm that the type, location and capacities of utilities serving or available to the premises are sufficient for Lessee's purposes and that the use contemplated by Lessee for the premises as described in paragraph 7.1 is permissible under applicable governmental restrictions and any con vents, conditions and restrictions binding upon the property of which the premises is a part. Except as set forth in paragraphs 3.2 and 8.1 below, Lessor has no obligation to alter, change, decorate, improve or repair the premises, whether to adapt the premises for the use for which it is leased to Lessee or for any other purpose.

3.2 Refurbishing by Lessor. Lessor, at Lessor's sole cost, shall service the HVAC, evaporative coolers, mechanical, plumbing and roll-up doors prior to Lessee move-in. Lessor will install new VCT in the kitchen area and replace the existing counter in the kitchen area, Lessee shall pick colors for both. Additionally, Lessor shall carpet the one office with the epoxy floor and glue down any existing carpet tiles in the open showroom. The warehouse will be free of any existing equipment, damaged ceiling tiles will be replaced in the office area and the entire space will be professionally cleaned as well as all carpet steam cleaned.

4. RENT.

4.1 Monthly Rent. Lessee shall pay Lessor:

$ 0.00 per month commencing on October 1, 2006 and continuing up to and including October 31, 2006.

$ 7,440.00 per month commencing on November 1, 2006 and continuing up to and including October 31, 2007.

$ 7,600.00 per month commencing on November 1, 2007 and continuing up to and including October 31, 2008.

$ 7,760.00 per month commencing on November 1, 2008 and continuing up to and including October 31, 2009.

These amounts will be paid, together with sales tax, in advance and except as set forth in this Lease, without deduction, setoff, prior notice, or demand, on or before the first day of each month of the term hereof. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment based upon a calendar day month. Rent shall be payable to Lessor at the address to which notices to Lessor are given or to such other persons or at such other places as Lessor may designate in writing.

4.2 Rent During Extended Term To Be Negotiated by Parties. The parties shall have thirty (30) days after Lessor receives the option notice in which to agree on the monthly rent during the extended term. If the parties agree on the monthly rent for the extended term during that period, they shall immediately execute an amendment to this lease stating the monthly rent for the extended term. If the parties are unable to agree on the monthly rent for the extended term within that period, the option notice shall be of no effect and this lease shall expire at the end of the initial term. Neither party to this lease shall have the right to have a court or any other third party set the monthly rent for the extended term.

4.3 Additional Rent. In addition to rent, all other amounts to be paid by Lessee to Lessor pursuant to this lease including Lessee's pro rata share of insurance premiums and real property taxes and assessments, shall be deemed to be additional rent, whether or not designated as such, and shall be due and payable within ten (10) days after receipt by Lessee of Lessor's statement. Lessor shall have the same remedies for the failure to pay additional rent as for the non-payment of rent. All rent and additional rent shall be payable in current legal tender of the United States of America.

4.4 Application of Payments. Payments received by Lessor from Lessee, unless Lessor elects, in its sole discretion, otherwise, shall first be applied to any interest awed to Lessor pursuant to the provisions of paragraph 16.3 below, then to any late charges owed to Lessor pursuant to the provisions of paragraph 16.4 below, then

to any additional rent payable by Lessee to Lessor pursuant to the provisions of paragraph 4.3 above and the then to the monthly rent described in paragraph 4.1.

5.

SECURITY DEPOSIT. On execution of this lease, Lessee shall deposit with Lessor the sum of SEVEN THOUSAND SEVEN HUNDRED SIXTY AND 00/100 Dollars ($7,760.00) as a security deposit for the performance by Lessee of the provisions of this lease. If Lessee is in default, Lessor may use the security deposit, or any portion of it, to cure the default or to compensate Lessor for all damage sustained by Lessor resulting from Lessee's default. Lessee shall immediately on demand pay to Lessor a sum equal to the portion of the security deposit expended or applied by Lessor as provided in this paragraph so as to maintain the security deposit in the sum initially deposited with Lessor. If Lessee is not in default at the expiration or termination of this lease, Lessor shall return the security deposit (or so much thereof as has not been applied) to Lessee within a reasonable period of time after (i) Lessee vacates the premises in the condition required by this Lease, and (ii) Lessor has reconciled Lessee's payments of additional rent for the last year of the term of this Lease. Lessor's obligations with respect to the security deposit are those of a debtor and not a trustee. Lessee acknowledges and agrees that in the event Lessee shall file a voluntary petition pursuant to the Bankruptcy Code or any successor thereto, or if an involuntary petition is filed against Lessee pursuant to the Bankruptcy Code or any successor thereto, then Lessor may apply the security deposit towards those obligations of Lessee to Lessor which accrued prior to the filing of such petition. Lessor may maintain the security deposit separate and apart from Lessor's general funds or may commingle the security deposit with Lessor's general and other funds. Lessor shall not be required to pay Lessee interest on the security deposit. In no event shall the security deposit be used as rental for the last month of the term.

6.

TAXES.

6.1 Occupancy, Sales and Rent Taxes. In addition to and together with rent, Lessee shall pay to Lessor any governmental taxes now or hereafter imposed on rents collected or paid pursuant to the terms of this lease, including, without limitation, state, county or local rental, occupancy, sales, transaction privilege and excise taxes.

6.2 Personal Property Taxes. Lessee shall pay to the appropriate taxing authority, not later than ten (10) days prior to delinquency, all personal property taxes assessed against any personal property located on or used in connection with the premises.

6.3 Real Property Taxes and Assessments. Lessee shall pay all increases in real property taxes and assessments, whether the increase results from increased rates and/or valuation levied and assessed against the premises, over and above those real property taxes and assessments levied and assessed against the premises for the base year 2006.

If the premises are not separately assessed, Lessee's proportionate share of real property taxes and assessments increases shall be the product of the increase, multiplied by a fraction, the numerator of which the total number of square feet included in the premises and the denominator of which is the total number of square feet in all buildings included in the tax parcel.

Each year Lessor shall notify Lessee of the real property taxes and assessments and together with such notice shall furnish Lessee with a copy of the tax bill, and a copy of the tax bill for the base year if not previously furnished. Lessee shall pay Lessor for the increase in the real property taxes and assessments not later than ten (10) days after receipt of the notice from Lessor. Lessee's liability to pay real property taxes and assessments shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included in the term at its commencement and expiration. Lessee's obligation to pay increases in real property taxes and assessments for the last year of the term of this lease shall survive the expiration or earlier termination of this lease.

For the purposes of this lease, "real property taxes and assessments" shall mean and include all real property taxes and personal property taxes, general and special assessments, foreseen as well as unforeseen, which are levied or assessed upon or with respect to the property on which the premises is situated, any improvements, fixtures, equipment and other property of Lessor, real or personal, located on the property and used in connection with the operation of all or any portion of the property, as well as any tax, surcharge or assessment which shall be levied or assessed in addition to or in lieu of such real or personal property taxes and assessments. Real property taxes and assessments shall also include any expenses incurred by Lessor in contesting the amount or validity of any real or personal property

taxes and assessments. Real property taxes and assessments shall not, however, include any franchise, gift, estate, inheritance, conveyance, transfer or net income tax assessed against Lessor.

7. USE OF PREMISES.

7.1 Use of Premises: Lessee shall continuously occupy and use the premises throughout the term of this lease for the purpose of offices and warehousing for a virtual reality products company, and for no other purpose whatsoever. If Lessee wishes to change the use of the premises, Lessee shall first seek Lessor's prior written consent. Within thirty (30) days after receipt by Lessor of Lessee's request for consent, Lessor shall provide Lessee written notice that Lessor (i) consents to the proposed change in use, or (ii) declines to consent to the change (in which event, Lessor shall set forth the basis for its denial), or (iii) elects to terminate this lease, in which event this lease shall terminate ten (10) days following receipt by Lessee of Lessor's notice of termination.

72 Limitations on Use. Lessee shall not do or permit anything to be done in or about the premises which will (a) make void or voidable any insurance then in force with respect thereto, or make it impracticable or more expensive to obtain fire, liability or other insurance on the premises or increase the rate of fire insurance over that in effect prior to this lease, (b) cause or be likely to cause any waste or damage to the premises, (c) constitute a public or private nuisance, or violate the rights of adjoining owners or occupants, or violate any laws or any covenants, conditions or restrictions of record, or (e) in any way obstructs any public or private roadways, sidewalks or common areas adjoining the premises or interfere with the rights of other tenants or occupants of the property. Throughout the term of this lease, Lessee, at its sole cost and expense, shall promptly remove any violation and shall comply with all present and future laws, ordinances, orders, rules, regulations and requirements of all federal, state, and municipal governments, courts, departments, commissions, boards, any national or local Insurance Rating Bureau, or any other body exercising functions similar to those of any of the foregoing, and with all covenants, conditions and restrictions pertaining to the premises. In addition, Lessee shall not place a load upon any floor of the premises which exceeds the load per square foot which the floor of the premises was designed to carry, nor shall Lessee install business machines or other mechanical equipment in the premises which cause noise or vibration that may be transmitted to the structure of the premises. Lessee shall conduct business operations only within the premises and in no event shall Lessee conduct business operations on the sidewalks, parking areas or other common areas adjacent to the premises.

7.3 Hazardous Materials.

(a)

Lessee shall not use or permit any other person to use any portion of the premises for the storage, use, treatment or disposal of any hazardous material (as hereafter defined), except that, subject to strict compliance with the provisions of paragraphs 7.1, 7.2 and this 7.3, Lessee may, in connection with its operation of its business described in paragraph 7.1, bring on the premises products and substances in normal and customary quantities required for cleaning and maintenance of the premises, or for normal applications related to the above described use of the premises. In the event Lessee brings hazardous materials on the premises (whether pursuant to the provisions of the preceding sentence or otherwise), Lessee shall provide to Lessor copies of all materials handling data sheets and manifests pertaining to such hazardous materials, as well as copies of all permi ts and licenses maintained by Lessee with governmental authorities having jurisdiction.

(b)

Lessee represents, warrants and agrees that as to any equipment, materials, substances or other things coming on the premises during the term of this lease (including, without limitation, the products and substances described in subparagraph (a) above), Lessee will, at the sole cost and expense of Lessee, comply with all local, state and federal statutes, rules, regulations and orders governing the use, storage and disposal of flammable or combustible material, hazardous substances, toxic substances and hazardous waste as now or hereafter defined as a "hazardous waste," "hazardous substance," "toxic substance," pollutant or contaminant under any federal, state or local statute or regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. section 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.G. section 6901, et seq.) and/or A.R.S. Section 36-2801, or any successor statute, substances which contain gasoline, diesel fuel or other petroleum hydrocarbons and any other substance the presence of which requires investigation or remediation under any federal, state or local statute, regulation, ordinance, order, action, policy or common law (herein collectively referred to as "hazardous materials"), and that Lessee will indemnify and defend Lessor against and hold Lessor harmless for, from and all claims, damages,

losses, liabilities, demands, liens, fines, penalties, costs and

expenses (including attorneys' fees and court costs) relating to or arising out of such hazardous materials coming on the premises during the term of this lease (except those brought to the premises by Lessor in connection with improvements or repairs to the premises or otherwise caused by actions or omissions of Lessee or its agents, servants, contractors, employees or invitees. On termination or expiration of this lease, Lessee will remove from the premises all hazardous materials and all containers in which such hazardous materials have been stored. In this regard, if Lessor shall so request, Lessee shall provide to Lessor a Phase 1 Environmental Site Assessment prepared in accordance with then current ASTM standards prepared by an environmental engineering firm designated by Lessee and reasonably acceptable to Lessor demonstrating compliance by Lessee with the requirements of this paragraph 7.3. The foregoing does not in any way limit any other obligation of Lessee under this lease.

(c)

Lessor represents and warrants that to the best of Lessor's knowledge, there are no hazardous materials on or under the premises at the date of execution of this lease in violation of the codes and ordinances of governmental authorities having jurisdiction. Lessor will indemnify Lessee against and hold Lessee harmless from all claims, damages, loss, cost and expense (including attorneys' fees) relating to or arising out of a breach by Lessor of this warranty or brought to the premises by Lessor in connection with its improvements or repairs to the premises as provided in this lease.

(d)

The indemnifications of the parties in this paragraph 7.3 shall include, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of hazardous materials for which such indemnifying party is responsible as above specified in this paragraph 7.3, and Lessee's obligations under this paragraph 7.3 shall survive the expiration or earlier termination of this lease.

8. MAINTENANCE.

8.1 Lessor Maintenance. Except as provided in paragraphs 13 and 14 and except for damage caused by Lessee, Lessor, at its cost, shall maintain, in good condition, the structural parts of the building of which the premises is a part, which structural parts include only the foundations, bearing and exterior walls (excluding glass and doors), subflooring, and roof (excluding membrane). Lessor shall have no obligation to make any such repairs until receipt of written notice from Lessee of the need of such repairs. Lessor shall promptly commence such repairs following receipt of such written notice and shall diligently pursue such repairs to completion. Notwithstanding the provisions of this paragraph 8.1 to the contrary, Lessee shall pay the entire cost of any repairs made necessary by the negligence or willful misconduct of Lessee, its agents, servants, contractor s, employees or invitees. Lessee waives the benefit of any present or future law which might give Lessee the right to repair the premises at Lessor's expense or to terminate this lease because of the condition of the premises.

8.2 Lessee Maintenance. Except as provided in paragraph 8.1, Lessee at its cost shall maintain, in good condition, all portions of the premises, including, without limitation, the office entry, glass, windows, all doors, including overhead doors and "man" doors and the interior of the premises. In addition, Lessee shall, at Lessee's expense, repair any damage to the structural parts of the building (as defined in paragraph 8.1) caused by the negligence or willful misconduct of Lessee, its agents, servants, contractors, employees or invitees. Lessee and not Lessor shall be solely responsible for any repairs to the premises resulting from vandalism or malicious mischief.

8.3 Air ConditioninglEvaporative Cooling. Lessee shall be solely responsible for the maintenance, repair and parts replacement of the air conditioning and evaporative cooling ("HVAC Equipment") installed on the premises and shall execute a semi-annual inspection and maintenance contract covering all of the office HVAC Equipment. Said maintenance contract shall be executed with a licensed air conditioning contractor approved by Lessor. Said maintenance contract shall remain in effect during the entire term of the lease and any extension or renewal thereof. Lessee shall furnish Lessor with a copy of said maintenance contract, as well as all records and documents pertaining to the maintenance and/or service of the HVAC Equipment. Notwithstanding the foregoing, Lessor will warrant the HVAC equipment for the first (1^st) year of the lease term . Additionally, so long as Lessee shows proof of maintaining the HVAC system with a licensed contractor, Lessor will agree to split the cost with Lessee on replacement of a compressor or replacement of the HVAC unit, during the initial lease term.

8.4 HVAC. Although Lessee is responsible, at its sole cost and expense, for all HVAC Equipment repair, replacement and maintenance, Lessor retains the right, but not the obligation, to inspect HVAC Equipment and replace filters on a regular schedule. In this regard, Lessee shall, at its sole cost and expense, perform or cause to be performed "Normal A/C Servicinq" and "Normal Cooler Servicinq". "Normal A/C Servicing" shall mean the following service and maintenance on the air conditioning units, performed by a licensed HVAC contractor, every twelve (12) months during the lease.

(1)

Spring Maintenance:

a.

Lubricate Motor

b.

Check and tighten all electrical connectors

c.

Inspect and clean evaporative and condenser coils

d.

Check refrigerant charge

e.

Visual inspection of unit for other required maintenance

(2)

Monthly Maintenance - change air conditioner filter

"Normal Cooler Servicing" shall mean the following service and maintenance on evaporative cooling units, performed by a licensed HVAC contractor, every twelve (12) months during the Lease.

(1)

Spring Maintenance:

a.

Change cooler pads

b.

Lubricate bearings

c.

Replace or adjust (as required) blower belt

d.

Drain and clean cooler basin

e.

Visual Inspection of unit for other required maintenance

(2)

Fall Preparation: Turn off water and drain cooler at end of season until Spring

8.5 EMERGENCY; SELF-HELP. In the event of an emergency requiring repairs, Lessor shall have the delegable right to enter the premises at any time, without prior notice to Lessee. Lessor shall have the right to use any reasonable means which Lessor may deem proper in order to obtain entry to the premises in an emergency, without liability to Lessee. No entry by Lessor shall, under any circumstances, be construed or deemed to be a forcible or unlawful entry into, or a detainer of the premises, or an eviction of Lessee from any part of the premises. If Lessee fails to perform Lessee's obligations under paragraphs 8.2 or 8.3 of this lease, Lessor may, at Lessor's option, enter the premises after ten (10) days prior written notice to Lessee and perform such obligations of Lessee, the cost of which, together with interest at the rate of ten percent (10%) per annum, shall be due and payable as additional rent to Lessor, together with Lessee's next installment of rent.

8.6 Surrender. On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the premises to Lessor in the same conditions as when received, ordinary wear and tear excepted, clean and free of debris with all building systems in good working order. Lessee shall repair any damage to the premises occasioned by the installation or removal of Lessee's trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this lease, Lessee shall leave the airlines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning and plumbing in good operating condition. Lessee shall give written notice to Lessor at least thirty (30) days prior to vacating the premises for the express purpose of arranging a meeting with Lessor for a joint inspection of the premises. In the event Lessee fai ls to give such notice or fails to participate in such joint inspection, Lessor's inspection at or following Lessee vacating the premises shall be conclusively deemed correct for the purposes of determining Lessee's liability for repairs and/or restoration of the premises.

9. ALTERATIONS. Lessee shall not make any alterations to the premises without Lessor^'s consent to the proposed work including the plans, specifications and the proposed architect and/or contractors for such alterations. Lessee acknowledges that any review by Lessor of Lessee^'s plans and specifications and/or right of approval exercised by Lessor with respect to any alterations is for Lessor's benefit only and

Lessor shall not, by virtue of such review or right of approval, be deemed to make any representation, warranty or acknowledgement to Lessee or to any other person or entity as to the adequacy of Lessee's plans and specifications or any alterations. Lessor may require Lessee to remove any or all of said alterations at the expiration of the term and restore the premises to their prior condition. Unless Lessor requires their removal, any alterations (including, without limitation, power panels and lighting fixtures, whether or not such installations constitute trade fixtures of Lessee) made shall remain on and be surrendered with the premises on expiration or termination of the term. Notwithstanding the foregoing, Lessor will approve the improvements planned, by Lessee, for the open showroom illustrated as Schedule 1 A if this lease.

10.

LIENS. Lessee shall pay all costs for construction done by Lessee or cause to be done by Lessee on the premises as permitted by this lease. Lessee shall keep the premises and the building of which the premises is a part free and clear of all mechanic's, materialmen's and other professional service liens resulting from construction done by or for Lessee. Lessee shall have the right to contest the correctness or validity of any such lien if, immediately on demand by Lessor, Lessee procures and records a lien release bond issued by a corporation authorized to issue surety bonds in Arizona in an amount equal to one and one-half times the amount of the claim of lien. The bond shall meet the requirements of A.R.S. Section 33-1004, or any successor statute, and shall provide for the payment of any sum that the claimant may recover on the claim (together with costs of suit, if it re covers in the

11.

UTILITIES. Lessee shall pay or cause to be paid all charges for gas, light, heat or power, telephone, trash collection and other services supplied to Lessee in connection with the premises. If Lessor shall so require, concurrently with the execution of this lease, Lessee shall execute such applications and deliver such deposits as may be necessary to establish in Lessee's name one or more of the utility services serving the premises. If any of the foregoing utility services are not separately metered to the premises, Lessee shall pay to Lessor its share of the cost for utility service based upon Lessor's statement within five (5) days after receipt of such statement. If, in Lessor's reasonable business judgment, Lessee is a heavy user of water, sewer and/or trash disposal services (as compared to the other occupants of the property) Lessor may, in its sole discretion, requir e that Lessee, at its sole cost and expense, arrange for any such utility service to the premises to be separately metered or charged. Lessor shall have no liability to Lessee, nor shall Lessee's covenants and obligations under this lease including, without limitation, Lessee's obligation to pay rent and additional rent, be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or disruption in utility service to the premises.

12.

INDEMNITY AND INSURANCE.

12.1 Nonliability of Lessor. Lessee shall indemnify, protect, hold harmless and defend Lessor for, from and against all claims, damages, demands, losses, costs, liabilities and expenses (including reasonable attorneys' fees and court costs) (collectively, "Claims"), however caused, arising in whole or in part from Lessee's use of the premises or the property of which the premises is part or the conduct of Lessee's business or from any activity, work or thing done, permitted or suffered by Lessee or by any invitee, servant, agent, contractor, employee or subtenant of lessee on the premises or the property of which the premises is part, including any bodily injury to an employee of Lessee arising out of and in the course of employment of the employee at the premises, and shall further indemnify, protect, hold harmless and defend Lessor for, from and against all Claims arising i n whole or in part from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease or arising in whole or in part from any act, neglect, fault or omission by Lessee or by any invitee, servant, agent, employee or subtenant of Lessee anywhere on the property of which premises is a part; and if any action or proceeding is brought against Lessor by reason of any such Claim, Lessee, upon notice from Lessor, shall fully defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property, injury and death to persons and all Claims of any other nature resulting from Lessee's use of the premises or the property of which premises is a part, and Lessee hereby waives, releases and discharges Lessor for, from and against all Claims in respect thereof. Neither Lessor nor its agents or employees shall be liable for any damaged property of Lesse e entrusted to any employee or agent of Lessor or for loss of or damage to any property of Lessee by theft or otherwise. Lessor shall not be liable for any injury or damage to persons or property resulting from any cause, including, but not limited to, fire, explosion, failing plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein, or from the roof of any structure on the property of which premises is a part, or from any streets or subsurfaces on or adjacent to the property of which premises is a part, or from any other place or resulting

from dampness or any

other causes whatsoever, unless caused by or due to the failure of Lessor to repair such condition (but only if Lessor is obligated to perform such repairs under this Lease) within a reasonable time after written notice of the need for such repair is given by Lessee to Lessor, and through no fault of Lessee. Neither Lessor nor its employees or agents shall be liable for any defects in the premises, the negligence or misconduct, including, but not limited to, criminal acts, by maintenance or other personnel or contractors serving the premises or the property of which premises is a part and Lessee expressly waives, releases and discharges Lessor for, from and against all Claims resulting from any bodily injury to an employee of Lessee arising out of and in the course of employment of the employee at the premises. None of the events or conditions set fo rth in this paragraph 12.1 shall be deemed a constructive or actual eviction, nor shall Lessee be entitled to any abatement or reduction of rent or additional rent by reason of such events or conditions. Lessee shall give prompt notice to Lessor with respect to any defects, fires or accidents which Lessee observes on the property of which the premises is a part.

12.2 Public Liability and Property Damage Insurance. Lessee shall maintain a policy or policies of commercial general liability insurance for personal injury, bodily injury and damage to property with a combined single liability limit of not less than One Million and NoIlOO Dollars ($1,000,000.00), per occurrence, Three Million and NoI100 Dollars ($3,000,000.00), annual aggregate, insuring against all liability of Lessee and its agents, servants, contractors, employees or invitees arising out of and in connection with Lessee's use or occupancy of the premises and the adjoining property of which the premises is a part. Said policy or policies of insurance shall:

(a)

Name Lessor as an additional insured utilizing an ISO CG 20 26 additional insured endorsement (or its equivalent).

(b)

Be issued by insurance companies authorized to do business in the State of Arizona, with a financial rating of at least an A - VIII status as rated in the most recent edition of Best's Insurance Reports.

(c)

Be endorsed to provide cost liability coverage for Lessor, Lessee and Lessor's lender, if any, shall provide for severability of interests, shall be issued as a primary policy and shall provide that any insurance which Lessor or Lessor's lender may carry is strictly excess, secondary and non-contributing with any insurance carried by Lessee.

(d)

Contain an endorsement requiring thirty (30) days' written notice from the insurance company to Lessor and Lessee before cancellation or change in the coverage, scope, or amount of any policy.

(e)

Shall insure performance by Lessee of the indemnity provisions of paragraph_ 12.1; and

(f)

Shall contain a waiver of subrogation in favor of Lessor.

Said policy, or a certificate of the policy (Accord Form 27 or 28, or their equivalent), together with evidence of payment of premiums and the required additional insured endorsement, shall be deposited with the Lessor at the commencement of the term, and on renewal of the policy not less than twenty (20) days before expiration of the term of the policy. If Lessee wishes to present to Lessor a certificate of liability insurance utilizing Acord Form 25-S, Lessor need not accept such form of certificate unless such form of certificate includes a rider in the form attached to this lease as Schedule 2.

12.3 Additional Lessee Insurance. In addition to the insurance described in paragraph 12.2_, above, Lessee shall obtain and maintain in force, at Lessee's sole cost and expense, the following described policies of insurance:

(a)

A policy or policies of "causes of loss-special form" property insurance, including coverage for vandalism or malicious mischief, insuring any alterations to the premises made by Lessee and Lessee's stock and trade, furniture, personal property, fixtures and equipment in the premises, with coverage in an amount equal to the replacement cost of such alterations, stock and trade, furniture, personal property, fixtures and equipment.

(b)

A policy or policies of workers' compensation insurance with an insurance carrier and in amounts approved by the Industrial Commission of the State of Arizona and a policy of employers^' liability of insurance with limits of liability not less than One Million and No/100 Dollars ($1,000,000.00) per occurrence.

(c)

Insurance covering all plate glass on the premises.

(d)

Boiler and machinery insurance on all boilers, pressure vessels, gas fire equipment, HVAC Equipment and mechanical systems serving the premises. if not covered by the insurance described in subparagraph (a) above, then the insurance specified in this subsection shall be in the amount not less than One Hundred Thousand and No/100 Dollars ($100,000.00).

(e)

Business Auto Coverage for owned, hired and non-owned vehicles with a combined single limit of not less than One Million and No/100 Dollars ($1,000,000.00), per occurrence, Three Million and No/100 Dollars ($3,000,000.00) annual aggregate.

Lessee acknowledges that no insurance maintained by Lessor with respect to the premises or the property (whether liability or property insurance) shall insure the interest of Lessee in the premises or Lessee's furniture, fixtures, equipment or improvements in the premises and any proceeds payable with respect to any such insurance maintained by Lessor shall be the sole property of Lessor. The insurance policies to be maintained by Lessee pursuant to the provisions of this paragraph12.3 shall satisfy the
requirements of subparagraphs 12.2(b) through (f) above.

12.4 Lessee Payment of Increase in Fire Insurance Cost. If the property insurance rate on the building or the premises is raised above the existing rate per annum per each One Hundred and No/100 Dollars ($100.00) of coverage Travelers Property Casualty Company of America Policy No. Y630378L8376TIL05 by reason of the nature of Lessee's business or the manner in which Lessee conducts its business, then the increased cost of such fire insurance above the now existing rate per annum per each One Hundred and No/100 Dollars ($100.00) of coverage up to the expiration of this lease or any renewal hereof shall be payable by Lessee as additional rent hereunder, with and in addition to the next succeeding rent installment payable hereunder following the effective date of such rate increase.

13.

DESTRUCTION. If, during the term, the premises are totally or partially destroyed from fire or other casualty generally insurable under a "cause of loss-special form" policy of property insurance (excluding repairs resulting from vandalism or malicious mischief which shall be the sole obligation of Lessee), rendering the premises totally or partially inaccessible or unusable, Lessor shall restore the premises to substantially the same condition as they were on the commencement date, if the restoration can be made under the existing laws and can be completed within ninety (90) days after the date of the destruction. Such destruction shall not terminate this lease. If the restoration cannot be made in the time stated in this paragraph, then within fifteen (15) days after the parties determine that the restoration cannot be made in the time stated in this parag raph, Lessee may terminate this lease immediately by giving notice to Lessor. If Lessee fails to terminate this lease and if restoration is permitted under the existing laws, Lessor, at its election, may either terminate this lease or restore the premises within a reasonable time and this lease shall continue in full force and effect. If the existing laws do not permit the restoration, either party may terminate this lease immediately by giving notice to the other party. In no event shall Lessor be required to restore alterations made by Lessee, Lessee's improvements, Lessee's trade fixtures, and Lessee's personal property, such excluded items being the sole responsibility of Lessee to restore. Any extra expenses incurred by Lessor in the reconstruction of the premises or any portion of the building of which the premises is a part as a result of the use, storage or release of hazardous materials on the premises shall be paid by Lessee to Lessor within ten (10) days after Lessor's request for payment. In case of destruction there shall be an abatement or reduction of rent, between the date of destruction and the date of Lessor's completion of restoration, based on the extent to which the destruction interferes with Lessee's use of the premises. If the destruction occurs during the last year of the term, Lessor may terminate this lease by giving notice to Lessee not more than thirty (30) days after the destruction. Lessee hereby waives any statute now or hereafter in effect which grants a lessee the right to terminate a lease or which provides for an abatement of rent on account of damage or destruction. This waiver shall include, without limitation, A.R.S. Section 33-343.

14.

CONDEMNATION. If all or such portion of the premises so as, in the reasonable judgment of Lessor, to make the balance thereof untenantable is condemned by eminent domain for any public or quasi-public use or purpose or is transferred in avoidance of an exercise of the power of eminent domain (an "Appropriation"), then this lease shall terminate as of the date that title vests in the condemning authority. All rental and additional rent shall be paid up to such date of termination and Lessee shall have no further claim against Lessor nor against the condemning authority for the value of any unexpired term of the lease, and Lessor shall be entitled to receive any and all proceeds awarded on account of such Appropriation. In the event an Appropriation of a portion of the premises which does not result in a termination of this lease as provided

above, the rent payable hereunder shall be abated in the proportion which the portion of the premises so taken bears to the total premises immediately prior to the Appropriation. The entire award made by reason of any such partial Appropriation shall belong entirely to Lessor. No taking of any portion of the sidewalks or the parking area shall entitle Lessee to terminate this lease or to an abatement of rent and Lessee waives any statutory or other right to terminate this lease on account of any appropriation of the premises, the building or the property.

15.

ASSIGNMENT.

15.1 Prohibition Against Voluntary Assignment, Subletting and Encumbering. Lessee shall not voluntarily assign or encumber its interest in this lease or in the premises, or sublease all or any part of the premises, or allow any other person or entity to occupy or use all or any part of the premises, or advertise that any portion of the premises is available for lease, without first obtaining Lessor's consent. If Lessor shall so require, Lessee, any guarantor and the assignee or sublessee, as the case may be, shall join in the execution of Lessor's form of consent. Any assignment, encumbrance, or sublease without Lessor's consent shall be voidable and, at Lessor's elections, shall constitute a default. No consent to any assignment, encumbrance, or sublease shall constitute a further waiver of the provisions of this paragraph.

15.2 Deemed Transfer. If Lessee is a corporation, unincorporated association, a limited liability company, a partnership or other business entity, any dissolution, merger, consolidation or other reorganization of Lessee, for the sale, transfer, assignment or hypothecation of fifty percent (50%) or more of any stock or other ownership interest in such corporation, association, limited liability company, partnership or other business entity shall be deemed an assignment within the meaning of and subject to the provisions of this paragraph 15. If, however, Lessee is a corporation whose stock is regularly traded on a national stock exchange or is regularly traded in the over-the-counter market and quoted on NASDAQ, the transfer of stock, regardless of quantity, shall not constitute an assignment for the purposes of this lease.

15.3 Lessor's Consent Required. If Lessee desires at any time to assign this Lease or sublet the premises or any portion thereof, it shall first notify Lessor of its desire to do so and shall submit in writing to Lessor: (a) the name, address, telephone number and social security number, or tax payer identification number, as applicable, of the proposed subtenant or assignee; (b) the nature of the proposed subtenant's or assignee's business to be carried on in the premises; (c) a true, correct and complete copy of the proposed sublease or assignment; and (d) such financial information as Lessor may reasonably request concerning the proposed subtenant or assignee. Lessee's failure to comply with the provisions of this paragraph 15.3 shall entitle Lessor to withhold its consent to the proposed assignment or subletting.

15.4. No Release From Liability. No assignment, subletting or other transfer of the lease or the premises (with or without the consent of Lessor) shall release Lessee from primary liability under this lease and neither Lessee nor any guarantor of this lease shall be released from performance of any of the terms, covenants and conditions of this lease.

15.5 Fees. In the event Lessee shall assign or sublet the premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any other act the Lessee proposes to do, then Lessee shall pay Lessor's reasonable attorneys' fees incurred in connection therewith.

16.

DEFAULT; REMEDIES.

16.1 Default. The occurrence of any of the following events will constitute a default on the part of Lessee:

(a)

Failure to pay any installment of rent, additional rent or any other sum due and payable hereunder when such payment is due;

(b)

Failure to perform any of Lessee's agreements or obligations hereunder, if such failure (except a failure in the payment of any installment of rent, additional rent or any other monetary obligation hereunder) continues for ten (10) days after written notice thereof from Lessor to Lessee, provided that if such default is other than the payment of money and cannot be cured within such ten (10) day period, then Lessee will not be in default hereunder if Lessee, within such ten (10) day period, commences curing of such failure and diligently and in good faith prosecutes the same to completion within twenty (20) additional days;

(c)

A general assignment for the benefit of creditors;

(d)

The filing of a voluntary petition in bankruptcy by Lessee or any of the guarantors or the filing of an involuntary petition by Lessee's or any of the guarantors' respective creditors, such involuntary petition remaining undischarged for a period of thirty (30) days;

(e)

Failure by Lessee to operate its business within the premises for more than ten (10) successive days;

(f)

The appointment of a receiver to take possession of substantially all of Lessee's or any of the guarantors' respective assets or of this leasehold, such receivership remaining undissolved for a period of thirty (30) days;

(g)

The levy of a writ of attachment or execution or other judicial seizure of substantially all of Lessee's or any of the guarantors' respective assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of thirty (30) days after the levy thereof; or

(h)

the occurrence of any event defined elsewhere in this lease as a "default"

16.2 Remedies. Upon the occurrence of a default under this lease by Lessee, Lessor may, without prejudice to any other rights and remedies available to a landlord at law, in equity or by statute, exercise one or more of the following remedies, all of which shall be construed and held to be cumulative and non-exclusive:

(a)

Terminate this lease and re-enter and take possession of the premises, in which event, Lessor is authorized to make such repairs, redecorating, refurbishments or improvements to the premises as may be necessary in the reasonable opinion of Lessor acting in good faith for the purposes of reletting the premises and the costs and expenses incurred in respect of such repairs, redecorating and refurbishments and the expenses of such reletting (including brokerage commissions) shall be paid by Lessee to Lessor within ten (10) days after receipt of Lessor's statement;

(b)

Without terminating this lease, re-enter and take possession of the premises;

(c)

Without such re-entry, recover possession of the premises in the manner prescribed by any statute relating to summary process, and any demand for rent, re-entry for condition broken, and any and all notices to quit, or other formalities of any nature to which Lessee may be entitled, are hereby specifically waived to the extent permitted by law;

(d)

Without terminating this lease, Lessor may relet the premises as Lessor may see fit without thereby avoiding or terminating this lease, and for the purposes of such reletting, Lessor is authorized to make such repairs, redecorating, refurbishments or improvements to the premises as may be necessary in the reasonable opinion of Lessor acting in good faith for the purpose of such reletting, and if a sufficient sum is not realized from such reletting (after payment of all costs and expenses of such repairs, redecorating and refurbishments and expenses of such reletting (including brokerage commissions) and the collection of rent accruing therefrom) each month to equal the rent and additional rent payable hereunder, then Lessee shall pay such deficiency each month within ten (10) days after receipt of Lessor's statement; or

(e)

Lessor may declare immediately due and payable all the remaining installments of rent and additional rent, and such amount, less the fair rental value of the premises for the remainder of the lease term shall be paid by Lessee within ten (10) days after receipt of Lessor's statement.

Lessor shall not by re-entry or any other act, be deemed to have terminated this lease, or the liability of Lessee for the total rent and additional rent reserved hereunder or for any installment thereof then due or thereafter accruing, or for damages, unless Lessor notifies Lessee in writing that Lessor has so elected to terminate this lease. After the occurrence of a default, the acceptance of rent or additional rent, or the failure to re-enter by Lessor shall not be deemed to be a waiver of Lessor's right to thereafter terminate this lease and exercise any other rights and remedies available to it, and Lessor may re-enter and take possession of the premises as if no rent or additional rent had been accepted after the occurrence of a default.

16.3 Interest on Past Due Amounts. In addition to late charge described in paragraph 16.4 below, if any installment of rent, additional rent or any other payment is not paid promptly when due, it will bear interest at the rate of ten percent (10%) per annum from the date on which it becomes due until paid; provided, however, this provision is not intended to relieve Lessee from any default in the making of any

payment at the time and in the manner herein specified. The foregoing interest, expenses and damages will be recoverable from Lessee by the exercise of Lessor's remedies hereinabove set forth.

16.4 Late Charge. Lessee acknowledges that late payment by Lessee to Lessor of rent or additional rent will cause Lessor to incur costs not contemplated by the lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges. Therefore, if any installment of rent or additional rent due from Lessee is not received by Lessor within ten (10) days after it is due, Lessee shall pay to Lessor an additional sum of ten percent (10%) of the overdue rent or additional rent as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee. No payments need be accepted after the tenth (10th) day of the month unless accompanied by the late payment charge. This provision shall not be con strued to allow or permit Lessee to make payments after the due date or to waive any Lessor's rights in connection with a late payment.

16.5 Bankruptcy of Lessee. In the event of the bankruptcy, reorganization, liquidation, or dissolution of the Lessee, or in the event Lessee shall make an assignment for the benefit of creditors, or in the event Lessee shall seek similar relief under any present or future Federal or State bankruptcy act, which relief results in a stay of the termination of this lease, then, the rent and additional rent payable hereunder shall be deemed to be an administrative expense. In addition, the Lessee, as debtor in possession, or if appointed, the Trustee in bankruptcy, must assume or reject this lease within sixty (60) days (or such shorter period of time as may be permitted by law) after the filing of the petition in bankruptcy.

16.6 Additional Remedies. All of the remedies given to Lessor in this lease in the event Lessee commits a default are in addition to all other rights or remedies available to a landlord at law, in equity or by statute. All rights, options and remedies available to Lessor shall be construed and held to be cumulative, and no one of them shall be exclusive of the other. Upon the occurrence of a default, all privileges and contingencies which may be exercised by Lessee under this lease including, without limitation, options to renew, extend and expand, as well as relocation rights, contraction rights or other rights which may be exercised by Lessee during the term shall be void and of no further force and effect.

16.7 NSF Checks. If any check of Lessee is returned for insufficient funds, Lessee shall pay Lessor a $75.00 processing charge and all bank fees assessed by Lessor's bank, in addition to payment of the amount due plus applicable interest and late charges; provided, however, this provision is not intended to relieve Lessee from any default in the making of any payment at the time and in the manner herein specified. If during the term of this lease a second check of Lessee is returned for insufficient funds, all future payments by Lessee shall be by cashier's checks or other immediately available funds.

16.8 Right to Cure. In the event Lessor shall neglect or fail to perform or observe any of the covenants, provisions or conditions contained in this lease on its part to be performed or observed, and such failure continues for thirty (30) days after written notice of default (or if more than thirty (30) days shall be required because of the nature of the default, if Lessor shall fail to commence the curing of said default within the thirty (30) day period and proceed diligently to completion), then Lessor shall be responsible to Lessee for any actual damages sustained by Lessee as a result of Lessor's breach, but not special, consequential or punitive damages. Lessee shall have no right to terminate this lease, except as expressly provided elsewhere in this lease. Notwithstanding any other provision of this lease, any claim (whether in contract, tort or for breach of any exp ress or implied covenant contained in this lease) which Lessee may have against Lessor for failure to perform or observe any of the covenants, provisions or conditions contained in this lease shall be deemed waived unless such claim is asserted by written notice to Lessor within thirty (30) days of the commencement of the alleged default or of occurrence of the cause of action and unless suit be brought thereon within twelve (12) months subsequent to the accrual of such cause of action.

16.9 Lessor's Right to Perform Lessee's Covenants. If Lessee shall at any time fail to pay any sum in accordance with the provisions of this lease, or shall fail to make any other payment or perform any other act on its part to be made or performed, then Lessor, after ten (10) days' written notice to Lessee (or without notice in case of emergency) and without waiving or releasing Lessee from any obligation of Lessee contained in this lease, may, but shall be under no obligation to: (a) pay any sum payable by Lessee pursuant to the provisions of this lease, or (b) make any other

payment or perform any other act on Lessee's part to be made or performed as provided in this lease, and may enter upon the premises for any such purpose, and take all such action on the premises, as may be necessary for the premises. All sums so paid by Lessor and all costs and expenses, including reasonable attorneys' fees, incurred by Lessor in connection with the performance of any such act shall be paid by Lessee to Lessor on demand, together with interest thereon at the rate of ten percent (10%) per annum from the respective dates of Lessor's making of each such payment or incurring of each such cost and expense, including reasonable attorneys' fees, until repaid by Lessee in full.

17.

SIGNS. Lessee shall, not later than ninety (90) days after the execution of this lease, cause to be installed upon the premises signage satisfying the requirements of the sign criteria attached to this lease as Schedule 3. Lessee shall not place or permit to be placed any sign, marquee, advertisement or awning on the premises without the written consent of Lessor. Lessee, upon request of Lessor, shall immediately remove any sign or decoration which Lessee has placed or permitted to be placed in, on, or about the premises which, in the opinion of Lessor, is objectionable or offensive, and if Lessee fails so to do, Lessor may enter the premises and remove the same. Lessor has reserved the exclusive right to the exterior sidewalls, rear wall and roof of said premises, and Lessee shall not place or permit to be placed upon said sidewalls, rear wall or roof, any sign, advert isement or notice without the written consent of Lessor. All signs shall be professionally prepared and shall be installed and maintained at the expense of Lessee in compliance with the sign ordinances of governmental authorities having jurisdiction. Lessee shall, at its sole cost and expense, pay all fees imposed by governmental authorities with respect to its signage. Any signs placed upon the premises by Lessee which are not approved by Lessor may be removed by Lessor at the expense of Lessee. Lessee shall not alter, remove or relocate any existing signs on the premises without the prior written consent of Lessor. All of Lessee's signage shall conform to the then current sign criteria established by Lessor, as the same by be modified or updated by Lessor from time to time. Except as set forth in this paragraph 17, Lessee shall not erect or maintain any other signage on the premises. Upon the expiration or earlier termination of this lease, Lessee shall remove its signage from the premises and shall repair any damage to the premises caused by the removal of Lessee's signage. Notwithstanding the foregoing, Lessee may have its logo signage in conformance with the sign criteria. The logo colors are blue, black and silver.

18.

LESSOR'S ACCESS TO PREMISES. Lessor and its authorized representatives shall have the right to enter the premises at all reasonable times for any of the following purposes:

(a)

To determine whether the premises are in good condition and whether Lessee is complying with its obligations under this lease;

(b)

To do any necessary maintenance (including maintenance and repairs to other premises on the property) and to make any restoration to the premises that Lessor has the right or obligation to perform;

(c)

To serve, post, or keep posted any notice required or allowed under the provisions of this lease;

(d)

To post "for sale" signs at any time during the term and to post "for rent" or "for lease" signs during the last one hundred twenty (120) days of the term, or during any period while Lessee is in default; and

(e)

To show the premises to prospective purchasers, lenders, brokers, or lessees, at any time during the term.

Lessor may, in its sole discretion, retain a key with which to unlock all of the doors in, upon or about the premises, excluding however, Lessee's vaults, safes and files.

19.

SUBORDINATION. This lease is and shall be subordinate to any encumbrance now of record or recorded after the date of this lease affecting the premises. Such subordination is effective without any further act of Lessee. Lessee shall from time to time on request from Lessor execute and deliver any documents or instruments that may be required by a lender to effectuate any subordination. If Lessee fails to execute and deliver any such documents or instruments, Lessee irrevocably constitutes and appoints Lessor as Lessee's authorized agent to execute and deliver any such documents or instruments. Lessee shall attorn to any purchaser at any foreclosure sale, or any grantee or transferee designated in any deed given in lieu of foreclosure. Lessee shall execute the written agreement and any other document required by the lender to accomplish the purposes of this paragraph.

20.

ESTOPPEL CERTIFICATE. Lessee, within ten (10) days after notice from Lessor, shall execute and deliver to Lessor a certificate stating that this lease is unmodified and in full force and effect, or in full force and effect as modified, and stating the modifications. The certificate also shall state the amount of minimum monthly rent, the dates to which the rent has been paid in advance, the amount of any security deposit or prepaid rent, that Lessor is not in breach or default of this lease (or if Lessor is in default, stating in detail such default), and setting forth such other information as may be reasonably requested by Lessor and as is factually correct. Lessee's failure to deliver such statement within such time shall be conclusive upon Lessee that this lease is in full force and effect and has not been modified except as may be represented by Lessor, that not more than one month's rent or other charges have been paid in advance and Lessor is not in default under this lease and such other information is as certified by Lessor.

21.

NOTICES. All notices to be given to Lessee shall be given in writing personally or by depositing the same in the United States mail, postage prepaid, and addressed to Lessee at the premises, whether or not lessee has departed from, abandoned or vacated the premises. All notices to be given to Lessor shall be given in writing personally or by depositing the same in the United States mail, postage prepaid, and addressed to the Lessor c/o Arizona Industrial Properties, Inc., 5202 South 40th Street, Phoenix, Arizona 85040, or at such other place or places as may be designated from time to time by Lessor. Notwithstanding the foregoing, should Lessee elect to change its notice address, Lessee shall provide Lessor written notice of their intent.

22.

WAIVER. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of rent, and such acceptance does not relieve Lessee's liability for any late charge or interest due on such rent payment accepted by Lessor.

23.

ATTORNEYS' FEES. If Lessor hires an attorney by reason of breach or default by Lessee hereunder, Lessee shall pay Lessor's reasonable attorneys' fees, and if either party commences an action against the other party arising out of or in connection with this lease, the prevailing party shall be entitled to have and recover from the losing party reasonable attorneys' fees and costs of suit.

24.

HOLDING OVER. It is agreed that the date of termination of this lease and the right of Lessor to recover immediate possession of the premises thereupon is an important and material matter affecting the parties hereto and the rights of third parties, all of which have been specifically considered by Lessor and Lessee. In the event of any continued occupancy or holding over of the premises without the express written consent of Lessor beyond the end of the term hereof, whether in whole or in part, or by leaving property on the premises, or otherwise, this lease shall continue as a month-to­month tenancy and Lessee will pay one hundred twenty five percent (125%) of the rent then in effect pursuant to paragraph 4, in advance at the beginning of each held-over month, plus any other charges or payments contemplated in this lease, and any other costs, expenses, damages, li abilities, and attorney's fees incurred by Lessor on account of Lessee's holding over.

25.

MISCELLANEOUS PROVISIONS. 25.1 Time of Essence. Time is of the essence of each provision of this lease.

25.2 Consent of Parties. Whenever consent or approval of either party is required, unless a different standard of consent is expressly set forth in this Lease, that party shall not unreasonably withhold such consent or approval.

25.3 Provisions Are Covenants and Conditions. All provisions, whether covenants or conditions, on the part of Lessee shall be deemed to be both covenants and conditions.

25.4 Successors. This lease shall be binding on and inure to the benefit of the parties and their successors, except as provided in paragraphs 15.1 and 15.2.

25.5 Reserved Rights. Lessor shall have the right to change the name, number or designation of the building of which the premises is a part, the property of which the premises is part andlor the premises without notice or liability to Lessee.

25.6 Complete Agreement; Construction. The language of this lease shall be construed in accordance with its normal and usual meaning and not strictly for or against either Lessor or Lessee. Lessor and Lessee acknowledge and agree that each party has reviewed and revised this lease and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply to the interpretation of this lease. This lease constitutes the complete agreement between Lessor and Lessee with respect to the leasing of the premises and supersedes all prior or contemporaneous writings, including any letters of intent. Neither this lease nor any memorandum of this lease shall be recorded by Lessee.

25.7 Conveyance by Lessor. In the event Lessor or any successor Lessor shall convey or otherwise dispose of the premises, it shall thereupon be released from all liabilities and obligations imposed upon the Lessor under this lease (except those accruing prior to such conveyance or other disposition) and such liabilities and obligations shall be binding solely upon the then owner of the premises. Lessee shall look solely to Lessor's interest in the premises for the satisfaction of any judgment or decree requiring the payment of money by Lessor which is based upon any claim Lessee may have against Lessor under this lease (whether in contract, tort or for breach of any express or implied covenant contained in this Lease). No other property or assets of Lessor, or any partner, member, shareholder or investor in Lessor shall be subject to levy, execution or other enforcement proc edures for satisfaction of any such judgment or decree.

25.8 Severability. The unenforceability, invalidity, or illegality of any provision shall not render the other provisions unenforceable, invalid, or illegal.

25.9 Captions. The captions of this lease shall have no effect on its interpretation.

25.10 Joint and Several Obligations. If more than one person or entity is Lessee, the obligations imposed on Lessee shall be joint and several.

25.11 Authority. If Lessee is a corporation, limited liability company, trust, or general or limited partnership, each individual executing this lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this lease on behalf of such entity. If Lessee is a corporation, limited liability company, trust or partnership, Lessee shall, within thirty (30) days after execution of this lease, deliver to Lessor evidence of such authority satisfactory to Lessor.

25.12 Execution of lease. The delivery of this lease by Lessor to Lessee shall not be deemed to be an offer or reservation of the premises for Lessee. Delivery of this lease, fully executed by Lessee, to Lessor constitutes an offer to lease the premises, and this lease shall only become effective and binding upon Lessor's execution hereof and delivery of a signed copy to Lessee.

25.13 Rules and Regulations. Lessor or such other persons as Lessor may designate shall have the right, from time to time, to establish, modify, amend and enforce rules and regulations with respect to the sidewalks, parking areas and other common areas of the property adjacent to the premises. Attached to this lease as Schedule 4 are the current rules and regulations for the property of which the premises is a part. Lessee shall abide by and conform to all such rules and regulations and shall use commercially reasonable efforts to cause its employees, suppliers, shippers, customers, contractors and invitees to abide and conform to all such rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with any rules and regulations by other lessees of the property.

25.14 WAIVER OF JURY TRIAL. LESSOR AND LESSEE EACH WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY OF ANY CONTRACT OR TORT CLAIM, COUNTERCLAIM, CROSS-COMPLAINT OR CAUSE OF ACTION IN ANY ACTION, PROCEEDING OR HEARING BROUGHT BY EITHER LESSOR OR LESSEE AGAINST THE OTHER ON ANY MATTER ARISING OUT OF OR 1N ANY WAY CONNECTED TO THIS LEASE, THE RELATIONSHIP OF LESSOR AND LESSEE OR LESSEE'S USE OR OCCUPANCY OF THE PREMISES, INCLUDING ANY CLAIM OF INJURY OR DAMAGE OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY CURRENT OR FUTURE LAW, STATUTE, REGULATION, CODE OR ORDINANCE.

25.15 Guaranty of Lease. Intentionally deleted.

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IN WITNESS WHEREOF, the parties have executed this lease as of the date first above written.

Park 40, a General Partnership

LESSOR

Virtra Systems, Inc., a Texas corporation qualified to do business in Arizona

By:

Name:

Robert Ferris

 Its: President

LESSEE