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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

            [X]     ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006

            [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM             to
                                          ------------    ------------

                         COMMISSION FILE NUMBER 00-32903
                                                --------

                                DERMISONICS, INC.
                                -----------------
                 (Name of Small Business Issuer in Its Charter)

                     NEVADA                         98-0233859
                     ------                         ----------
        (State or other jurisdiction of          (I.R.S. Employer
         incorporation or organization)         Identification No.)

             2 PARK PLAZA, SUITE 450                   92614
               IRVINE, CALIFORNIA                      -----
               ------------------                    (Zip Code)
     (Address of principal executive offices)

                                 (949) 733-1101
                                 --------------
                (Issuer's Telephone Number, Including Area Code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

   Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
                                                               $0.001 PAR VALUE


     Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.  [ ]

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

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

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  YES [ ]  NO [X]


<PAGE>
     The issuer's revenues for the fiscal year ended September 30, 2006 were $0.

     The aggregate market value of the Common Stock held by non-affiliates was
approximately $5,000,000 based upon the closing price of the Common Stock of
$0.16, as reported by the NASDAQ Over-the-Counter Bulletin Board ("OTCBB") on
February 14, 2007.


     There  were  49,224,005 shares of common stock, $0.001 par value per share,
outstanding  as  of  February  14,  2007.


                       DOCUMENTS INCORPORATED BY REFERENCE

None.

     TRANSITIONAL  SMALL  BUSINESS  DISCLOSURE  FORMAT.  YES  [ ]  NO  [X]


<PAGE>
<TABLE>
<CAPTION>
                               TABLE OF CONTENTS
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Description                                                     Page Number

--------------------------------------------------------------------------------
<S>             <C>                                             <C>
                                     PART I
                                     ------

ITEM 1          DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . .  1

ITEM 2          DESCRIPTION OF PROPERTIES . . . . . . . . . . . . . . 22

ITEM 3          LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . 23

ITEM 4          SUBMISSION OF MATTERS TO A VOTE
                OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . 23

                                    PART II
                                    -------


ITEM 5          MARKET FOR COMMON EQUITY, RELATED
                STOCKHOLDER MATTERS AND SMALL
                BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. . . . 23

ITEM 6          MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                PLAN OF OPERATION . . . . . . . . . . . . . . . . . . 27

ITEM 7          FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . .F-1

ITEM 8          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . 30

ITEM 8A         CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . 30

ITEM 8B         OTHER INFORMATION . . . . . . . . . . . . . . . . . . 30


                                    PART III
                                    --------


ITEM 9          DIRECTORS AND EXECUTIVE OFFICERS. . . . . . . . . . . 31

ITEM 10         EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . 32

ITEM 11         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . 34

ITEM 12         CERTAIN RELATIONSHIPS AND RELATED
                TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . 36

ITEM 13         EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . 37

ITEM 14         PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . . . . 44

SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>


<PAGE>
                                     PART I

ITEM  1.  DESCRIPTION  OF  BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS.

     On  July 28, 2004, Dermisonics, Inc. (formerly Second Stage Ventures, Inc.)
entered  into  an  Asset  Purchase  Agreement  (the  "Purchase  Agreement") with
Encapsulation  Systems,  Inc.  and  its  wholly  owned subsidiary, Echo RX, Inc.
(collectively,  "ESI"),  pursuant  to  which  we  acquired  certain intellectual
property  encompassing  patents  pending filed with the United States Patent and
Trademark  Office and other proprietary technology and information which cover a
new  type  of  non-invasive  drug  delivery  system  more  commonly  known  as a
transdermal  patch  (the  "U-Strip  Technology").

     Also  on  July  28,  2004,  we  sold  certain  assets  relating  to  our
easytrivia.com  business  to a former director of the Company who developed that
business  concept.

     On  December  1,  2006,  Dermisonics, Inc. (the "Company" or "Dermisonics")
received  a notice of default from ESI as a result of the Company's inability to
make  the  final  payment of $250,000 due under the Purchase Agreement with ESI.

     On  January  24,  2007,  Bruce  K. Redding notified the Company that he was
resigning  as the Company's Executive Vice President. Mr. Redding did not resign
as  a  member  of the Board of Directors of the Company. Mr. Redding is also the
Chief  Executive  Officer,  a  member  of  the  Board of Directors, and majority
shareholder  of  ESI,  the  largest  shareholder  of  the  Company.

     On  January  24,  2007,  Mr.  Redding  also  notified  the Company that ESI
considers  the  Company  in  breach  of  the  Company's  final  $250,000 payment
obligation  under  the  terms  of the Purchase Agreement. The Purchase Agreement
provided for a $500,000 initial payment and eight quarterly payments of $250,000
as part of the consideration for the purchase by the Company of patent and other
rights relating to the U-Strip Technology. The final $250,000 payment was due on
December  1, 2006, subject to the Company's right to cure any default during the
30-day  period  following  receipt  of  notice  from  ESI  ("cure  period").

     On  December  28, 2006, the Board of Directors of the Company considered an
offer  for  a  $500,000  capital infusion (the "$500,000 Offer"), which could if
accepted  have  provide capital to make the final payment obligation of $250,000
during  the  cure  period.  Based  on the representation by Mr. Redding that ESI
would  permit  a  further  extension of the cure period to allow the Company the
time to raise the capital for the payment on terms more favorable to the Company
than  the  $500,000  Offer, the Company rejected the $500,000 Offer. On December
29,  2006, Mr. Redding notified the Company that any decision to extend the cure
period  for the final payment would be determined by the ESI Board of Directors,
with  Mr.  Redding  abstaining  from  any  vote  on  the  matter.

     In  an  attempt  to  cure  the  default  without  having cash available, an
agreement  was  reached  between  the  Company  and  Redmoor  Investment  Ltd.
("Redmoor") to apply a portion of monies owed Redmoor by ESI toward the $250,000
final  payment  the Company owes ESI. Under the proposed agreement with Redmoor,
the  Company  would  be  indebted to Redmoor for $250,000 and the final $250,000
payment  obligation to ESI would be cured. Redmoor was one of ESI's creditors in
ESI's  chapter  11  bankruptcy,  with  a  claim  in excess of $600,000, of which
$325,000 was to have been paid to by ESI to Redmoor in cash in December 2006 but
had  not  been  paid  as  of  the  date of this report. On January 23, 2007, the
Company notified ESI's counsel that $250,000 of the funds owed to Redmoor should
be  applied  to  the  final  $250,000  payment under the Purchase Agreement (the
"January 2006 Tender"). ESI rejected the January 2006 Tender on the grounds that
the  terms of the Purchase Agreement do not require ESI to accept the offer from
the  Company  to cure the default in the manner proposed by the Company and that
the  cure  period had not been extended ESI also asserted that the patent rights
and  related  technology comprising the U-Strip Technology purchased from ESI by
the  Company  pursuant  to the Purchase Agreement have reverted to ESI under the
terms  of  the  Purchase  Agreement.


                                        1
<PAGE>
     Management  of the Company believes that the January 2006 Tender was a bona
fide attempt to cure the default of the final $250,000 payment, and will seek to
enforce  its  rights through litigation against ESI if a satisfactory settlement
of  the  dispute  cannot  be  achieved.

     In addition to what ESI has billed the Company for research and development
consulting  services,  ESI  has  informed  the  Company  that  it  has  spent
approximately  $385,000 on the development of one of the new applications of the
U-Strip  Technology  designed to deliver cosmetic formulations to the surface of
the skin (the "U-Wand"). ESI has asserted that it owns the rights to the U-Wand;
however,  the Company believes that the technology related to the U-Wand is part
of  the  U-Strip  Technology  owned  by  the  Company. If the Company is able to
demonstrate  that it is the owner of the rights to the U-Wand through litigation
or  settle  the  questions  of ownership of the U-Wand rights through settlement
negotiations  with  ESI,  the Company would have an additional liability for the
expenses  incurred  by ESI in the development of the U-Wand. The $385,000 is not
reflected  in  the  Company's  Consolidated  Financial  Statements.

     ESI has also asserted that the Company owes ESI $90,000 for patent fees ESI
paid  to  its patent counsel at the time of the Purchase Agreement; however, the
Company  believes  that  the  $90,000  patent  expense was included in the total
consideration  paid  in  accordance with the terms of the Purchase Agreement and
that  no  additional  amount  is  owed  to  ESI  with  regards  to  this matter.

     Prior  to  Mr.  Redding's  resignation  as  an  officer of the Company, the
Company  and  Mr.  Redding  had engaged in settlement discussions concerning the
issuance  of  additional shares of common stock of the Company to Mr. Redding in
settlement  of  his accrued salary through December 31, 2005. In September 2005,
the Company agreed to issue Mr. Redding 152,135 shares of common stock valued at
$1.00  per share in accordance with a registration statement to be filed on Form
S-8;  however,  the  Company  failed  to  issue  the  shares  under  a  Form S-8
registration  statement, and Mr. Redding was issued 153,135 restricted shares of
common  stock.  No  definitive  agreement to settle Mr. Redding's claim has been
reached,  but  Mr.  Redding  has  demanded  that  the  Company issue him 800,000
additional shares of common stock registered on Form S-8 to fully compensate him
for  the  accrued  compensation  due  him  at  December  31,  2005.

     The  following discussion assumes that the Company will continue to own the
U-Strip  Technology. However, the Company cannot give any assurance that it will
prevail  in  settlement  negotiations  or  litigation  concerning  its claim for
ownership  rights  in the U-Strip Technology. If the Company does not succeed in
negotiating a settlement or in litigation, it will have no rights in the U-Strip
Technology  and  will  be  forced  to  abandon  its  current  business  plan.

ASSET PURCHASE.

     Pursuant  to the Purchase Agreement, we acquired from ESI all of its right,
title  and interest in and to all intellectual property relating to a device and
process allowing for the non-invasive delivery of large molecule drugs through a
proprietary  transdermal patch. These assets comprise patents pending filed with
the  United  States Patent and Trademark Office and several other jurisdictions,
including  the  European  Community,  and  other  proprietary  technology  and
information  (the  "Intellectual  Property").  On  June  21,  2005, a patent for
substance  delivery device (Patent No. US 6,908,448 B2) was issued on one of the
patents  pending  we  acquired from ESI. We paid an aggregate purchase price for
the  Intellectual  Property  of  $19,448,594  payable  as  follows:

     -    $2,500,000 in cash, $500,000 of which was payable during the 2004
          calendar year, $1,000,000 of which was payable in four installments
          during the 2005 calendar year, and $1,000,000 of which is payable in
          four installments during the 2006 calendar year, all evidenced by a
          promissory note in the principal amount of $1,826,734, bearing no
          stated interest but using an imputed interest rate of 6.25%;
     -    assumption of an ESI note payable in the principal amount of
          $81,860, payable with interest at the rate of 16.25% in equal monthly
          installments of $2,714;
     -    the issuance of 12,000,000 shares (increased to 18,000,000 shares
          following a stock dividend in January 2005) of our common stock (the
          "ESI Shares") having an aggregate value of $17,040,000


                                        2
<PAGE>
          (based upon the closing price of our common stock on the
          Over-the-Counter Bulletin Board on the closing date); and
     -    the payment of an annual royalty equal to 2.5% of gross revenues
          derived from the Intellectual Property to be paid for the life of all
          related patents, and any allowable regulatory extensions, or for 20
          years, whichever is longer.

     As  of  the  date  of the Purchase Agreement, ESI was an involuntary debtor
under  Chapter  7  of  the  United States Bankruptcy Code, pending in the United
Stales  Bankruptcy  Court  for  the  Eastern  District  of  Pennsylvania  (the
"Bankruptcy  Court").  The sale by ESI of the Intellectual Property on the terms
provided  in  the Purchase Agreement was made upon order of the Bankruptcy Court
issued  on  July 13, 2004 (the "Order"). Under the Order, we are entitled to all
of  the  protections  provided  to  a  good  faith  purchaser  of  assets out of
bankruptcy.  Moreover,  all  non-debtor  parties to executory contracts with ESI
which  were  given  adequate  notice  of  the  sale  are  forever precluded from
asserting  against  us  any  default  under such contracts as of the date of the
Order  and  objecting  to  the sale of the Intellectual Property to the Company.

     Under  the Purchase Agreement, we delivered the ESI Shares to a third-party
escrow  agent  to  hold  the  said  shares  in  escrow and released therefrom as
follows:

     (A)  ESI is entitled to distribute a number of the ESI Shares as may
          be required in order to satisfy claims of non-affiliates of ESI, as
          provided in a plan of reorganization of ESI to be approved by the
          Bankruptcy Court.

     (B)  Commencing after July 28, 2005, one ESI Share shall be released
          to ESI for each dollar of gross revenue derived by the Company from
          the commercial exploitation of the Intellectual Property.

     (C)  On February 28, 2007 any remaining ESI Shares held in escrow
          shall be released to ESI.

     ESI  is  not  entitled to vote the ESI Shares held in escrow on any matters
put  to  the  Company's  stockholders,  except  as  to  any  proposed  capital
reorganization  or  reclassification  with  respect  to  the  Company's  equity
securities,  until  they  are released from escrow as described above. While the
ESI  Shares  are  held in escrow, the holders are entitled to participate in any
dividends  or  distributions  made by the Company to all holders of common stock
and  to  any  payment  or distribution upon the liquidation or winding-up of the
Company.

     The  promissory  note  we  executed in favor of ESI provides that we pay an
aggregate  of  $2,000,000  in  eight equal installments over two years (the "ESI
Note").  As of the date of this report, we have paid $1,750,000 on the ESI Note.
In  the event of a default under the ESI Note, the entire amount then owing will
become  due and payable immediately, together with all costs incurred by ESI and
reasonable attorney's fees. The following constitute events of default under the
ESI  Note:  (i) if we fail to make any payment due within 30 days after the date
on  which  we  receive  notice  of  such failure, (ii) if we fail to observe and
perform  any  of  the  covenants  or  agreements  on  its part to be observed or
performed  under the ESI Note or the Security Agreement (described below), (iii)
if  we  default  under  the  terms of the Security Agreement, or (iv) if we take
steps  that  evince bankruptcy or liquidation. We did not made the final payment
that was due on December 1, 2006 and, as of the date of this report we have been
unsuccessful  in  our  attempts  to  have  ESI accept the January 2006 Tender or
otherwise  negotiate a settlement. We believe it is likely that the Company will
have  to litigate this matter in order to establish its continuing rights in the
U-Strip  Technology, if any, and there can be no assurance that the Company will
be  successful  in  any  such  litigation.

     In order to fund the initial $500,000 license fee payment, we were required
to  pay  required under the Purchase Agreement, we borrowed the principal sum of
$500,000  from  Gary M. Scott evidenced by a promissory note dated June 30, 2004
bearing  interest  at the rate of 10% per annum, payable in full, with interest,
on  the  earlier  of  the  date  on  which  we  closed  the  acquisition  of the
Intellectual  Property or July 31, 2004. By amendment dated as of July 28, 2004,
Mr.  Scott  agreed  to  extend  the  time  in  which  to  repay  the  note


                                        3
<PAGE>
until  September  15,  2004, in consideration of a payment of $50,000. Mr. Scott
agreed  to  further  extend the time in which to repay the amount due under this
promissory  note  through  December  17,  2004. In consideration of granting the
extension  the  Company  agreed to pay a total of $100,000 in extension fees and
accrued  interest  and  default  interest after December 1, 2004 of $605 per day
until  the  promissory  note  is paid in full. On September 22, 2005, we entered
into  an  Agreement  and Mutual Release with Mr. Scott, paying him $653,880 (the
$500,000 outstanding loan principal, $71,175 in loan extension fees, and $82,705
in  accrued  interest through September 22, 2005). Pursuant to the Agreement and
Mutual  Release,  we  agreed to pay an additional $60,000 in consulting fees (of
which  $20,000  was paid in December 2005) and release each other from any legal
claims  against  one  another.

     We  also  executed a Patent Security Agreement in favor of ESI securing our
obligations  under the Purchase Agreement and the ESI Note and granting to ESI a
security  interest  in  and  to  the  Intellectual  Property  (the  "Security
Agreement").  Under the Security Agreement, if we commit an act of default under
the  ESI  Note  or  if  we  fail  to pay the trailer fee within 30 days after we
receive  written  notice  from  ESI of such failure, ESI shall have the right to
take  back the Intellectual Property. ESI's right to take back the technology is
evidenced  by  a  Patent  Assignment  Agreement  dated  July  28,  2004.

     As  further  provided  under  the  Purchase  Agreement,  we entered into an
employment  agreement  with  Bruce  K.  Redding,  Jr.  Mr. Redding is one of the
inventors  of  the  technologies  encompassing the Intellectual Property and the
author  or  co-author  of the various patents pending transferred to the Company
under  the  Purchase  Agreement. The terms of Mr. Redding's employment agreement
are described under "Item 10. Executive Compensation -Employment Agreements with
Management."  Because of limited capital, we have been in material breach of the
employment  agreement  with  Mr.  Redding  since  the  date  of  that agreement.

     As an adjunct to the Order and at the direction of the Bankruptcy Court, we
entered  into  a  stipulation  with  ReactMed,  Incorporated  and  ESI  (the
"Stipulation"),  which was the result of an objection by ReactMed to the sale of
the  Intellectual  Property  that  would  affect  its  rights under an agreement
between  ESI  and ReactMed. Pursuant to the Stipulation, the parties agreed that
ESI was in default under a joint development and license agreement with ReactMed
(the  "ReactMed  Agreement")  in  which  ESI  (i)  agreed to jointly develop the
Intellectual  Property  with  ReactMed  for  the  purpose of commercializing the
Intellectual  Property  for certain military and Homeland defense uses, and (ii)
granted  a  license  to  ReactMed  to  sell products based upon the Intellectual
Property  within  the such area. In the Stipulation, we agreed to assume some of
ESI's  obligations  under  the ReactMed Agreement, including, providing ReactMed
with technical assistance in connection with its development of the Intellectual
Property as provided in the ReactMed Agreement, providing ReactMed with a sample
of our transducer array and certain other equipment specified under the ReactMed
Agreement  for  the  purpose of testing components of the Intellectual Property,
and  extending  the  term  of  ReactMed's license to sell the specified products
under  such agreement to April 30, 2005. ESI also agreed to transfer to ReactMed
a  number  of  the  shares  of  our  common stock it received under the Purchase
Agreement  equal  to  $150,000  (151,617  shares)  and  pay ReactMed $25,000. In
December 2004, we agreed with ESI to pay $8,750 of the cash payment due ReactMed
and  to  issue 75,807 shares of our common stock to ESI, an amount equal to half
of  the  shares  ESI  transferred  to  ReactMed.

THE INTELLECTUAL PROPERTY.

Overview of Transdermal Technology.

     Transdermal  systems  deliver  drugs through the skin into the bloodstream.
Medications  delivered  via  skin  patches  avoid  liver metabolism, a necessary
feature  for drug molecules to metabolize easily, and allows for lower dosing of
medications.  There  are  two types of transdermal delivery systems: passive and
active. In passive transdermal systems, the drug diffuses through the skin where
it  can  act  locally  or  penetrate the capillaries for systemic effect. Active
patches  require  a  physical force to facilitate the movement of drug molecules
across  the skin. By using an applied force (such as ultrasound or an electrical
current),  active  transdermal  systems  are  capable of delivering proteins and
other  large  molecules.


                                        4
<PAGE>
     Existing  "passive" patch technologies are subject to numerous obstacles to
the  successful transmission of drugs transdermally, including the fact that the
size  and shape of the pharmaceutical compound itself prevent it from physically
passing  through the pore opening due to size limitations and lack of motivation
(push).  Passive patches have achieved commercial success because they provide a
slow, steady release and avoid the blood level peaks and valleys associated with
oral  dosing.  However,  we  believe that their applications are limited to drug
compounds  comprised  of  small  molecules.  Passive  drug delivery patches have
applications  including  smoking cessation (nicotine), birth control and hormone
replacement  therapy  (estradiol),  and  angina  (nitroglycerine).

     By  contrast,  active transdermal drug delivery systems allow certain drugs
to  be  delivered  through  the  skin many times faster than passive transdermal
patches. Moreover, this technology may allow for the delivery of a wider variety
of  drugs  than  existing  passive transdermal technology and is programmable to
allow  a  variety  of different dosing profiles. For example, active transdermal
delivery  can  non-invasively duplicate the steady or periodic delivery patterns
of  intravenous  infusion.

U-Strip Technology.

     Overview.

     The  Intellectual  Property  we acquired encompasses a drug delivery system
incorporating  a  transdermal  patch  in  combination  with microelectronics and
ultrasonic  technology.  Our  technology  represents  an active transdermal drug
delivery  process by which drugs can be transported through the skin by applying
a  low-level  ultrasonic  wave.  This process differs significantly from passive
transdermal  drug  delivery  that  relies on the slow, steady diffusion of small
molecule  drugs  through  skin.  The  technology  we  are  developing  advances
transdermal  drug  delivery  system  technology by allowing for the non-invasive
delivery  of macromolecular pharmaceutical formulations, i.e., drugs constituted
from  large molecules. We expect devices incorporating our technology to utilize
sub-miniature,  high-powered  ultrasonic  devices,  coupled  with  a  modified
transdermal  patch.

     We  believe  that  this  platform  technology can be used to non-invasively
administer approximately 175 existing drugs that cannot presently be effectively
delivered  through  the  pores  of  the  skin using existing passive transdermal
technology  due  to  their  large  molecular  size.  We  believe the control and
convenience  enabled  by  our  technology  has  the  potential  to:

          -    improve therapeutic outcomes;
          -    reduce side-effects;
          -    increase patient compliance; and
          -    improve overall cost-effectiveness of drug therapies.

     Our  drug  delivery technology constitutes a "medical device" as defined by
the  United  States  Food  and Drug Administration ("FDA") and is subject to FDA
approval  prior  to public distribution. As yet the device has not been approved
by  the  FDA  and  is  subject to significant clinical trials on human beings, a
procedure that could encompass several years and may never result in approval of
the  device  for  use  on  human beings. To date, we have conducted only limited
laboratory tests of the technology for the purposes of determining the viability
and  efficacy  of  the  scientific  theories  and  technologies  embodied in the
technology. We also have performed limited testing of the abstract facets of the
technology  on  humans  and animals but do not possess sufficient information to
support  an  application  to the FDA. We have not yet constructed a prototype of
the  device  utilizing  the  miniature  technology  to  be incorporated into the
product  we  hope  to  offer  commercially.

     Management expects initially to focus on and pursue regulatory approval for
the  transdermal  delivery  of  insulin  for  diabetics utilizing our device. In
management's  estimation,  this  field  not  only represents a potentially large
market  for  the  device  but also is an area in which users could obtain relief
from the significant pain and discomfort experienced as they continually monitor
their condition by testing blood samples they must obtain by pricking their skin
several  times  a  day  and  then  injecting  themselves  with  insulin.


                                        5
<PAGE>
     Our Technology.

     Our  technology  utilizes  a  transdermal patch with an attached ultrasonic
device that we expect will overcome the limitations of passive patch technology.
The  device  is  designed  to  generate  ultrasonic  transmissions  of  variable
intensity  and  frequency  that  are  transmitted through a modified transdermal
patch.  In theory, the ultrasound will dilate the skin's pores, which allows for
the  delivery  of  pharmaceutical  compounds  composed of large molecules and is
expected  to  increase  the  absorption of the drug through the skin. The device
will  be  programmable  to  deliver a prescribed amount of active pharmaceutical
agents  on  a  programmed  drug delivery regimen that can be customized for each
patient.  The projected portability of this drug delivery system, in contrast to
other clinical systems employing ultrasound devices that are fixed in place, can
improve  the  quality of life for many patients with chronic diseases. Moreover,
we  have  designed  the  system  to  be  programmable,  which  will provide more
flexibility  and  control  over  an  individual  patient's  dosing  needs.

     Our proprietary drug delivery technology offers the potential to expand the
applications  for transdermal patches to a broader array of drugs across a wider
variety  of  therapeutic  indications.  We  believe  that  our active ultrasonic
transdermal  drug  delivery system will retain the advantages of passive patches
in  that  it  will be comfortable, non-invasive, easy to use, and convenient. In
addition,  our  transdermal  delivery  system  is  being designed to be precise,
controllable  and  programmable because the drug will be delivered only when the
device  is  activated.  We  believe  that  these are distinct advantages for the
administration  of  many drugs where achieving optimal blood levels will greatly
improve  therapeutic outcomes as well as reduce or eliminate side effects. These
features  also  improve  overall  cost-effectiveness  of  drug  therapies.

     The  ultrasonic  waves  produced  by  our device will force (push) the drug
either  through a user's hair follicles or sweat pores. Ultrasonic waves will be
used  to  enlarge  the  skin's  pathway  and  then to drive the drug through the
opening.  Mechanically,  the  drug follows the hair follicles to the bloodstream
(equivalent  of  a  near  intravenous injection) or the sweat pores to the fatty
tissue  (equivalent  of  a  sub-coetaneous  injection).

     We  believe  that  existing  conventional  ultrasound  and  other  active
transdermal technology therapies are ineffective at pore expansion and can cause
damage  to  drug formulations and skin irritation, discoloration and damage. Our
limited  clinical  testing  of  the  technology  supports  our  belief  that the
ultrasonic  transmission methodology we will incorporate into our device reduces
the  thermal  effects of ultrasound without damaging the target drug or the skin
of  the  patient.  Volunteers  report  an  inability  to sense or hear the sonic
transmission.

Hardware.

     To  date, product research has focused on creating the hardware required to
construct a small, wearable, lightweight insulin delivery system that is durable
enough  to be worn on a patient's arm on a full-time basis. The inventors of the
technology  expect  that  the  application of the technology could extend beyond
insulin  and  serve as a platform for the delivery of a myriad of existing drugs
that  cannot  be  delivered  utilizing  current  passive transdermal technology.

     We  have  not  yet  fabricated  a  device  incorporating  the  miniaturized
technology  that we propose to utilize in the product we expect to submit to the
FDA  for approval. Management believes that the miniaturized hardware, circuitry
and  power  source (battery) we will require to produce a comfortable, wearable,
and  effective  device  as  described in our patent applications is commercially
available.  Accordingly,  once  the  efficacy  of  the  theories  underlying our
technology  is  proven  to  our satisfaction, we believe that we will be able to
employ  off-the-shelf  components  in  the  development  of  a  final  product.

     The hardware elements we will seek to incorporate into our transdermal drug
delivery  device  encompass  an  ultrasonic applicator, a flat transducer, and a
modified  patch.

     The  ultrasonic  applicator  will  consist  of  a  device  that  generates
ultrasonic  transmissions  and  a keypad to operate and control the dosage level
and  frequency.  The  dose  controller  will  contain  a  miniature  battery and


                                        6
<PAGE>
circuitry  that precisely control the rate, dosage, and pattern of drug delivery
through  the skin. The user or his physician will be able to program the unit to
provide  for  multiple  dosage  levels  so  that,  for  example,  in the case of
diabetics,  the  device could be programmed to deliver additional insulin during
mealtime.  A  large  display  will  provide a message center that will allow the
wearer to see existing device settings and reprogram the device as necessary and
prescribed  by  his  physician.  The  patient  or  his physician will be able to
program  the unit manually, but the device will be fitted with a radio frequency
receiver, which will allow for radio signals to be received from a remote sensor
device  to  automatically adjust the device to the patient's needs in real time,
minimizing  patient  interaction.

     The ultrasonic applicator unit will record the dose delivered and store the
information in memory for 60 days. It will be capable of downloading, via modem,
a  dose  report  to  the  physician  to  enable individualized dose tracking and
individualized  dose  management.  We  expect  to  utilize  a mini-transducer to
produce  ultrasonic  signals  with  sufficient intensity to transverse the patch
using  minimal  power.

     A  flat transducer will generate the alternating ultrasonic waveform effect
necessary to enlarge the pores of the skin and also drive or push the medication
through  the  patch  into  the  skin's  pores,  in what can be referred to as an
"active"  transdermal  delivery  system.  Our transducer will emit an ultrasonic
transmission  that  enlarges  the  pores  of  the  skin  without  damaging  the
pharmaceutical  preparation  being delivered, one of the primary deficiencies of
existing ultrasonic patch technology. The modified transducer system is designed
to deliver a prescribed dose of medicine on demand as a result of the ultrasonic
excitation of the patient's skin. The device delivers the drug in an array which
enables  sequencing  upon the skin and prevents over-exerting one skin transport
site.  Alternatively,  the  transducers  in  the array can be operated in tandem
increasing  the  dose  quantity  through  the patient's skin. We expect that our
transducers  will  be  battery  powered.

     We  expect  that  our transdermal drug delivery system will employ either a
traditional  flexible  patch  design or a proprietary two-part system called the
Medi-Cap  (TM).  The  Medi-Cap(TM)  transdermal  drug  delivery  system has been
designed  to use a two-part modified transdermal patch consisting of a patch cap
(into  which  the  medicated  patch  is  placed) and the transducer coupler that
contains  the  transducer  array.  The  patch  cap will store the pharmaceutical
preparation  and  connect  to  the transducer coupler to complete the system. It
will  be  removable  and  disposable.

     The  design  of our active transdermal drug delivery systems is intended to
maximize  overall  delivery  system  efficiency  while  addressing  commercial
requirements  for  reproducibility,  formulation stability, safety, convenience,
and low cost. To achieve this goal, our delivery system is designed to integrate
proprietary  and  patent  pending  technology  with  commercially  available,
off-the-shelf  components. We believe our active transdermal approach will offer
a  level of portability, convenience, control, and programmability not available
with  other  methods  of  drug  delivery.

     We  believe  the  controllability  and  programmability  offered  by  our
technology  offer  a  competitive  advantage  that  will  enable our products to
deliver  more  consistent  and predictable results for a broad range of existing
and  new  drugs.  Using  this  technology, we believe we can create a variety of
cost-effective,  wearable, drug delivery systems that are non-invasive, discreet
and  easy  to  use  in  both  a  clinical  environment as well as for day-to-day
self-medication  programs  such  as  insulin  administration,  high  cholesterol
therapies;  gastro-intestinal  system  treatments;  oncology  drug  delivery;
cardiovascular  care;  chronic  pain  control and treatment; fertility drugs for
women;  hormone  treatment;  and  pain  management.

     We believe the key clinical advantages of our drug delivery technology will
be:

          -    Controllable Dosing- Enables accurate control over dosage
               and duration of delivery - drugs can be delivered fast or slow,
               in a single dose or in several doses over time at selected
               intervals.
          -    Programmable - Electronic controllers can be programmed to
               handle a wide variety of drug delivery dosage profiles with or
               without manual adjustment.


                                        7
<PAGE>
          -    Non-invasive and comfortable - Achieves comparable results
               to injections and intravenous administrations without the pain,
               and therefore the anxiety, associated with those methods. This
               feature is particularly important for children.
          -    Consistent and reliable results- Enables highly controlled
               delivery of intended doses systemically or a specified target
               area, producing predictable results.
          -    Broadly applicable - Potentially useful for delivery of a
               wide range of drugs.
          -    Verifiable - Our systems are capable of automatically
               capturing and storing information regarding the exact time and
               dosage of drug delivered. This information can be used in disease
               management to verify that patients comply with drug therapy
               regimens.

     We  believe  our  active  transdermal  drug  delivery  will  overcome  the
limitations  of  traditional,  passive  transdermal  delivery  systems,  such as
patches  or  creams,  that  are  slow  to take effect, difficult to control, and
useful  for  only  a  limited  number  of drugs with small molecular structures.

     Spin-Off  Applications.

     During  2005,  we  developed  two  additional  applications  based  on  the
technology we acquired from ESI for which we have filed two provisional patents.
One  of the new applications is designed to deliver cosmetic formulations to the
surface  of  the  skin.  The other application is designed to deliver antiseptic
solutions  to  cuts,  abrasions,  and  wounds.  We  are  in  the early stages of
developing  prototypes  for these two applications and developing business plans
for  commercializing  products  that  deliver  cosmetics and antiseptics via our
transdermal  delivery  technology.

MARKET ANALYSIS.

     We believe the drug delivery market in the United States accounts for 6% of
the pharmaceutical industry revenues, with sales of pharmaceutical products that
utilize advanced drug delivery technology reaching approximately $40 billion. We
also  believe  that  this  market  will  continue  to  grow and expect that drug
delivery will account for approximately 40% of all pharmaceutical sales in 2007.
The fast growth of this industry sector can be attributed to the following major
developments:

          -    The need for effective delivery of new biopharmaceuticals;
          -    Patent  expirations  and  label  changes  driving  pharmaceutical
               companies  to  reformulate  their products to extend product life
               cycles;
          -    Manufacturers of generic drugs are also increasingly
               interested in novel drug delivery technologies for making their
               products competitive; and
          -    New technologies can minimize side effects and lead to
               better patient compliance.

     Other market drivers include expansion of pharmaceutical company pipelines,
product  differentiation,  and reduction of health care costs. Since the 1970's,
more  than  35  drug  delivery systems have been marketed, including transdermal
patches,  time-release  pills,  osmotic  pumps  and  depot  implants.

     Over  300  companies  are  currently  known to be involved in drug delivery
research  and  development.  In  addition,  universities,  foundations and small
private  companies  and  laboratories  unknown  to  us  are researching new drug
delivery  systems.

     We  have not completed our market research for the cosmetics and antiseptic
devices  that  are  in  early  stages  of  development.

MARKET OPPORTUNITY.


                                        8
<PAGE>
     We  believe  that  there  exists  a  significant  market  opportunity for a
non-invasive,  programmable  drug  delivery system which is worn by the patient.
Our technology will have application in a variety of healthcare settings and for
a  variety  of  compounds  and  therapies.

     We  believe  the  market  for  our  technology  is  driven by the following
factors:

          -    Pharmaceutical companies looking (i) to extend the life
               cycle of existing FDA approved drugs through the utilization of
               new drug delivery systems, and (ii) for ways to effectively
               deliver new biopharmaceuticals and other drugs comprised of
               macromolecular proteins and peptides.
          -    Physicians who are seeking to deliver drugs (i) more
               effectively, without side effects, (ii) more economically, and
               (iii) by minimizing patient interaction in the daily medication
               process which will increase therapeutic compliance and promote
               proper dosing.
          -    Patients, who are demanding pain-free, less complicated
               delivery systems.

     We believe that our active transdermal drug delivery system will be capable
of  satisfying  each  of  the  participants  in  the  health-care  chain.

     The  market  for  our  ultrasonic  drug  delivery  system  extends  to  all
pharmaceutical  companies that manufacture drugs that otherwise would be subject
to  delivery by way of a transdermal patch but which cannot be delivered in such
fashion  because  the  molecules  comprising  the  formulation are too large for
existing transdermal technology. Our technology can provide a means of extending
the  life cycle of drugs that cost many millions of dollars to develop, test and
bring  to  market. It also may provide a means to deliver new biopharmaceuticals
and  other  drugs comprised of macromolecular proteins and peptides that are not
subject to delivery by passive transdermal technology. Management estimates that
there  are  approximately  175  existing pharmaceutical compounds that cannot be
effectively  delivered  through  the  pores  of  the  skin  using conventionally
available  transdermal  technology  due  to their large molecular size but which
could  be capable of being delivered by our transdermal system, and our research
and  business  development  efforts  are  geared  towards  quantifying  the
opportunities and moving forward with the most promising of them. We expect this
number  to  increase  as pharmaceutical companies continue to develop new drugs.

     We  believe that physicians will be satisfied with the improved therapeutic
outcomes  that  result  from  the use of our transdermal technology, the reduced
side-effects  which  sometimes accompany other forms of drug delivery, increased
patient  compliance  with  therapeutic  regimens, and the improvement in overall
cost-effectiveness  of drug therapies. All of these factors are achieved because
our  device  delivers  the  precise  dosage of a drug at the proper time without
over-medicating  a  patient.

     We  believe  that patients will benefit most from our drug delivery system.
Our  technology  would  replace  self-administered  injections and large content
capsules  for many of the therapeutically prescribed pharmaceuticals now used to
battle  chronic illnesses. The technology is appealing to patients because it is
designed  to  be:

          -    non-invasive, needle-free and therefore pain-free;
          -    programmable to meet each patient's individual patient's
               requirements for the specific pharmaceutical therapy prescribed;
               and
          -    wearable and thus offers the patient portability, providing
               freedom from periodic injection or clinic visits.

     An  aging  yet  active United States population demands changes in the drug
delivery  regimen  and  techniques  customary  in  the past. Traditionally, drug
delivery  took  the  form  of  tablets,  elixirs,  inhalants,  injections,  or
transdermal patches. However, each of the delivery methods has its deficiencies,
including:

          -    many pharmaceutical formulations are not well suited to oral
               dosage forms (tablets or elixirs) because these formulations may
               be damaged in the gastrointestinal tract of the patient;


                                        9
<PAGE>
          -    the use of encapsulation and special gel-cap forms to
               provide release of a drug after it has by-passed the stomach have
               proven difficult to produce because inaccuracies of dosing and
               the use of materials which may not be approved by the FDA;
          -    inhalants involve placing a drug through the lung lining
               into the bloodstream, however problems with dosing and the fact
               that a patient who simply has a cold could reduce a drug's
               efficiency and limit the potential applications of this approach
               to drug delivery;
          -    injectable drug delivery is invasive and painful; and
          -    transdermal patches offer non-invasive drug delivery but are
               limited to "small molecule" drugs, limiting the number of
               medications which can be administered through conventional
               "passive" patch products.

     We believe that active transdermal patches are the only effective
non-invasive drug delivery method available, offering many key advantages:

          -    the set-it-and-forget-it appeal of transdermal patches has
               been well demonstrated in such applications as motion sickness,
               cardiac drug administration, hormone delivery and nicotine
               patches;
          -    patients prefer the non-invasive nature offered by
               transdermal patches and therefore compliance is generally high
               with a patch regimen as opposed to injectable, oral or even
               inhaled drug delivery techniques, where the patient needs to
               remember to follow a predetermined schedule;
          -    transdermal patches can offer several days of drug delivery
               with little or no maintenance from the patient, in essence
               offering a programmed automatic drug delivery; and
          -    transdermal patches provide consistent dosage delivery to
               ensure the patient is receiving the proper amount of the
               prescribed drug.

BUSINESS STRATEGY.

General

     Management  expects  that  the  Company  will  generate  revenues  from the
following  sources:

          -    a testing program to assess the feasibility of drugs subject
               to delivery by way of our transdermal delivery system; and
          -    license and royalty fees.

     Our  objective  is  to  exploit  our technology through the development and
commercial  introduction  of  products  incorporating  existing  FDA-approved
compounds into our drug delivery systems. Our business strategy is to (i) define
products  that address unmet medical needs, (ii) analyze the market potential of
such  defined  products,  (iii)  develop  the  products  with  and  through  an
appropriate  clinical stage partner, (iv) collaborate with strategic partners to
complete  the  development  of  such products, and (v) launch such products on a
commercial  basis  through  marketing  partners.

     We  expect  to  focus  our  efforts  on applying our platform technology in
therapeutic  areas where our approach to drug delivery can substantially improve
a  drug  therapy,  offering  therapeutic, economic and lifestyle advantages over
existing  methods  of  delivering  the  same  drug. We will seek to partner with
pharmaceutical  and  other  healthcare  companies that are market leaders in the
specific  therapeutic  areas  and  which can provide immediate market access and
financial  support  during  the  later stages of clinical studies. We propose to
focus  on existing FDA-approved drugs. We believe this approach reduces clinical
risks and eliminates certain costly and time consuming pre-clinical and clinical
studies,  thereby  shortening  time  to  approval and materially reducing costs.

     To  achieve  our  objectives,  we  plan to implement the following business
strategy:


                                       10
<PAGE>
          -    Use our technology to create products that improve therapy,
               thereby improving drug efficacy, while limiting side effects,
               reducing patient discomfort and inconvenience, which will improve
               compliance and lowering healthcare costs.
          -    Focus on applying our technology to a broad range of
               macromolecular pharmaceutical compounds that have not been
               subject to delivery by way of passive transdermal technology.
          -    Select FDA-approved drugs in order to reduce the development
               risk and costs of our products.
          -    Seek to develop and enter collaborative and marketing
               arrangements with leaders in specific therapeutic areas that can
               provide established, significant market access as well as finance
               late stage clinical trials. We will expect our partners to handle
               sales, marketing and distribution.
          -    Focus on areas where we believe the United States market
               potential is large and well established and where we believe we
               can materially increase, or even create, the market. For this
               reason, we have elected to focus on the market for insulin
               delivery to diabetics.

Suitability Testing.

     We  expect  to  establish  a  laboratory  to  offer  a screening program to
pharmaceutical companies to determine whether existing and newly developed drugs
are  candidates  for  delivery  by way of our active transdermal device. We will
negotiate  with  manufacturers  of successful candidates to enter into long-term
development  agreements that may include funding milestones. A typical structure
could  include  a  technology  marketing  agreement  with  research  grants  and
milestone  payments  at  each  major step in the pre-clinical and clinical path.

License and Royalty Fees.

     Management  anticipates that the Company will generate the preponderance of
its  revenues  from  licenses and accompanying royalty streams. The Company will
seek  to  negotiate with drug manufacturers that have the potential to reach the
market  quickly  and  on  pharmaceutical  preparations  that  would be favorably
received  by  physicians  and  patients.  Specifically,  we  intend  to  target
pharmaceutical  companies  which  manufacture  formulations  which  not only are
subject  to delivery utilizing our transdermal systems but which already are FDA
approved  and  widely  distributed.

     Initially,  we  will  focus  on developing an insulin delivery system based
upon the economics of the diabetes industry, domestically and worldwide, and the
need  to relieve the physical discomfort experienced by patients associated with
maintaining  a  treatment  regimen.  In  2000,  there were more than 171 million
people  worldwide  who  suffered  from  diabetes  and  received  some  form  of
therapeutic  care  and  treatment from healthcare professionals. It is predicted
that  by  2030 this figure will more than double to reach a total of 366 million
people  with  diabetes.  In the United States, more than 14.6 million people are
treated  daily  for  diabetes,  with 28% receiving insulin or oral delivery drug
therapies  (5.4  million)  to  control  the rise and fall of their blood glucose
levels.  Of  that  population, 16% are insulin-only users, with 2% using insulin
pumps  as  their  primary delivery method device. We believe the direct cost for
treating  diabetes  in  the  United  States  exceeds  $92  billion  per.

     Diabetes  sufferers  represent a potentially large and lucrative market for
our  device.  We  believe that physicians and patients will respond favorably to
and  support  a  non-invasive,  needle-free and therefore pain-free painful drug
delivery  system.

     Thereafter,  we  intend to target manufacturers of other well-known, widely
distributed pharmaceutical formulations currently approved by the FDA. We expect
to  target  the  following  markets, all of which represent multi-billion dollar
annual  industries:

          -    high cholesterol drugs;
          -    gastro-intestinal system treatments;
          -    central nervous system treatments;
          -    oncology drug delivery;
          -    cardiovascular care;


                                       11
<PAGE>
          -    chronic pain control and treatment; and
          -    fertility drugs for women.

     A  number  of  the drugs developed to treat these conditions are subject to
delivery  by  way  of our transdermal ultrasonic drug transport delivery system.
Many  of  these drugs must be delivered in precise doses at specific times while
other  drugs  must be modulated to achieve the most efficacious result. Patients
could  benefit from many of the anticipated benefits derived from the use of our
technology,  including:

          -    in the case of persons seeking to control high cholesterol,
               caregivers can be certain that patients are receiving their
               medication in a consistent and predictable manner which accounts
               for variable factors introduced by the patient during the normal
               course of daily activities such as exercise, food consumption and
               alcohol consumption;
          -    in the case of drugs developed to treat gastro-intestinal
               conditions, certain foods can trigger a negative
               gastro-intestinal reaction that may require an unanticipated dose
               of medicine, which our device is capable of delivering;
          -    people suffering from central nervous system disorders, such
               as epilepsy, Parkinson's disease or other psychiatric disorders,
               may not be capable of remembering multiple daily doses of their
               medicine, our transdermal technology obviates the need to
               remember when and how much of a given formulation to take;
          -    cancer treatments sometimes incorporate complex multi-drug
               regimens that require specific precise dosages of multiple and
               varying drugs at specific times.

     We  will  seek  to license our technology to the companies that manufacture
these  drugs  and receive a continuing royalty. The terms of any license will be
negotiated  after  we  have  received FDA approval of our transdermal ultrasonic
drug  transport  delivery  system.  We  may  seek  to  enter  into collaborative
relationships with pharmaceutical companies prior to the receipt of FDA approval
from  which  we  would  receive  funds to complete testing of our technology and
pursue  FDA  approval and for which the pharmaceutical company would be granted.

     We  are  in  the  early  stages  of  developing  our business plans for the
cosmetic  and  antiseptic  delivery  devices; however, it is anticipated that we
will  seek  to  license  those  technologies  also  to  cosmetics and antiseptic
manufacturers.

RESEARCH AND DEVELOPMENT ACTIVITIES.

     To  date,  we  have  focused  our  research  and  development activities on
verifying  the  theories  underlying  our  drug  delivery  system.  We have only
conducted  limited  laboratory  tests  of  the  technology  for  the purposes of
determining  the  viability,  safety and efficacy of the scientific theories and
technologies  embodied  in  the  technology for the delivery of insulin. We also
have  performed  limited  testing  of  the  abstract facets of the technology on
humans  and  animals.  We  have  not  yet  constructed a prototype of the device
utilizing  the  miniature technology to be incorporated into the product we hope
to  offer  commercially.

     Substantial  additional  research  and  development efforts are required to
complete  the  development  of  the  device  prior  to submission to the FDA for
approval.  These  activities  will  consist  of,  among other things, conducting
extensive  additional  animal and human trials and developing a prototype of the
device  that  we hope to commercialize. We cannot estimate the time required for
completion  these  activities  or  when  we  will  submit a device to the FDA to
commence  the  approval  process.  We  cannot assure that we will ever develop a
product  that  is  approved  for  commercial  distribution.

     We  have  also increased our research and development activities related to
devices  to  deliver  cosmetics and antiseptics. These products may also require
similar  FDA  applications  and  approvals.

GOVERNMENT REGULATION.


                                       12
<PAGE>
     Our proposed drug delivery system constitutes a "medical device" as defined
by  the  FDA  and  is  subject  to  extensive  regulation  by  the FDA and other
regulatory  bodies.  In  nearly  all  cases,  medical devices distributed in the
United  States  require either a 510(k) clearance or pre-market approval ("PMA")
from the FDA. Under the Food, Drug and Cosmetic Act, as amended, medical devices
are  classified  into  one  of  three  classes  depending  on the degree of risk
imparted  to patients by the medical device. Class I devices are those for which
safety  and effectiveness can be assured by adherence to General Controls, which
include compliance with Quality System Regulations ("QSRs"), facility and device
registrations and listings, reporting of adverse medical events, and appropriate
truthful  and  non-misleading  labeling,  advertising and promotional materials.
Some  Class  I  devices  also require pre-market review and clearance by the FDA
through  the  510(k)  Pre-market  Notification process described below. Class II
devices  are subject to General Controls, as well as pre-market demonstration of
adherence  to  certain  performance  standards  or  other  special  controls  as
specified by the FDA. Pre-market review and clearance by the FDA is accomplished
through  the  510(k) Pre-market Notification procedure. In the 510(k) Pre-market
Notification  procedure, the manufacturer submits appropriate information to the
FDA  in  a  Pre-market  Notification  submission. If the FDA determines that the
device is "substantially equivalent" to a device that was legally marketed prior
to  May 28, 1976, the date upon which the Medical Device Amendments of 1976 were
enacted,  or  to  another  similar  commercially  available  device subsequently
cleared  through  the  510(k)  Pre-market  Notification  process,  it will grant
clearance  to  commercially  market  the device. It generally takes three to six
months  from  the  date of submission to obtain clearance of a 510(k) Pre-market
Notification  submission, but the process may take longer. If the FDA determines
that  the  device,  or  its  "labeled"  intended  use,  is  not  "substantially
equivalent,"  the  FDA  will  automatically  place  the  device  into Class III.

     A  Class  III product is a product that has a wholly new intended use or is
based  on advances in technology for which the device's safety and effectiveness
cannot  be  assured  solely  by  the General Controls, performance standards and
special  controls applied to Class I and II devices. These devices often require
formal  clinical investigation studies to assess their safety and effectiveness.
A  Pre-market  Approval ("PMA") from the FDA is required before the manufacturer
of  a Class III product can proceed in marketing the product. The PMA process is
much more extensive than the 510(k) Pre-market Notification process. In order to
obtain  a  PMA,  Class  III  devices,  or  a particular intended use of any such
device,  must  generally  undergo  clinical  trials  pursuant  to an application
submitted  by  the manufacturer for an Investigational Device Exemption ("IDE").
An IDE allows the investigational device to be used in a clinical study in order
to  collect  safety and effectiveness data required to support a PMA application
or  a  510(k)  Pre-market  Notification  submission  to  the  FDA.  Only a small
percentage  of  510(k) Pre-market Notification submissions require clinical data
to  support  the  application.  Investigational  use  also  includes  clinical
evaluation  of  certain  modifications  or new intended uses of legally marketed
devices.  All  clinical  evaluations  of investigational devices, unless exempt,
must have an approved IDE before the study is initiated. An approved IDE permits
a  device to be shipped lawfully for the purpose of conducting investigations of
the  device  without  complying  with  other  requirements of the Food, Drug and
Cosmetic  Act  that  would  apply  to  devices  in  commercial  distribution.

     Any devices manufactured or distributed by us pursuant to FDA clearances or
approvals  will be subject to extensive and continuing regulation by the FDA and
certain  state  agencies.  We will be subject to inspection by the FDA and state
health  inspectors and have to comply with various other regulatory requirements
that  usually  apply  to  medical  devices  marketed in the United States. These
regulatory  requirements include, among others, manufacturing and design control
regulations, labeling, Medical Device Reporting regulations which require that a
manufacturer  report  to  the  FDA certain types of adverse events involving its
products,  and  the  FDA's  prohibitions against promoting approved products for
unapproved,  or  "off-label,"  uses.  Our  failure  to  comply  with  applicable
regulatory  requirements  could  result  in enforcement action by the FDA, which
could  have  a  material  adverse  effect  on  us.

     Unanticipated  changes  in  existing  regulatory  requirements,  failure to
comply  with  such  requirements  or  adoption  of new requirements could have a
material  adverse  effect  on us. We also are subject to numerous federal, state
and  local  laws  relating  to  such  matters  as  safe working conditions, good
manufacturing  practices,  environmental  protection,  fire  hazard  control and
hazardous  material  disposal.  There  can  be  no  assurance  we will not incur
significant costs to comply with such laws and regulations in the future or that
such  laws  or


                                       13
<PAGE>
regulations will not have a material adverse effect upon our business, financial
condition  and  results  of  operations.

     We  cannot  assure you that any of our potential drug delivery systems will
be  approved  by  the  regulatory  bodies or approved on a timely or accelerated
basis,  or  that  any  approvals  received  will  not subsequently be revoked or
modified.  See  also  "Risk  Factors."

PRODUCT LIABILITY AND INSURANCE.

     The  development,  manufacture  and  sale  of our drug delivery system will
expose  us  to  an  inherent  risk  of product liability claims. We will seek to
obtain  general  liability  insurance  and  product  liability insurance when it
becomes  necessary.  Coverage is expensive and difficult to obtain and there can
be no assurance that such coverage will be available to us. Any claims or series
of  claims against us, regardless of their merit or eventual outcome, could have
a  material  adverse  effect on our business, financial condition and results of
operations.

COMPETITION.

General

     We  face  competition  from  medical  product  companies,  as  well as from
universities  and  other  non-profit research organizations in the field of drug
delivery  systems  and individual industries in which we intend to introduce our
product  as  a  platform  for  treatment delivery systems. Many emerging medical
product  companies  have  corporate  partnership  arrangements  with  large,
established  companies  to  support  the  research,  development,  and
commercialization  of  products  that  may  be competitive with our products. In
addition,  a  number  of  large established companies are developing proprietary
technologies  or  may  enhance  their capabilities by entering into arrangements
with  or  acquiring  companies  with  drug  delivery  technologies.  Many of our
existing or potential competitors have substantially greater financial, research
and  development,  regulatory, marketing, and production resources than we have.
Other  companies  may  develop  and introduce products and processes competitive
with  or  superior  to  our  technology.

     For our proposed products, an important factor in competition is the timing
of  market  introduction  of our products or those of our competitors' products.
Accordingly, the relative speed with which we can develop products, complete the
regulatory  clearance processes and supply commercial quantities of the products
to  the  market  is  an important competitive factor. We expect that competition
among  products  cleared  for  marketing  will  be based on, among other things,
product efficacy, safety, reliability, availability, price, and patent position.

     Our proposed current product, and any future products which we may develop,
will  likely  compete  with both conventional drug delivery methods and advanced
drug  delivery  methods.

     Conventional Drug Delivery Methods

     Traditionally, the pharmaceutical industry has relied on oral delivery and
injection as the primary methods of administering drugs:

     Conventional Oral Method.

     Conventional,  oral  drug dosage forms, such as pills and capsules, are the
most  common  types  of  drug  delivery.  Oral drug delivery methods are easy to
administer,  but  their  efficacy  can  be limited because drugs must first pass
through  the  digestive  system  and  liver  before  being  absorbed  into  the
bloodstream. Orally delivered drug dosages must, therefore, be large to overcome
the  degradation  that  occurs  in  the  gastrointestinal  tract and liver. As a
result,  conventional oral dosage forms often produce higher initial drug levels
than are required to achieve the desired therapeutic effects, thereby increasing
the risk of side effects, some of which can be serious. Also, it is difficult to
maintain  therapeutically  optimal  drug  levels  using  oral  drug  delivery


                                       14
<PAGE>
methods.  Further,  oral  drug  delivery  methods can require patients to follow
inconvenient  dosing  routines,  which  may  diminish  patient  compliance  with
self-medication  schedules.

     Injection Methods.

     Injectable  drug  dosage forms generally provide rapid onset of therapeutic
action  and  offer  many of the same advantages as conventional oral drug dosage
methods.  Injectable  drug delivery methods use needles, raising the possibility
of  needle-stick injuries, as well as the risk of infection to the caregiver and
the  patient.  The use of needles also increases patient anxiety due to the pain
of injection. Further, patients often find self-injectable therapies unpleasant.
As  a  result,  injected  drugs  for  many diseases meet with varying degrees of
patient  acceptance  and compliance with the prescribed regimens, which can lead
to  increased  incidence of medical complications and potentially higher disease
management costs. In addition, some elderly, infirm or pediatric patients cannot
administer  their own injections and require assistance, thereby increasing both
the  inconvenience  to  these  patients  and  the  cost  of  therapy.

     Advanced Drug Delivery Technologies

     The  limitations  of  conventional forms of drug delivery, such as oral and
injection  methods,  have  driven demand for advanced drug delivery alternatives
that  are  safer,  more  effective  and  more convenient. Advanced drug delivery
technologies  have  improved  oral and injection methods as well as offering new
means  of  administering  drugs,  such  as  through the skin and the respiratory
system.  Advanced  drug  delivery  technologies  include;

          -    sustained release pills and injectables,
          -    active and passive transdermal patches.
          -    infusion pumps, and
          -    pulmonary, nasal and transmucosal delivery methods.

     In  some cases, these technologies offer better control over the release of
drugs  into the bloodstream, thereby improving therapeutic efficacy and reducing
side effects and risks. In other cases, advanced drug delivery technologies make
therapies  easier  to  administer and support more complex therapeutic regimens.
Innovative drug delivery technologies can offer many advantages over traditional
methods,  including  ease  of  use  and  administration, greater control of drug
concentration  in  the  blood,  improved  safety  and efficacy, improved patient
compliance,  expanded  indications  for  certain  therapies,  and  totally  new
therapies  using  drugs  that  cannot  be  delivered  otherwise.

PATENTS AND PROPRIETARY RIGHTS.

     We  regard  the establishment of a strong intellectual property position in
our  technology  as  an  integral part of the development process. We attempt to
protect  our  proprietary technologies through patents and intellectual property
positions. Patent applications covering key elements of our technology have been
filed in the United States and internationally, including the European Community
and  China.  In  addition,  the  inventors  of  the  Intellectual Property claim
approximately  60  new  inventive  concepts may be subject to patent protection.

     The  patent  position  of  medical  device  firms,  including  our company,
generally  is  highly  uncertain  and  may  involve  complex  legal  and factual
questions.  Potential  competitors  may have filed applications for, or may have
been  issued  patents,  or  may obtain additional patents and proprietary rights
relating to products or processes in the same area of technology as that used by
our  Company.  The  scope  and  validity  of these patents and applications, the
extent  to which we may be required to obtain licenses thereunder or under other
proprietary  rights, and the cost and availability of licenses are uncertain. We
cannot assure you that our patent applications will result in additional patents
being  issued  or  that  any  of  our  patents  will  afford  protection against
competitors  with  similar  technology;  nor  can  we assure you that any of our
patents  will  not  be  designed around by others or that others will not obtain
patents  that  we  would  need  to  license  or  design  around.


                                       15
<PAGE>
     We  also  rely  upon  unpatented  trade  secrets. We cannot assure you that
others  will  not  independently  develop  substantially  equivalent proprietary
information  and  techniques,  or otherwise gain access to our trade secrets, or
disclose  such technology, or that we can meaningfully protect our rights to our
unpatented  trade  secrets.

     We require our employees, consultants, advisers, and suppliers to execute a
confidentiality  agreement upon the commencement of an employment, consulting or
manufacturing relationship with us. The agreement provides that all confidential
information  developed  by  or made known to the individual during the course of
the  relationship  will  be kept confidential and not disclosed to third parties
except  in  specified  circumstances.  In  the case of employees, the agreements
provide  that  all  inventions conceived by the individual will be the exclusive
property  of  our  company. We cannot assure you, however, that these agreements
will  provide  meaningful  protection  for  our trade secrets in the event of an
unauthorized  use  or  disclosure  of  such  information.

     On  June  21,  2005,  a patent for substance delivery device (Patent No. US
6,908,448  B2)  was  issued  on one of the patents pending we acquired from ESI.

MANAGEMENT AND EMPLOYEES.

     Upon the closing of the Purchase Agreement, the officers and directors of
the Company resigned and Bruce H. Haglund was appointed to serve as the sole
director of the Company until funding had been received. In March 2006, Grant
Atkins was appointed to the Board of Directors, and in July 2006, Bruce Redding
was appointed to the Board of Directors.

     The Company entered into a three-year employment agreement with Bruce K.
Redding on July 29, 2004 (subsequently amended on September 7, 2005.)  The terms
of Mr. Redding's employment agreement are described under "Item 10.  Executive
Compensation- Employment Agreements with Management."  In January 2007, Mr.
Redding resigned as an officer of the Company because of the breach of the terms
of this employment agreement with the Company.

     In  January  2007,  as  a  result of not having the capital to meet payroll
obligations,  the  Company laid off all of its employees. If and when additional
funding  is  obtained, the Company will re-hire former employees or may hire and
train  new  employees.  The  Company  was  not  obligated  to make any severance
payments for salaries, health benefits or accrued vacation and sick time related
to  the  termination  of  any  of  its  employees.

     In  order  to  implement  our  business plan, which includes completing the
development  of  our  technology, obtaining appropriate FDA and other regulatory
approvals  and  successfully  initiating  marketing  activities, we will require
significant  additional  staff.  Current management expects that we will have to
retain  additional  experienced  personnel  in the following areas: research and
development,  regulatory  affairs,  marketing,  and financial and administrative
operations.  We  may be constrained in our ability to engage such personnel both
by  financial  limitations  and  competitive  nature of the market for qualified
personnel  in  each  of  the afore-mentioned areas. We cannot be certain that we
will  obtain  the  capital  required  to  engage  the staff required to complete
development  of  our technology, that we will identify and be able to engage the
qualified  staff  necessary to commercialize our technology, apply to obtain the
required  regulatory  approvals or successfully market our technology nor can we
be  certain that qualified personnel will be available to us on acceptable terms
or  at  all.

RISK FACTORS.

     An  investment  in  our common stock is highly speculative, involves a high
degree  of  risk, and should be made only by investors who can afford a complete
loss.  Investors  should carefully consider the following risk factors, together
with  the  other  information in this report before you decide to buy our common
stock.  Our  most  significant  risks  and  uncertainties  are  described below;
however,  they  are  not  the  only  risks  we  face.


                                       16
<PAGE>
If any of the following risks actually occur, our business, financial condition,
or  results of operations could be materially adversely affected, the trading of
our  common stock could decline, and you may lose all or part of your investment
therein.

WE  MAY  LOSE  THE RIGHTS TO OUR CRITICAL PATENTS AND OUR ABILITY TO DEVELOP OUR
CURRENT  TECHNOLOGIES  AND  BUSINESS  MODEL.

     Default on ESI Note

     On  January  24,  2007, Mr. Redding notified the Company that ESI considers
the  Company  in breach of the Company's final $250,000 payment obligation under
the  terms  of  the  Purchase  Agreement.  The final $250,000 payment was due on
December  1, 2006, subject to the Company's right to cure any default during the
30-day  period  following  receipt  of  notice  from  ESI  ("cure  period").

     On  December  28, 2006, the Board of Directors of the Company considered an
offer  for  a  $500,000  capital infusion (the "$500,000 Offer"), which could if
accepted provide capital to make the final payment obligation of $250,000 during
the  cure  period.  Based  on  the  representation by Mr. Redding that ESI would
permit  a  further extension of the cure period to allow the Company the time to
raise  the  capital  for the payment on terms more favorable to the Company than
the  $500,000  Offer,  the  Company rejected the $500,000 Offer. On December 29,
2006,  Mr.  Redding  notified  the  Company that any decision to extend the cure
period  for the final payment would be determined by the ESI Board of Directors,
with  Mr.  Redding  abstaining  from  any  vote  on  the  matter.

     In  an  attempt  to  cure  the  default  without  having cash available, an
agreement  was  reached  between  the  Company  and  Redmoor  Investment  Ltd.
("Redmoor") to apply a portion of monies owed Redmoor by ESI toward the $250,000
final  payment  the Company owes ESI. Under the proposed agreement with Redmoor,
the  Company  would  be  indebted to Redmoor for $250,000 and the final $250,000
payment  obligation to ESI would be cured. Redmoor was one of ESI's creditors in
ESI's  chapter  11  bankruptcy,  with  a  claim  in excess of $600,000, of which
$325,000 was to have been paid to by ESI to Redmoor in cash in December 2006 but
had  not  been  paid  as  of  the  date of this report. On January 23, 2007, the
Company notified ESI's counsel that $250,000 of the funds owed to Redmoor should
be  applied  to  the  final  $250,000  payment under the Purchase Agreement (the
"January 2006 Tender"). ESI rejected the January 2006 Tender on the grounds that
the  terms of the Purchase Agreement do not require ESI to accept the offer from
the  Company  to cure the default in the manner proposed by the Company and that
the  cure period had not been extended. ESI also asserted that the patent rights
and  related  technology comprising the U-Strip Technology purchased from ESI by
the  Company  pursuant  to the Purchase Agreement have reverted to ESI under the
terms  of  the  Purchase  Agreement.

     We believe that the January 2006 Tender was a bona fide attempt to cure the
default  of  the  final  $250,000  payment,  and will seek to enforce its rights
through  litigation  against  ESI  if  a  satisfactory settlement of the dispute
cannot  be  achieved.

     If  the  Company  does  not  succeed  in  negotiating  a  settlement  or in
litigation,  it will have no rights in the U-Strip Technology and will be forced
to  abandon  its  current  business  plan.

WE  WILL REQUIRE SIGNIFICANT FINANCING TO FUND OUR OPERATIONS, INCLUDING FUNDING
TO  SEEK  TO  ENFORCE  OUR CLAIMS TO PATENTS AND TECHNOLOGIES ACQUIRED FROM ESI,
REPAYING  AMOUNTS BORROWED TO FINANCE OUR OPERATIONS, COMPLETING THE DEVELOPMENT
OF  COMMERCIAL  PRODUCTS BASED UPON OUR TECHNOLOGY, SEEKING FDA APPROVAL FOR OUR
DEVICE  AND OTHERWISE IMPLEMENTING OUR BUSINESS PLAN, AND WITHOUT SUCH FINANCING
WE  WILL  NOT  BE  ABLE  TO  CONTINUE  OPERATIONS.

     We  do  not  currently  have  sufficient  financial  resources  to fund our
operations.  We  will require significant capital to fund our future operations.
To  date, we have not generated any revenues from operations. The success of our
business  depends  on our ability to develop products based on our drug delivery
technology,  subject  such  products  to  potentially  rigorous,  costly  and
time-consuming  clinical  testing,  and  obtain  regulatory  approval  for  and
manufacture  those  products. We will require significant additional capital to:


                                       17
<PAGE>
          -    enforce  our  claims  to patents and technology acquired from ESI
          -    satisfy our payment obligations under the Purchase
               Agreement;
          -    hire and retain technical and other staff;
          -    complete the development of products that incorporate our
               drug delivery technology;
          -    undertake the clinical trials required to submit our drug
               delivery device to the FDA for clearance (or approval, if the FDA
               does not accept our proposition that our device is subject to
               510(k) clearance);
          -    obtain office and laboratory space necessary to accomplish
               our business plans;
          -    commercialize our technology; and
          -    otherwise fully implement our business, operating, and
               development plans.

     If  we  are unable to secure funding and cure the defaults on our financial
obligations  under  the  Purchase  Agreement,  we  may  have  to  relinquish the
Intellectual  Property  to  the  seller.

     The exact amount of our current and future capital requirements will depend
on  numerous  factors,  some  of which are not within our control, including the
progress  of  our  research  and  development  efforts, the costs of testing and
manufacturing  products,  and  changes  in governmental regulation. We expect to
finance  a  portion  of  our  product  development  through  collaborations with
pharmaceutical  companies.  We cannot guarantee that such collaborations will be
successful.  Our  ability  to raise additional financing depends on many factors
beyond  our control, including the state of capital markets, the market price of
our common stock and the development or prospects for development of competitive
technology by others. The necessary additional financing may not be available to
us  or  may  be available only on terms that would result in further dilution to
the  current  owners  of  our common stock. If we are unable to raise additional
funds  when  we need them, we may have to curtail or discontinue our operations,
in which case you could lose the entire amount of you investment in the Company.

WE  HAVE NOT COMPLETED THE DEVELOPMENT OF ANY PRODUCTS THAT INCORPORATE OUR DRUG
DELIVERY  TECHNOLOGY.  IF  WE ARE SUCCESSFUL IN DEVELOPING ANY SUCH PRODUCTS, WE
WILL  BE  REQUIRED  TO  OBTAIN  REGULATORY  APPROVAL FROM THE FDA PRIOR TO THEIR
COMMERCIAL  USE  AND  OTHERWISE  COMPLY  WITH ALL OF THE REGULATORY REQUIREMENTS
APPLICABLE  TO  OUR  BUSINESS.

     Prior  to  bringing  any  products  to market in the United States, we must
obtain  FDA  approval.  As  of  the  date  hereof,  we  have  not  completed the
development of any products that incorporate our drug delivery technology and we
cannot  assure  you that we will ever develop products that will be suitable for
submitting  to  the  FDA  for  the  required approval. The approval process will
require the further development of our product, significant clinical testing and
trials  and  potentially  lengthy  FDA submissions and review, all of which will
require  substantial  funding.  Although  we  believe  that  our  device  is
substantially similar to existing products previously approved by the FDA, which
could  reduce  the  time  required to obtain FDA clearance, we cannot be certain
that  the FDA will agree with our assessment. Under such circumstances, the time
required  to  prove  the efficacy and safety of our product could be lengthy and
costly.

     In  addition,  our  Company  and  the  devices  we  hope  to  develop  and
commercialize  are  subject to extensive FDA regulations. Failure to comply with
these  and  other  current  and  emerging  regulatory requirements in the global
markets  in  which  our  products  are sold could result in, among other things,
warning  letters,  fines,  injunctions,  civil  penalties,  recall or seizure of
products,  total  or partial suspension of production, refusal of the government
to  grant  pre-market  clearance  for  devices,  withdrawal  of  clearances, and
criminal  prosecution.

     We  cannot be certain that the FDA will approve our product for public use.
If  the  FDA does not approve our product for public use or if we otherwise fail
to  comply  with  FDA  regulations,  you  could  lose  the entire amount of your
investment  in  the  Company.

WE  ARE  A YOUNG COMPANY WITH A LIMITED OPERATING HISTORY AND HAVE NOT GENERATED
ANY  REVENUES  FROM OPERATIONS. THEREFORE, IT IS DIFFICULT FOR YOU TO ASSESS OUR
COMPANY.


                                       18
<PAGE>
     To date, our operations have consisted primarily of analyzing and acquiring
the Intellectual Property, conducting an analysis of our industry and developing
our  business  model.  Accordingly,  we have only a limited operating history on
which  you  can  base  an  investment  decision  in  our  securities.  Since our
inception,  we  have  not  generated  any revenues from operations. We expect to
incur  operating  losses  for  the  foreseeable  future.

     We  cannot assure you that we will be able to execute our business model on
a wide-scale basis or that we ever will achieve profitability. The likelihood of
our  success  must  be  considered  in  light  of  the  problems,  expenses  and
complications frequently encountered in connection with the development of a new
business  and  the  competitive  environment  in  which  we  operate.

OUR  PRODUCTS  MAY NOT ACHIEVE THE BROAD MARKET ACCEPTANCE THEY NEED IN ORDER TO
BE  A  COMMERCIAL  SUCCESS.

     To  date,  we  have  not  received FDA approval for the use of devices that
incorporate  our  technology  and, consequently, we are not yet distributing any
products. The success of drug delivery devices incorporating our technology will
depend  to  a  large  degree  on  the  medical community's acceptance of them as
reliable,  safe  and  cost  effective  alternatives to existing competitive drug
delivery  methods. If products based upon our technology are not accepted by the
medical  community  and  are  not  widely  used,  our  business  and  results of
operations  would  negatively  and  materially  affected.

WE  EXPECT  TO  RELY ON THIRD PARTIES TO MARKET AND DISTRIBUTE PRODUCTS BASED ON
OUR  TECHNOLOGY  AND  THEY  MAY  NOT  BE  SUCCESSFUL  IN  SELLING  OUR PRODUCTS.

     We  expect  to  distribute  products  incorporating  our technology through
partners  which  will  be  responsible  for  marketing  and  distributing  these
products.  We  expect  that  our  partners will assume direct responsibility for
business  risks  associated  with  these activities, including, risks related to
credit,  currency  exchange, foreign tax laws or tariff and trade regulation. We
cannot  be  certain that our distribution partners will succeed in marketing our
products effectively. If this happens, we may not be able to successfully market
our  products,  which  would  decrease  our  revenues.

WE  EXPECT TO RELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS AND OUR BUSINESS
WILL  SUFFER  IF  THEY  DO  NOT  PERFORM.

     We  do  not  anticipate  manufacturing  products based upon our technology.
Rather,  we  expect  to  rely  on independent contract manufacturers or business
partners  for  the manufacture of these drug delivery systems. Our business will
suffer if our contract manufacturers have production delays or quality problems.
Furthermore,  medical  device  manufacturers  are  subject  to the manufacturing
regulations  of  the  FDA, international quality standards, and other regulatory
requirements.  If  our  contractors  or  business  partners  do  not  operate in
accordance with regulatory requirements and quality standards, our business will
suffer.

WE MAY LOSE OUT TO LARGER AND BETTER-ESTABLISHED COMPETITORS.

     The  medical  device  industry  is  intensely  competitive.  Most  of  our
competitors  have  significantly  greater  financial,  technical, manufacturing,
marketing  and  distribution  resources  as  well  as  greater experience in the
medical  device  industry  than  we  have. The particular medical conditions our
product  lines  address  can  also  be  addressed  by other means. Many of these
alternatives  are  widely accepted by physicians and have a long history of use.
Physicians  may use our competitors' products and/or the products we develop may
not be competitive with other technologies. If these things happen, we may never
generate meaningful revenues. In addition, our current and potential competitors
may  establish  cooperative relationships with large medical equipment companies
to  gain  access  to  greater  research  and development or marketing resources.
Competition may result in price reductions, reduced gross margins and prevent us
from  gaining  market  share.

PRODUCTS WE ARE DEVELOPING THAT INCORPORATE OUR TECHNOLOGY MAY BE DISPLACED BY
NEWER TECHNOLOGY.


                                       19
<PAGE>
     The  medical  device  industry  is  undergoing  rapid  and  significant
technological  change.  Third  parties  may  succeed  in developing or marketing
technologies  and  products  that  are  more  effective than those we propose to
develop  and  market, or that would make our technology and products obsolete or
non-competitive.  Additionally,  researchers  could develop new technologies and
medications  that  replace  or  reduce  the  importance  of  our  technology.
Accordingly, our success will depend, in part, on our ability to respond quickly
to medical and technological changes through the development and introduction of
new  products.  We may not have the resources to do this. If our product becomes
obsolete  and  our  efforts  to  develop  new  products  do  not  result  in any
commercially  successful  products,  our  sales  and  revenues  will  decline.

OUR INTELLECTUAL PROPERTY MAY NOT HAVE OR PROVIDE SUFFICIENT LEGAL PROTECTIONS
AGAINST INFRINGEMENT OR LOSS OF TRADE SECRETS.

     Our  success depends, in part, on our ability to secure and maintain patent
protection,  to preserve our trade secrets, and to operate without infringing on
the patents of third parties. While we seek to protect our proprietary positions
by  filing  United  States  and  foreign  patent  applications for our important
inventions  and  improvements, domestic and foreign patent offices may not issue
these patents. Third parties may challenge, invalidate, or circumvent our patent
applications  in  the future. Competitors, many of which have significantly more
resources  than  we  have  and  have  made  substantial investments in competing
technologies,  may  apply  for  and  obtain patents that will prevent, limit, or
interfere  with  our  ability  to  make, use, or sell our products either in the
United  States  or  abroad.

     In  the  United States, patent applications are secret until patents issue,
and  in  foreign  countries,  patent  applications  are  secret for a time after
filing.  Publications  of  discoveries  tend  to  significantly  lag  the actual
discoveries  and  the  filing  of related patent applications. Third parties may
have  already filed applications for patents for products or processes that will
make  our  products  obsolete or will limit our patents or invalidate our patent
applications.

     We  typically require our employees, consultants, advisers and suppliers to
execute  confidentiality  and  assignment  of invention agreements in connection
with  their  employment,  consulting, advisory, or supply relationships with us.
They  may  breach  these agreements and we may not obtain an adequate remedy for
breach.  Further,  third  parties  may  gain  access  to  our  trade  secrets or
independently  develop  or  acquire  the  same  or  equivalent  information.

OUR PRODUCT SALES MAY BE ADVERSELY AFFECTED BY HEALTHCARE PRICING REGULATION AND
REFORM ACTIVITIES.

     The  healthcare  industry  is undergoing fundamental changes resulting from
political,  economic  and  regulatory  influences.  In  the  United  States,
comprehensive  programs  have  been  proposed  that  seek  to increase access to
healthcare  for the uninsured, control the escalation of healthcare expenditures
within  the  economy  and  use  healthcare reimbursement policies to balance the
federal  budget.

     We  expect that Congress and state legislatures will continue to review and
assess  healthcare  proposals,  and  public  debate  of these issues will likely
continue.  We  cannot  predict  which,  if any, of such reform proposals will be
adopted  and  when  they  might be adopted. Other countries also are considering
healthcare  reform.  Significant  changes  in  healthcare  systems  could have a
substantial  impact  on  the  manner  in which we conduct our business and could
require  us  to  revise  our  strategies.

WE COULD BE DAMAGED BY PRODUCT LIABILITY CLAIMS.

     Products  incorporating  our  technology are intended to be used by persons
who require a steady and precise dosage of medicine to maintain their health and
life.  If  any  of  our  proposed products were to malfunction or a physician or
patient  were  to  misuse  them and injury results to a patient or operator, the
injured  party  could  assert  a product liability claim against our company. We
will  seek to obtain product liability insurance in an amount that we believe is
adequate  for  our  current activities. Insurance may not be sufficient to cover
all  of  the  liabilities resulting from a product liability claim, and we might
not  have  sufficient  funds  available to pay any claims over the limits of our
insurance.  Because  personal  injury  claims  based  on


                                       20
<PAGE>
product  liability in a medical setting may be very large, an underinsured or an
uninsured  claim  could  financially  damage  our  company.

WE MAY HAVE TROUBLE ATTRACTING AND RETAINING QUALIFIED PERSONNEL AND OUR
BUSINESS MAY SUFFER IF WE DO NOT.

     Our  business  requires additional staff in all areas to successfully bring
our  technology  to  market.  Our  success depends on our ability to attract and
retain  technical  and management personnel with expertise and experience in the
medical  device business. The competition for qualified personnel in the medical
device  industry  is intense and we may not be successful in hiring or retaining
the  requisite  personnel.  If  we  are  unable  to attract and retain qualified
technical  and management personnel, we will suffer diminished chances of future
success.

OUR COMMON STOCK IS TRADED OVER THE COUNTER, WHICH MAY DEPRIVE STOCKHOLDERS OF
THE FULL VALUE OF THEIR SHARES.

     Our  common  stock  is  quoted  via  the National Association of Securities
Dealers'  Over-the-Counter Bulletin Board (OTCBB). As such, our common stock may
have  fewer  market makers, lower trading volumes and larger spreads between bid
and  asked  prices  than  securities  listed on an exchange such as the New York
Stock  Exchange  or  the Nasdaq Stock Market. These factors may result in higher
price  volatility  and  less  market  liquidity  for  the  common  stock.

A LOW MARKET PRICE MAY SEVERELY LIMIT THE POTENTIAL MARKET FOR OUR COMMON STOCK.

     Our  common stock is currently trading at a price substantially below $5.00
per  share,  subjecting  trading  in  the  stock  to certain SEC rules requiring
additional  disclosures  by  broker-dealers.  These rules generally apply to any
non-NASDAQ  equity security that has a market price share of less than $5.00 per
share,  subject  to certain exceptions (a "penny stock"). Such rules require the
delivery,  prior  to  any  penny  stock  transaction,  of  a disclosure schedule
explaining  the penny stock market and the risks associated therewith and impose
various  sales  practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and institutional or wealthy investors.
For  these  types  of  transactions,  the  broker-dealer  must  make  a  special
suitability  determination  for  the purchaser and have received the purchaser's
written  consent  to  the  transaction prior to the sale. The broker-dealer also
must  disclose  the  commissions  payable  to the broker-dealer, current bid and
offer  quotations  for  the  penny  stock  and, if the broker-dealer is the sole
market  maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed  control  over  the  market.  Such  information must be provided to the
customer  orally  or in writing before or with the written confirmation of trade
sent  to  the  customer. Monthly statements must be sent disclosing recent price
information  for  the  penny  stock  held  in the account and information on the
limited  market  in  penny  stocks.  The  additional  burdens  imposed  upon
broker-dealers  by  such  requirements  could  discourage  broker-dealers  from
effecting  transactions  in  our  common  stock.

THE PRICE OF OUR COMMON STOCK LIKELY WILL BE HIGHLY VOLATILE.

     The  price  of our common stock likely will be highly volatile. Some of the
factors  leading  to  the  volatility  could  include:

          -    price and volume fluctuations in the stock market at large
               which do not relate to our operating performance;
          -    FDA and/or international regulatory actions;
          -    fluctuations in our operating results;
          -    financing arrangements we may enter that require the
               issuance of a significant number of shares in relation to the
               number of shares currently outstanding;
          -    announcements of technological innovations or new products
               which we or our competitors make;


                                       21
<PAGE>
          -    developments with respect to patents or proprietary rights;
          -    public concern as to the safety of products that we or
               others develop; and
          -    fluctuations in market demand for and supply of our
               products.

BECAUSE WE WILL NOT PAY CASH DIVIDENDS, STOCKHOLDERS WILL ONLY BENEFIT FROM
OWNING COMMON STOCK IF IT APPRECIATES.

     We  have never paid cash dividends on our common stock and we do not intend
to  do  so in the foreseeable future. We intend to retain any future earnings to
finance our growth. Accordingly, any potential investor who anticipates the need
for  current dividends from his investment should not purchase our common stock.

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This  report  contains  forward-looking  statements  within  the meaning of
Section  27A  of the Securities Act and Section 21E of the Exchange Act. We have
based  these  forward-looking statements largely on our current expectations and
projections  about  future  events  and financial trends affecting the financial
condition  of  our  business.  These forward-looking statements are subject to a
number  of  risks, uncertainties and assumptions, including, among other things:

          -    our ability to obtain financing to support our operations;
          -    the receipt or denial of regulatory approvals;
          -    our expectations and estimates concerning future financial
               performance, financing plans and the impact of competition,
          -    advances in technologies,
          -    our ability to implement our growth strategy,
          -    anticipated trends in our business,
          -    general economic and business conditions, both nationally
               and in our markets; and
          -    other risk factors set forth under the section titled
               "BUSINESS-Risk Factors" in this report.

     In  addition,  in  this  report,  we  use  words  such  as  "anticipates,"
"believes,"  "plans," "expects," "future," "intends," and similar expressions to
identify  forward-looking  statements.

     We undertake no obligation to update publicly or revise any forward-looking
statements,  whether  as a result of new information, future events or otherwise
after  the  date  of this report. In light of these risks and uncertainties, the
forward-looking  events and circumstances discussed in this report may not occur
and  actual results could differ materially from those anticipated or implied in
the  forward-looking  statements.

ITEM  2.  DESCRIPTION  OF  PROPERTIES

     We do not currently lease any property. We do not reimburse Wilson, Haglund
&  Paulsen  for  the  use  of  their offices for our principal executive office;
however,  we  reimburse ESI for a portion of the rental expense incurred for the
use  of  their  facility.

     We  have identified facilities that will be sufficient for our needs in the
future;  however,  we have not entered into a lease for such facilities. We will
need  a  facility  that  includes  (i) a chemistry laboratory for the purpose of
conducting  experiments  to  examine  the compatibility of therapeutic compounds
with  the  ultrasonic transdermal delivery system (ii) an electrical engineering
laboratory to undertake the development of ultrasonic drivers, which provide the
low-level  power  to  the  miniature transducers which serve as the catalyst for
transdermal  delivery  of drugs and (iii) a center to complete the design of our
patch  technology.  We  believe  there are several suitable facilities that will
meet  our  needs  in  the  Philadelphia  area  where  we  are currently located.

     We expect that manufacturing of our drug delivery system will be undertaken
by  third  parties.


                                       22
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

     On February 1, 2006 Sontra Medical Corporation ("Sontra") announced that it
had  sent  a  notice  to  the  Company  stating  Sontra's  belief  that,  upon
commercialization,  that  the  Company's U-Strip ultrasonic transdermal delivery
system  for  insulin  and  other  drugs  will  infringe  one or more of Sontra's
patents.  We  have  engaged  in  discussions with Sontra's management over their
infringement  claim,  but  our management believes the Company's technology does
not  infringement  upon  Sontra's patents, and neither party has taken any legal
action  in  this  matter.

     In  August  2006,  the  Company  signed  a settlement agreement with Sandra
McElligott  whereby  the  Company  issued  200,000 shares of common stock to Ms.
McElligott  in  consideration of her release of any intellectual property claims
that  she  may  have against the Company. Additionally, the Company will pay Ms.
McElligott  $30,000 in cash, of which $15,000 was paid in September 2006 and the
remaining  $15,000  is  payable  by  December  31,  2006. As of the date of this
report,  the  $15,000  payment  due  by  December  31,  2006  has not been paid.

     The  Company  is  engaged in a dispute with ESI concerning the ownership of
the  U-Strip  Technology.  See  "Item  1. Description of Business - Overview and
Recent  Developments"  and  "Risk Factors." While the Company has made continual
efforts  since  December  28,  2006  to  resolve this dispute through settlement
negotiations,  we  may  have to resort to litigation to resolve the issue of the
ownership  of  the U-Strip Technology or any rights that the Company may have in
such  technology. As of the date of this report, we have not retained counsel to
pursue  such  litigation,  cannot  estimate  the legal fees associated with such
legal  action,  and cannot give any assurance as to the likelihood of prevailing
if  litigation  is  commenced.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No  matters  were  submitted  to  a  vote of the Company's security holders
during  the  fourth  quarter  of  the  fiscal  year  ended  September  30, 2006.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

     Our  common stock commenced trading on the NASD's Over the Counter Bulletin
Board  (the  "OTCB")  on  October 25, 2003. The stock currently trades under the
symbol  DMSI.OB.  The  prices set forth below reflect the quarterly high and low
closing sales prices for shares of common stock for each quarter within the past
two fiscal years as reported by the OTCB. The prices set forth in the table have
been  adjusted  to  reflect  a 2-for-1 stock dividend on December 31, 2003 and a
3-for-2  stock  dividend  on  January  19,  2005.  These  quotations  reflect
inter-dealer  prices, without retail markup, markdown or commission, and may not
represent  actual  transactions.

<TABLE>
<CAPTION>
----------------------------------------------
                                 CLOSING BID
                               -------  ------
                                HIGH     LOW
                               -------  ------
<S>                            <C>      <C>
Fiscal 2006
-----------------------------  -------  ------
July 1 - September 30, 2006    $  0.55  $ 0.12
April 1 - June 30, 2006        $  0.71  $ 0.16
January 1 - March 31, 2006     $  0.97  $ 0.40
October 1 - December 31, 2005  $  1.05  $ 0.85
-----------------------------  -------  ------


                                       23
<PAGE>
-----------------------------  -------  ------
Fiscal 2005
-----------------------------  -------  ------
July 1 - September 30, 2005    $  1.20  $ 0.85
April 1 - June 30, 2005        $  1.32  $ 0.80
January 1 - March 31, 2005     $  1.60  $ 0.97
October 1 - December 31, 2004  $  1.80  $ 1.47
----------------------------------------------
</TABLE>

     As  of  February  14,  2007, we had approximately 100 record holders of our
common  stock.  This  number  of  holders  of record does not include beneficial
owners  of  the  Company's  common  stock  whose shares are held in the names of
various  security  holders,  dealers,  and  clearing  agencies.

Dividends

     The  Company  has  not paid any cash dividends on its common stock and does
not  anticipate  paying  cash  dividends  in the foreseeable future. The Company
intends  to retain any earnings to finance the growth of its business. There can
be  no  assurance  that  the  Company  will  ever  pay  cash  dividends.

RECENT SALES OF UNREGISTERED SECURITIES

     During  the  fiscal  year  ended  September 30, 2006, we made the following
sales of equity securities which were not registered under the Securities Act of
1933,  as  amended:

ISSUANCES  PURSUANT  TO  SECTION  4(2)  UNDER  THE  SECURITIES  ACT OF 1933. The
following  restricted  securities were issued pursuant to the exemption from the
registration  provisions  of the Securities Act of 1933, as amended, afforded by
Section  4(2)  thereof:

Warrants

     On  October  5,  2005,  the  Company  issued Trilogy Capital Partners, Inc.
("Trilogy")  a  warrant  to  purchase  2,616,806  shares  of  common stock at an
exercise  price  of  $.72  per  share, exercisable through September 30, 2008 as
partial  consideration  pursuant  to  a consulting agreement under which Trilogy
agreed  to  provide marketing, financial, investor public relations, and related
matters. The warrant was fully vested at issuance and had a fair market value of
$1,236,454  at  issuance.  The  Company amortizes, on a straight-line basis, the
fair value of this warrant over the one-year consulting agreement as general and
administrative  expense,  beginning  in  October  2005. As such, during the year
ended  September  30,  2006,  the  Company  recognized  consulting  expense  of
$1,236,454  related  to  the  issuance  of  this  warrant.

Common Stock

     On  November  3, 2005, The Company entered into a consulting agreement with
The  van  de  Kamp Group to provide investor relations support. As compensation,
the  Company issued 20,000 shares of common stock, which had a fair market value
on  the  date  of grant of $18,200. As such, during the year ended September 30,
2006,  the  Company  recognized  consulting  expense  of  $18,200 related to the
issuance  of  these  shares  of  common  stock.

     On  December  7,  2005,  the  Company  entered  into  a one-year consulting
agreement  with  Robert  Trainor to provide marketing, consulting, and strategic
planning  advice in connection with the development, maintenance and growth of a
market  in  the  European  Union  for  the U-Strip. As compensation, the Company
issued 275,000 shares of common stock, which had a fair market value on the date
of  grant of $236,500. The Company amortizes, on a straight-line basis, over the
one-year  term  of  the  consulting  agreement  the  fair  value


                                       24
<PAGE>
of  the  common  stock.  As  such, during the year ended September 30, 2006, the
Company  recognized  consulting  expense  of $197,083 related to the issuance of
these  shares  of  common  stock.

     On March 14, 2006, the Company entered into a one-year consulting agreement
with  Alan  Fein  to  provide advice and consult with the Company concerning the
capitalization  of  the  Company  and  helping  with  private  financings.  As
compensation,  the  Company  issued  300,000 shares of common stock, which had a
fair market value on the date of grant of $171,000.  The Company amortizes, on a
straight-line basis, over the one-year term of the consulting agreement the fair
value  of  the common stock.  As such, during the year ended September 30, 2006,
the  Company recognized $99,750 as consulting expense related to the issuance of
these  shares  of  common  stock.

     On March 15, 2006, the Company entered into a one-year consulting agreement
with  Michael  Stock  to  provide  advice  and help with marketing and strategic
planning  in connection with the development, maintenance and growth of a market
in  the  U.S.  for  the  U-Strip  and  ancillary products.  As compensation, the
Company  issued 325,000 shares of common stock, which had a fair market value on
the date of grant of $172,250.  The Company amortizes, on a straight-line basis,
over  the one-year term of the consulting agreement the fair value of the common
stock.  As  such,  during  the  year  ended  September  30,  2006,  the  Company
recognized  $100,479  as  consulting  expense  related  to the issuance of these
shares  of  common  stock.

     On March 16, 2006, the Company entered into a one-year consulting agreement
with  International  Market  Trend  to  provide  financial  and  investor public
relations.  As  compensation, the Company issued 400,000 shares of common stock,
which  had  a  fair  market value on the date of grant of $212,000.  The Company
amortizes,  on  a  straight-line basis, over the one-year term of the consulting
agreement  the  fair  value of the common stock.  As such, during the year ended
September  30,  2006,  the  Company  recognized  $123,667  as consulting expense
related  to  the  issuance  of  these  shares  of  common  stock.

     On  April 5, 2006, the Company entered into a one-year consulting agreement
with  EurXchange  Consulting  Ltd.  to  provide  financial  and  investor public
relations  and  related  matters  in  the  Federal  Republic  of  Germany.  As
compensation,  the  Company  issued  300,000 shares of common stock, which had a
fair market value on the date of grant of $201,000.  The Company amortizes, on a
straight-line basis, over the one-year term of the consulting agreement the fair
value  of  the common stock.  As such, during the year ended September 30, 2006,
the Company recognized $100,500 as consulting expense related to the issuance of
these  shares  of  common  stock.

     On  April  18, 2006, pursuant to a consulting agreement, the Company issued
50,000  shares  of  common stock to Avalon International Group to provide advice
to,  undertake  for, and consult with the Company concerning strategic planning,
and  corporate  development  in connection with the operation of the business of
the  Company.  The  50,000 shares of common stock had a fair market value on the
date  of  grant  of $27,500.  As such, during the year ended September 30, 2006,
the  Company recognized $27,500 as consulting expense related to the issuance of
these  shares  of  common  stock.

     During the year ended September 30, 2006, the Company was in the process of
settling  an intellectual property claim with an unrelated party. The settlement
agreement  required  the  Company to issue 200,000 shares of common stock to the
unrelated  party  in  consideration of any intellectual property claims that the
unrelated  party may have against the Company. As such, included in professional
fees  and  research  and  development  consulting  expense  for  the  year ended
September  30,  2006 is the estimated fair value of the common stock of $34,000.
As  part  of  the  settlement agreement, the Company is also required to pay the
unrelated party $30,000 in cash, of which $15,000 was paid by September 30, 2006
and  the  remaining  $15,000  is  due  by  December  31,  2006.

Common Stock and Warrants

     On  February  1,  2006,  the  Company  approved  the  offering  (the  "2006
Offering")  of  5,200,000  units  (the  "Units")  for  a total offering price of
$1,300,000  to  accredited  investors,  consisting  of  shares  of  common


                                       25
<PAGE>
stock  and attached warrants. The purchase price of one Unit is $0.25. Each Unit
consists  of  one  share  of common stock and a warrant to purchase one share of
common  stock at an exercise price of $0.25. The warrants are exercisable at any
time  prior  to  the  second anniversary from the date of grant. During the year
ended  September  30,  2006,  the  Company  raised $711,000 and issued 2,844,000
shares  of common stock and warrants to purchase up to 2,844,000 shares of stock
in  accordance  with  the  terms  of  the  2006  Offering.

     In  connection with the 2006 Offering, the Company paid $65,500 in cash and
issued  five  warrants  to purchase a combined 262,000 shares of common stock as
compensation  for  raising  the  funds.  The  warrants have an exercise price of
$0.25  per share.  One warrant to purchase 20,000 shares of common stock expires
on  February  28, 2008.  The four warrants to purchase a combined 242,000 shares
of  common  stock  expire on March 31, 2008.  The warrants are fully vested upon
issuance.

Convertible Notes and Warrants

     On  December  21,  2005,  the  Company  issued convertible promissory notes
("2006  Convertible  Notes")  to  four  investors,  totaling $130,000.  The 2006
Convertible  Notes  bear  interest  at  12% per annum and mature on December 21,
2007.  The  2006  Convertible Notes are convertible into shares of the Company's
common  stock  at  the rate of the lesser of $1.00 or 80% of the average closing
bid price per share for the 10 trading days preceding conversion.  In connection
with the 2006 Convertible Notes, the Company issued warrants to purchase 195,000
shares  of  the  Company's  common stock at an exercise price of $1.00 per share
("2006  Convertible  Note  Warrants").  The  2006  Convertible Note Warrants are
exercisable  until  December  21,  2007.

     In  connection with the 2006 Convertible Notes, the Company paid $15,792 in
cash  and  issued  two  warrants  to purchase a total of 14,444 shares of common
stock  to  one  of the 2006 Convertible Note holders as compensation for raising
the funds.  The warrants have an exercise price of $1.00 per share and expire on
December  21,  2008.  The  warrants  are  fully  vested  upon  issuance.

     On July 14, 2006, the Company issued a $500,000 convertible promissory note
to Staples Management (the "Staples Convertible Note").  The Staples Convertible
Note  bears interest at 10% per annum and matures on July 14, 2007. In the event
of a default on the Staples Convertible Note, such note is convertible in common
stock  of the Company at a conversion rate equal to a 25% discount or 75% of the
average  closing  price  per  share  of common stock during the ten trading days
immediately  prior  to  any  such  conversion.  In  connection  with the Staples
Convertible  Note,  the Company issued a warrant to purchase 3,125,000 shares of
the  Company's  common  stock  at an exercise price of $0.16 per share ("Staples
Convertible  Note  Warrants").  The  Staples  Convertible  Note  Warrants  are
exercisable  until  July  14,  2009.

Convertible Notes and Warrants

     In  September 2006, all five of the Convertible Debenture holders exercised
their  conversion right pursuant to the terms of the Convertible Debentures (see
Note  9:  Short Term Convertible Debt, Convertible Debentures). Accordingly, the
Company  issued  1,777,749  shares  of  common  stock  and  warrants to purchase
1,777,749  shares  of  common  stock  at  an  exercise price of $0.16 per share.

ISSUANCES  PURSUANT  TO  REGULATION  S  UNDER  THE  SECURITIES  ACT OF 1933. The
following  securities  were  issued  pursuant  to  a  registration  statement on
Regulation  S  under  the  Securities  Act  of  1933,  as  amended:

Common Stock

     On  May  15, 2006, the Company entered into a one-year consulting agreement
with  Aaron  Lasry  to  provide  advice  to,  undertake for and consult with the
Company  concerning  the capitalization of the Company and shall be specifically
responsible  for  assisting  in  the  negotiation  and  completion  of  private
financings  for the Company.  As compensation, the Company issued 160,000 shares
of  common stock, which had a fair market value on the date of grant of $46,400.
The  Company  amortizes, on a straight-line basis, over the one-year term of the
consulting  agreement  the  fair value of the common stock.  As such, during the
year  ended


                                       26
<PAGE>
September 30, 2006, the Company recognized $15,467 as consulting expense related
to  the  issuance  of  these  shares  of  common  stock.

Common Stock and Warrants

     During  the  quarter  ended  September 30, 2006, the Company sold 1,300,000
shares  of  its  common  stock with attached warrants to Mercatus & Partners, LP
("Mercatus")  for  a purchase price of $0.25 per share (the "Mercatus Offering")
for  total  proceeds  of  $325,000. In connection with the sale of the 1,300,000
shares  of  common  stock, the Company granted Mercatus a warrant to purchase an
additional  1,300,000  shares  of common stock at an exercise price of $0.25 per
share.  The  warrant  expires  on  September  30,  2009.

     In  connection  with  the  Mercatus Offering, the Company granted a warrant
Avalon  International  Group  to  purchase  130,000  shares  of  common stock as
compensation  for  raising the funds. The warrant has an exercise price of $0.25
per  share  and  expires on September 30, 2009. The warrant is fully vested upon
issuance.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

     The  following  discussion  should  be  read  together  with  our Financial
Statements  and  the  Notes  related  to  those statements, as well as the other
financial  information  included  in this Form 10-KSB. Some of our discussion is
forward-looking  and involves risks and uncertainties. For information regarding
risk factors that could have a material adverse effect on our business, refer to
Item  I  of this Form 10-KSB, "Item 1. Description of Business-Risk Factors" and
"Cautionary  Notice  Regarding  Forward  Looking  Statements."

PLAN OF OPERATION

     The  following discussion assumes that we will be successful in our efforts
to  maintain  the  rights  to  the U-Strip Technology. If we are unsuccessful in
those  efforts  we  will  have  to  develop  a  new  plan  of  operation.

     We  anticipate generating revenues during the next 12 months from a testing
program  to  assess  the  feasibility of drugs subject to delivery by way of our
transdermal  delivery system. We also anticipate entering into agreements within
the next 12 months pursuant to which we will receive licensing and royalty fees.
Our  objective  is  to  exploit  our  technology  through  the  development  and
commercial  introduction  of  products  incorporating  existing  FDA-approved
compounds  into  our drug delivery systems. During the next 12 months we plan to
(i)  define  products  that address unmet medical needs, (ii) analyze the market
potential  of such defined products, (iii) develop the products with and through
an  appropriate  clinical  stage  partner,  and  (iv) collaborate with strategic
partners  to complete the development of such products. See "Item 1. Description
of  Business-Business  Strategy."

     We  believe  the  Company  can  generate  revenue  in the next 12 months by
offering  a  screening  program to pharmaceutical companies to determine whether
existing  and  newly  developed  drugs are candidates for delivery by way of our
active  transdermal  device.  See  "Item  1.  Description  of  Business-Business
Strategy-Suitability  Testing."

     Management  anticipates that the Company will generate the preponderance of
its  revenues from licenses and accompanying royalty streams. During the next 12
months  the  Company will seek to negotiate with drug and cosmetic manufacturers
that  have  the  potential  to  reach  the  market  quickly  for  pharmaceutical
preparations  that  would  be  favorably received by physicians and patients and
cosmetic  formulations  to  be  applied  using  our proprietary applicator under
development.  We  intend  to  target  pharmaceutical  companies that manufacture
formulations  which  not  only are subject to delivery utilizing our transdermal
systems  but which already are FDA approved and widely distributed. See "Item 1.
Description  of  Business  -Business  Strategy-License  and  Royalty  Fees."

     To achieve our business plans for the next 12 months, we will need to raise
substantial  additional  capital  for  our  operations  through the sale of debt
and/or  equity  securities.  During the year ended September 30, 2006, we raised
limited  amounts  of  capital  through  the sale of common stock, notes payable,
convertible  notes  and  convertible  debentures;  however, these funds were use
primarily  to  fund  payments  on  the  ESI  Note,  pay legal fees, fund limited
research  and  development,  and  for other general and administration costs. We
have


                                       27
<PAGE>
limited  cash  to  fund  our  operations  at  this  time,  so  we  plan to offer
convertible  debt  and/or  common  stock in a private placement during the first
quarter of 2006 to raise minimum proceeds of $2,500,000. We believe the proceeds
from  such a private placement, together with revenues from suitability testing,
will  enable  us  to repay existing obligations, meet current contingencies, and
fund expanded operations. Because we have no current assets and are insolvent as
of the date of this report, we will not be able to continue our business without
some  combination  of  additional  capital and revenue from suitability testing.

     We  have  identified facilities that include office and existing laboratory
space  that  will  be  sufficient  for  the  next  12  months of our anticipated
operations, without the need for significant expenditures on plant or equipment.
We  also  anticipate  hiring  a minimum of five new employees during the next 12
months  to  enable  us  to continue research and development of our Intellectual
Property,  perform  suitability testing for pharmaceutical companies, and pursue
license  opportunities  with  potential  strategic  partners.

     To  date,  we  have  focused  our  research  and  development activities on
verifying  the  theories  underlying  our  drug  delivery  system.  We have only
conducted  limited  laboratory  tests  of  the  technology  for  the purposes of
determining  the  viability,  safety and efficacy of the scientific theories and
technologies  embodied  in  the  technology for the delivery of insulin. We also
have  performed  limited  testing  of  the  abstract facets of the technology on
humans  and  animals.  We  have  not  yet  constructed a prototype of the device
utilizing  the  miniature technology to be incorporated into the product we hope
to  offer  commercially.

     During  the  next  12 months we plan to conduct extensive additional animal
and human trials and develop prototypes of the devices we hope to commercialize.
See  "Item  1.  Description  of  Business-Research  and Development Activities."

RECENTLY  ISSUED  ACCOUNTING  STANDARDS

     In  July  2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation  (FIN)  No.  48,  "Accounting  for Uncertainty in Income Taxes-an
interpretation  of  FASB  Statement  No.  109."  This  Interpretation  provides
guidance  for  recognizing  and measuring uncertain tax positions, as defined in
Statement  of  Financial  Accounting  Standards  (SFAS) No. 109, "Accounting for
Income  Taxes."  FIN No. 48 prescribes a threshold condition that a tax position
must  meet  for any of the benefit of an uncertain tax position to be recognized
in the financial statements.  Guidance is also provided regarding derecognition,
classification  and  disclosure  of  uncertain  tax  positions.  FIN  No.  48 is
effective  for fiscal years beginning after December 15, 2006.  The Company does
not  expect  that  this  Interpretation  will  have  a  material impact on their
financial  position,  results  of  operations  or  cash  flows.

     In  September  2006,  the  Securities  and Exchange Commission (SEC) issued
Staff  Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among
registrants,  SAB  108  expresses SEC staff views regarding the process by which
misstatements  in financial statements are evaluated for purposes of determining
whether  financial  statement restatement is necessary. SAB 108 is effective for
fiscal  years  ending  after  November  15,  2006,  and  early  application  is
encouraged.  The Company does not believe SAB 108 will have a material impact on
our  results  from  operations  or  financial  position.

     In September 2006, the FASB issued Statement No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements  No.  87,  88,  106,  and  132(R) (Statement 158). Among other items,
Statement 158 requires recognition of the overfunded or underfunded status of an
entity's  defined  benefit  postretirement  plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan  assets  and  obligations  as of the end of the employer's fiscal year, and
requires  recognition  of  the  funded  status of defined benefit postretirement
plans in other comprehensive income. Statement 158 is effective for fiscal years
ending  after  December  15,  2006,  and early application is encouraged. .  The
Company  does not expect that this Interpretation will have a material impact on
their  financial  position,  results  of  operations  or  cash  flows.

OFF-BALANCE SHEET ARRANGEMENTS.

     The Company has no off-balance sheet arrangements.


                                       28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                             Dermisonics, Inc. and Subsidiary
                               (A Development Stage Company)

                                     TABLE OF CONTENTS


                                                                                      PAGE
                                                                                      ----
<S>                                                                                   <C>
Report of Independent Registered Public Accounting Firm                                F-2

Consolidated Balance Sheet as of September 30, 2006                                    F-3

Consolidated Statements of Operations for Years Ended September 30, 2006 and 2005
and for the Period from September 1, 2000 (Date of Inception), to September 30, 2006   F-4

Consolidated Statements of Shareholders' Equity (Deficit) for Years Ended
September 30, 2006 and 2005 and for the Period from September 1, 2000
(Date of Inception), to September 30, 2006                                             F-5

Consolidated Statements of Cash Flows for Years Ended September 30, 2006
and 2005 and for the Period from September 1, 2000 (Date of Inception), to
September 30, 2006                                                                     F-6

Notes to Consolidated Financial Statements                                             F-7
</TABLE>


                                      F-1
<PAGE>
Peterson Sullivan PLLC

CERTIFIED PUBLIC ACCOUNTANTS                   TEL 206.382.7777 FAX 206.382.7700
601 UNION STREET, SUITE 2300                   http://www.pscpa.com
SEATTLE, WASHINGTON 98101


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------


To the Board of Directors and Stockholders
Dermisonics, Inc.
Irvine, California

We have audited the accompanying consolidated balance sheet of Dermisonics, Inc.
and  Subsidiary  (a development stage company) as of September 30, 2006, and the
related  consolidated  statements of operations, stockholders' equity (deficit),
and  cash  flows  for  the  years ended September 30, 2006 and 2005, and for the
period  from September 1, 2000 (date of inception) to September 30, 2006.  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 the standards of the Public Company
Accounting  Oversight  Board  (United  States).  Those standards require that we
plan  and  perform  the  audit  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 consolidated financial statements referred to above present
fairly,  in  all  material  respects,  the  consolidated  financial  position of
Dermisonics,  Inc.  and Subsidiary (a development stage company) as of September
30,  2006, and the consolidated results of their operations and their cash flows
for  the  years  ended  September  30,  2006  and  2005, and for the period from
September  1, 2000 (date of inception) to September 30, 2006, in conformity with
accounting  principles  generally  accepted  in  the  United  States.

The  accompanying  consolidated financial statements have been prepared assuming
the  Company  will  continue  as a going concern.  As discussed in Note 2 to the
consolidated  financial statements, the Company remains in the development stage
and  as  a  result  of  not yet generating significant revenues, has experienced
recurring  losses  and has liabilities in excess of liquid assets.  In addition,
there are uncertainties relating to the Company's rights to the ownership of its
significant  intangible  asset.  These  situations raise substantial doubt about
the  Company's ability to continue as a going concern.  The financial statements
do  not  include  any  adjustments  that  might  result from the outcome of this
uncertainty.

/S/  PETERSON  SULLIVAN  PLLC

Seattle,  Washington
February 2, 2007


                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                                     DERMISONICS, INC. AND SUBSIDIARY
                                      (A DEVELOPMENT STAGE COMPANY)
                                        CONSOLIDATED BALANCE SHEET
                                            SEPTEMBER 30, 2006


                                                Assets
<S>                                                                                         <C>
Current assets:
  Cash                                                                                      $    126,070
  Prepaid expenses                                                                               406,937
                                                                                            -------------

    Total current assets                                                                         533,007

Computer equipment                                                                                 3,019
Deferred financing fees                                                                           89,000
Intangible assets                                                                             19,458,654
                                                                                            -------------

    Total assets                                                                            $ 20,083,680
                                                                                            =============

                                 Liabilities and Shareholders' Equity

Current liabilities:
  Accounts payable and accrued expenses                                                     $  1,031,166
  Interest payable                                                                               250,574
  Short-term notes payable to stockholder                                                         59,500
  Staples convertible note payable, net of unamortized discount of $499,974                           26
  Current portion of convertible promissory notes, net of unamortized discount of $71,846        712,655
  Current portion of long-term debt, stockholders                                              1,845,988
                                                                                            -------------

    Total current liabilities                                                                  3,899,909

Long-term debt, stockholders, less current portion                                               239,000
Convertible promissory notes, long-term, net of unamortized discount of $160,146                 266,432
Interest payable, long-term                                                                       61,672
                                                                                            -------------

    Total liabilties                                                                           4,467,013

Commitments, contingencies and subsequent events

Shareholders' equity
  Common stock, $0.001 par value.  Authorized 100,000,000
    shares; issued and outstanding 48,473,234 shares at September 30, 2006                        48,473
  Common stock issuable; 750,771 shares                                                              751
  Additional paid-in capital                                                                  32,056,050
  Deficit accumulated during the development stage                                           (16,488,607)
                                                                                            -------------

    Total shareholders' equity                                                                15,616,667

                                                                                            -------------
  Total liabilities and shareholders' equity                                                $ 20,083,680
                                                                                            =============
</TABLE>

          See accompanying notes to consolidated financial statements


                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                                       DERMISONICS, INC. AND SUBSIDIARY
                                        (A DEVELOPMENT STAGE COMPANY)
                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                     FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005, AND FOR THE PERIOD
                       FROM SEPTEMBER 1, 2000 (DATE OF INCEPTION) TO SEPTEMBER 30, 2006


                                                                   For the Year Ended      Cumulative During
                                                                     September 30,          the Development
                                                                  2006          2005             Stage
                                                              ------------  ------------  -------------------
<S>                                                           <C>           <C>           <C>
Revenue                                                       $         -   $         -   $                -

Operating expenses:
  Professional fees and research and development consulting     2,334,268     5,571,347           11,891,921
  Loan fees                                                             -       103,833              187,121
  General and administrative                                    1,777,746       157,760            2,147,400
  Loss on extinguishment of convertible debentures                374,948             -              374,948
  Loss on debt settlement                                           1,313       367,110              368,423
                                                              ------------  ------------  -------------------

    Total operating expenses                                    4,488,275     6,200,050           14,969,813
                                                              ------------  ------------  -------------------

Interest expense                                                  595,772       758,636            1,396,995
                                                              ------------  ------------  -------------------
    Loss from continuing operations                             5,084,047     6,958,686           16,366,808
                                                              ------------  ------------

Discontinued operations
  Loss from operations of discontinued segment                          -             -             (121,799)
                                                              ------------  ------------  -------------------

    Net loss                                                  $(5,084,047)  $(6,958,686)  $      (16,488,607)
                                                              ============  ============  ===================

Net loss per share (basic and fully diluted)                  $     (0.12)  $     (0.17)

Weighted average shares outstanding used to
  calculate basic and fully diluted net loss per share         43,920,989    40,050,925
</TABLE>

          See accompanying notes to consolidated financial statements


                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                              DERMISONICS, INC. AND SUBSIDIARY
                                               (A Development Stage Company)
                                        STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                            For the Years Ended September 30, 2006 and 2005, and for the Period
                              from September 1, 2000 (Date of Inception) to September 30, 2006


                                                                                             Common Stock
                                                                       Common Stock            Issuable         Additional
                                                                   -------------------  ---------------------    Paid-in
                                                                     Shares    Amount     Shares      Amount     Capital
                                                                   ----------  -------  -----------  --------  ------------
<S>                                                                <C>         <C>      <C>          <C>       <C>
Issuance of Common Stock for Cash
  September 2000                                                    3,000,000  $ 3,000           -   $     -   $         -
Adjustment to paid-in capital to reflect reduction in  par value
  from $.005 to $.001 and the stock dividend of one-half of
  one share of common stock for all common stock outstanding                                                         7,000
Net Loss for 2000
                                                                   ----------  -------  -----------  --------  ------------
Balance, September 30, 2000                                         3,000,000  $ 3,000           -   $     -         7,000
Issuance of Common Stock for Cash
  May 2001                                                          3,945,000    3,945                             110,460
  June 2001                                                         7,560,000    7,560                             211,680
  July 2001                                                           969,000      969                              27,132
  August 2001                                                       2,526,000    2,526                              70,728
Adjustment to paid-in capital to reflect reduction in  par value
  from $.005 to $.001 and the stock dividend of one-half of
  one share of common stock for all common stock outstanding                                                        35,000
Net Loss for 2001
                                                                   ----------  -------  -----------  --------  ------------
Balance, September 30, 2001                                        18,000,000  $18,000           -   $     -       462,000
Net Loss for 2002
                                                                   ----------  -------  -----------  --------  ------------
Balance, September 30, 2002                                        18,000,000  $18,000           -   $     -       462,000
Net Loss for 2003
                                                                   ----------  -------  -----------  --------  ------------
Balance, September 30, 2003                                        18,000,000  $18,000           -   $     -       462,000
Common Stock Issuable for
  services received in April 2004                                                        2,515,833     2,516     2,339,725
Warrants Issuable for
  services received in April 2004                                                                                  693,196
Issuance of Common Stock
  for Purchase of Assets in July 2004                              18,000,000   18,000                          16,980,000
Adjustment to paid-in capital to reflect reduction in  par value
  from $.005 to $.001 and the stock dividend of one-half of
  one share of common stock for all common stock outstanding                                                        47,870
Net Loss for 2004
                                                                   ----------  -------  -----------  --------  ------------
Balance, September 30, 2004                                        36,000,000  $36,000   2,515,833   $ 2,516    20,522,791

Issuance of Common Stock
  Additional shares of common stock issued for fractional
  shares due to stock dividend                                              7        -
  For settlement of debt                                              942,515      942                           1,137,669
  For services                                                      3,427,598    3,428  (2,515,833)   (2,516)    1,336,588
  For cash in March 2005                                              288,462      288                             149,712
  For cash in April 2005                                              211,539      212                             109,788
Common stock issuable for debt settlement                                                  109,010       109        98,000
Issuance of Warrants
  For services                                                                                                   3,117,180
  For settlement of debt                                                                                            97,125
  For convertible note                                                                                               5,982
Recording beneficial conversion feature on                                                                         347,709
  convertible debentures
Recording beneficial conversion feature on                                                                          26,829
  convertible note
Recording beneficial conversion feature on                                                                         177,267
  convertible promissory notes, long-term
Net Loss for 2005
                                                                   ----------  -------  -----------  --------  ------------
Balance, September 30, 2005                                        40,870,121  $40,870     109,010   $   109   $27,126,640

Issuance of common stock previously reported as "issuable"            109,010      109    (109,010)     (109)
Issuance of Common Stock
  for settlement of debt                                               43,125       43                              38,770
  for services                                                      2,080,000    2,080                     -     1,332,770
  for IP settlement                                                   200,000      200                              33,800
  related to the 2006 Offering -  February 2006                       350,000      350                              40,709
  related to the 2006 Offering -  March 2006                        1,640,000    1,640                             129,941
  related to the 2006 Offering -  April 2006                          854,000      854                              71,294
  related to the Mercatus Offering - July, August, September 2006   1,300,000    1,300                             247,599
  upon conversion of convertible debentures                         1,026,978    1,027     750,771       751       282,662
  and accrued interest to equity
Issuance of Warrants
  for services                                                                                                   1,236,454
  related to convertible promissory note - December 2005                                                            71,330
  related to the 2006 Offering -  February 2006                                                                     46,441
  related to the 2006 Offering -  March 2006                                                                       278,419
  related to the 2006 Offering -  April 2006                                                                       141,352
  related to the Mercatus Offering - July, August, September 2006                                                   76,101
  related to the Staples Convertible Note - July 2006                                                              265,400
  financing costs related to the convertible promissory notes                                                       11,897
Financing costs related to the 2006 Offering                                                                       (98,000)
Recording beneficial conversion feature on                                                                         117,128
  convertible promissory notes
Recording beneficial conversion feature on                                                                         234,600
  Staples Convertible Note
Recording beneficial conversion feature of                                                                         242,943
  convertible debentures -  allocated common stock value
Recording beneficial conversion feature of                                                                         165,211
  convertible debentures - allocated warrant value
Recording cash penalty owed to the                                                                                 (37,411)
  investors in the 2006 Offering
Net Loss for 2006
                                                                   ----------  -------  -----------  --------  ------------
Balance, September 30, 2006                                        48,473,234  $48,473     750,771   $   751   $32,056,050
                                                                   ==========  =======  ===========  ========  ============


                                                                      Deficit
                                                                    Accumulated
                                                                    During the
                                                                    Development
                                                                       Stage         Total
                                                                   -------------  ------------
<S>                                                                <C>            <C>
Issuance of Common Stock for Cash
  September 2000                                                   $          -   $     3,000
Adjustment to paid-in capital to reflect reduction in  par value
  from $.005 to $.001 and the stock dividend of one-half of
  one share of common stock for all common stock outstanding                            7,000
Net Loss for 2000                                                       (16,588)      (16,588)
                                                                   -------------  ------------
Balance, September 30, 2000                                             (16,588)       (6,588)
Issuance of Common Stock for Cash
  May 2001                                                                            114,405
  June 2001                                                                           219,240
  July 2001                                                                            28,101
  August 2001                                                                          73,254
Adjustment to paid-in capital to reflect reduction in  par value
  from $.005 to $.001 and the stock dividend of one-half of
  one share of common stock for all common stock outstanding                           35,000
Net Loss for 2001                                                      (234,141)     (234,141)
                                                                   -------------  ------------
Balance, September 30, 2001                                            (250,729)      229,271
Net Loss for 2002                                                      (119,496)     (119,496)
                                                                   -------------  ------------
Balance, September 30, 2002                                            (370,225)      109,775
Net Loss for 2003                                                       (82,501)      (82,501)
                                                                   -------------  ------------
Balance, September 30, 2003                                            (452,726)       27,274
Common Stock Issuable for
  services received in April 2004                                                   2,342,241
Warrants Issuable for
  services received in April 2004                                                     693,196
Issuance of Common Stock
  for Purchase of Assets in July 2004                                              16,998,000
Adjustment to paid-in capital to reflect reduction in  par value
  from $.005 to $.001 and the stock dividend of one-half of
  one share of common stock for all common stock outstanding                           47,870
Net Loss for 2004                                                    (3,993,148)   (3,993,148)
                                                                   -------------  ------------
Balance, September 30, 2004                                          (4,445,874)   16,115,433

Issuance of Common Stock
  Additional shares of common stock issued for fractional
  shares due to stock dividend                                                              -
  For settlement of debt                                                            1,138,611
  For services                                                                      1,337,500
  For cash in March 2005                                                              150,000
  For cash in April 2005                                                              110,000
Common stock issuable for debt settlement                                              98,109
Issuance of Warrants
  For services                                                                      3,117,180
  For settlement of debt                                                               97,125
  For convertible note                                                                  5,982
Recording beneficial conversion feature on                                            347,709
  convertible debentures
Recording beneficial conversion feature on                                             26,829
  convertible note
Recording beneficial conversion feature on                                            177,267
  convertible promissory notes, long-term
Net Loss for 2005                                                    (6,958,686)   (6,958,686)
                                                                   -------------  ------------
Balance, September 30, 2005                                        $(11,404,560)  $15,763,059

Issuance of common stock previously reported as "issuable"                                  -
Issuance of Common Stock
  for settlement of debt                                                               38,813
  for services                                                                      1,334,850
  for IP settlement                                                                    34,000
  related to the 2006 Offering -  February 2006                                        41,059
  related to the 2006 Offering -  March 2006                                          131,581
  related to the 2006 Offering -  April 2006                                           72,148
  related to the Mercatus Offering - July, August, September 2006                     248,899
  upon conversion of convertible debentures                                           284,440
  and accrued interest to equity
Issuance of Warrants
  for services                                                                      1,236,454
  related to convertible promissory note - December 2005                               71,330
  related to the 2006 Offering -  February 2006                                        46,441
  related to the 2006 Offering -  March 2006                                          278,419
  related to the 2006 Offering -  April 2006                                          141,352
  related to the Mercatus Offering - July, August, September 2006                      76,101
  related to the Staples Convertible Note - July 2006                                 265,400
  financing costs related to the convertible promissory notes                          11,897
Financing costs related to the 2006 Offering                                          (98,000)
Recording beneficial conversion feature on                                            117,128
  convertible promissory notes
Recording beneficial conversion feature on                                            234,600
  Staples Convertible Note
Recording beneficial conversion feature of                                            242,943
  convertible debentures -  allocated common stock value
Recording beneficial conversion feature of                                            165,211
  convertible debentures - allocated warrant value
Recording cash penalty owed to the                                                    (37,411)
  investors in the 2006 Offering
Net Loss for 2006                                                    (5,084,047)   (5,084,047)
                                                                   -------------  ------------
Balance, September 30, 2006                                        $(16,488,607)  $15,616,667
                                                                   =============  ============
</TABLE>

          See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>
<TABLE>
<CAPTION>
                                               DERMISONICS, INC. AND SUBSIDIARY
                                                 (A DEVELOPMENT STAGE COMPANY)
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                              FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005, AND FOR THE PERIOD
                               FROM SEPTEMBER 1, 2000 (DATE OF INCEPTION), TO SEPTEMBER 30, 2006


                                                                                  For the Year Ended        Cumulative During
                                                                                     September 30,           the Development
                                                                                   2006          2005             Stage
                                                                               ------------  ------------  -------------------
<S>                                                                            <C>           <C>           <C>

Cash flows from operating activities:
  Net loss                                                                     $(5,084,047)  $(6,958,686)  $      (16,488,607)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                        -             -               40,546
    Impairment of software development costs                                             -             -               11,301
    Impairment of goodwill                                                               -             -                9,512
    Loss on extinguishment of convertible debentures                               374,948             -              374,948
    Loss on sale of subsidiary                                                           -             -                  362
    Issuance of common stock and warrants for services,
      financing fees, loss on settlement of debt, and                            2,644,117     5,413,525           11,093,079
      settlement of intellectual property lawsuit
    Accreted discount on convertible note payable, convertible
      promissory notes, convertible debentures, and                                148,860        24,086              172,946
      staples convertible note payable
    Beneficial conversion feature recorded as interest expense related
      to the convertible debentures and convertible note payable                         -       374,538              374,538
    Amortization of debt issuance costs                                             69,738         4,086               73,824
    Accrued interest on convertible debentures converted to equity                  51,613             -               51,613
    Accrued filing penalty owed to the investors in the 2006 Offering              (37,411)            -              (37,411)
    Changes in operating assets and liabilities, net of effects
      from purchase of subsidiary
      Prepaid expenses                                                            (401,869)       (5,068)            (406,937)
      Accounts payable and accrued expenses                                        690,394      (118,296)           1,035,018
      Due to shareholder company                                                         -             -              375,000
      Interest payable                                                             238,795        42,452              312,246
                                                                               ------------  ------------  -------------------

      Net cash used in operating activities                                     (1,304,862)   (1,223,363)          (3,008,022)

Cash flows from investing activies:
  Purchase of intangible assets                                                          -       (10,060)            (510,060)
  Purchase of subsidiary                                                                 -             -                 (200)
  Purchase of furniture and equipment                                               (3,019)            -               (3,696)
  Web site development costs                                                             -             -              (13,246)
  Cash acquired in purchase of subsidiary                                                -             -               14,420
  Advance to subsidiary                                                                  -             -              (60,000)
                                                                               ------------  ------------  -------------------

      Net cash used in investing activities                                         (3,019)      (10,060)            (572,782)

Cash flows from financing activies:
  Proceeds from short-term notes payable to stockholder                                  -             -               59,500
  Proceeds from short-term note payable                                                  -             -              500,000
  Proceeds from issuance of convertible debentures                                       -       232,827              232,827
  Proceeds from issuance of stockholder loans                                      239,000     1,289,976            1,528,976
  Proceeds from issuance of convertible promissory notes                           296,579       784,501            1,081,080
  Allocated proceeds from issuance of convertible promissory notes                  58,670             -               58,670
  Allocated proceeds from issuance of warrants attached to                          71,330             -               71,330
    convertible promissory notes
  Allocated proceeds from issuance of convertible note payable                           -        19,018               19,018
  Allocated proceeds from issuance of warrants attached to                               -         5,982                5,982
    convertible note payable
  Allocated proceeds from issuance of common stock                                 493,688       260,000            1,233,688
  Allocated proceeds from issuance of warrants attached to                         542,312             -              542,312
    common stock
  Allocated proceeds from issuance of staples convertible                          265,400             -              265,400
    note payable
  Allocated proceeds from issuance of warrants attached to                         234,600             -              234,600
    staples convertible note payable
  Convertible debt and equity issuance costs                                      (150,864)      (98,063)            (248,927)
  Repayment of convertible note payable                                            (25,000)            -              (25,000)
  Repayment of short-term note payable                                                   -      (500,000)            (500,000)
  Repayment of notes payable to shareholders                                      (948,756)     (403,826)          (1,352,582)
                                                                               ------------  ------------  -------------------

      Net cash provided by financing activities                                  1,076,959     1,590,415            3,706,874
                                                                               ------------  ------------  -------------------

      Increase (decrease) in cash                                                 (230,922)      356,992              126,070

Cash at beginning of period                                                        356,992             -                    -
                                                                               ------------  ------------  -------------------

Cash at end of period                                                          $   126,070   $   356,992   $          126,070
                                                                               ============  ============  ===================

Supplemental disclosure of cash flow information:
  Debt discount recorded for beneficial conversion feature                     $   554,112   $   183,249   $          737,361
  Cash paid for interest                                                       $    61,263   $   196,368   $          269,131
  Due to shareholder settled by issuance of warrants                           $         -   $   375,000   $          375,000
  Conversion of convertible debentures into 1,777,749 shares of
    common stock during the year ended September 30, 2006                      $   232,827   $         -   $          232,827
</TABLE>

          See accompanying notes to consolidated financial statements


                                      F-6
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  DESCRIPTION OF BUSINESS

THE COMPANY
-----------

Dermisonics,  Inc.,  (formerly  known  as  Second  Stage  Ventures,  Inc.) ("the
Company"),  a  development stage company, was incorporated under the laws of the
State  of  Nevada  on September 1, 2000.  In October 2000, the Company purchased
100%  of  the  outstanding  shares  of  common  stock of EasyTrivia.com, Inc. (a
Development  Stage  Company)  ("EasyTrivia").  EasyTrivia  developed  an
internet-based  entertainment  website  that features a trivia game show format.
In  July  2004, the director of EasyTrivia repurchased all outstanding shares in
EasyTrivia  for  $200  consistent  with  a  share purchase agreement between the
Company  and  the  director.  At  the  time  of  the decision to sell EasyTriva,
management  had  determined  that  the  value  of  intangible  assets related to
EasyTriva  had been impaired.  An impairment loss was recorded to give effect to
a  write-down of these assts to the net realizable value of the agree-upon sales
price  of  $200  prior  to  the  sale  date.

On  July  28,  2004,  the  Company  entered  into  an  Asset  Purchase Agreement
("Purchase  Agreement")  with  Encapsulation  Systems, Inc. and its wholly-owned
subsidiary,  Echo  RX,  Inc.  (collectively,  "ESI")  and  acquired  certain
intellectual  property  encompassing  a  new  type of non-invasive drug delivery
system  more  commonly  known  as a transdermal patch ("Intellectual Property").
Under  the  Purchase Agreement, the Company paid an aggregate purchase price for
the  Intellectual  Property  of  $19,448,594,  consisting  of  cash of $500,000,
long-term  notes  payable in the total amount of $1,908,594, and the issuance of
common stock valued at $17,040,000 on the effective date of the purchase.  Also,
the  Company  will pay an annual royalty equal to 2.5% of gross revenues derived
from  the  Intellectual Property to be paid for the life of all related patents,
and  any  allowable regulatory extensions, or for 20 years, whichever is longer.

When  the  Company  entered  into the Purchase Agreement, ESI was an involuntary
debtor under Chapter 7 of the United States Bankruptcy Code in the United States
Bankruptcy  Court for the Eastern District of Pennsylvania ("Bankruptcy Court").
ESI's  sale  of  the Intellectual Property on the terms provided in the Purchase
Agreement  was  made  upon  order of the Bankruptcy Court, pursuant to which the
Company is entitled to all of the protections provided to a good faith purchaser
of  assets  out  of  bankruptcy.

Upon  the  closing  of  the  Purchase  Agreement,  the  management  and Board of
Directors of the Company resigned and a new Chairman was appointed and serves as
an  interim  Chief Executive Officer.  The Chairman also serves as the Company's
sole  director.

During  the  year  ended  September  30,  2004,  the Company also founded Valcor
Resources,  Inc.,  a  wholly-owned  subsidiary,  for  the purpose of pursuing an
investment  in  certain timber operations.  During the year, the Company decided
not  to  pursue  this  investment  and  distributed  all  of  its shares in this
subsidiary  to  the  Company's  shareholder.  No gain or loss resulted in any of
these  transactions.

As  indicated  in  the  accompanying  consolidated  financial  statements,  the
Company's  accumulated  deficit during the development stage totaled $16,488,607
for the period from September 1, 2000 (date of inception) to September 30, 2006.
The  Company  has  sold  its only operating subsidiary and has not generated any
revenue from the recently purchased assets.  The Company's successful attainment
of  profitable  operations  is  dependent  on future events, including obtaining
additional  financing  to  sustain  its operations while it pursues its business
plan.

NOTE  2.  GOING  CONCERN

The  Company's  consolidated  financial  statements are prepared consistent with
accounting  principles  generally  accepted in the United States applicable to a
going  concern,  which contemplates the realization of assets and liquidation of
liabilities  in  the  normal  course  of  business.  However,  as  shown  in the
accompanying  consolidated  financial  statements,  the  Company  has  sustained
substantial  losses  as  it  has


                                      F-7
<PAGE>
remained  in  the development stage since inception and has no current source of
significant  revenue.  Management  is  in  the process of forming a new business
plan  to  develop  the  Intellectual  Property  it  has  acquired.

On  January  24,  2007,  Mr.  Redding,  ESI's  president and largest stockholder
notified  the  Company that ESI considers the Company in breach of the Company's
final  payment obligation of $250,000 under the terms of the Purchase Agreement.
ESI asserts that rights to the U-Strip Technology will revert to ESI as a result
of  the Company's breach of the terms of the Purchase Agreement.  If the Company
cannot  cure this default and is unsuccessful in negotiating a settlement of the
dispute  with  ESI  over  the final $250,000 payment, rights to the intellectual
property acquired through the Purchase Agreement may revert to ESI, resulting in
an  impairment of the Company's intangible assets and the Company will be forced
to  abandon  its  current  business  plan.  See  Note  3 "Summary of Significant
Accounting  Policies  -  Intangible  Assets"  and  Note  15 "Subsequent Events."

The consolidated financial statements do not include any adjustments relating to
the  recoverability  and  classification  of  recorded  asset  amounts  and
classification  of  liabilities  that  might  be necessary should the Company be
unable  to  continue  in  existence.


NOTE 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
---------------------------

The  accompanying  consolidated  financial  statements  include  the accounts of
Dermisonics  and  its  wholly  owned  subsidiary, EasyTrivia (collectively, "the
Company").  As  noted  in  Note  1,  EasyTrivia  was  sold  in  July  2004.  All
inter-company  accounts  and  transactions  have  been  eliminated.

RECLASSIFICATION
----------------

Certain  amounts  in  the  prior year financial statements were reclassified for
purposes  of  comparability  to  the  current  year  presentation.

CASH
----

Cash includes highly liquid investments with original maturities of three months
or  less.  On  occasion,  cash  balances  exceed  the  federally insured limits.

FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS
---------------------------------------

The  Company has the following financial instruments: cash, accounts payable and
accrued  expenses,  short-term  and  long-term  debt  to  stockholders,  staples
convertible  promissory  note,  and current and long-term convertible promissory
notes.  The  carrying  value  of  these  instruments,  other  than  the  staples
convertible  promissory  note,  approximate fair value based on their liquidity.
The  fair  value  of  the  staples  convertible promissory was determined as the
excess  of  the  proceeds  over  the  fair  value  of  the  warrants.

DEFERRED  FINANCING  FEES
-------------------------

The Company records costs incurred related to debt financings as additional paid
in  capital and amortizes, on a straight-line basis, the costs incurred over the
life of the related debt.  The amortization is recognized as interest expense in
the  consolidated  financial  statements.  Upon  conversion  into  equity  or
extinguishment  of  the  related  debt,  the  Company recognizes any unamortized
portion  of  the  deferred  financing  fees  as  interest  expense at that time.

INTANGIBLE ASSETS
-----------------


                                      F-8
<PAGE>
Patent  rights  and  trademarks  are  recorded  at cost.  At September 30, 2006,
management  believes  the patent rights and trademarks have indefinite lives and
are therefore not subject to amortization but are tested for impairment at least
annually  and that there is no impairment of these intangible assets at the date
of  this  report.

As  discussed  in  Note  2  "Going  Concern",  if the Company is unsuccessful in
negotiating  a  settlement  of  the  dispute  with  ESI  over the final $250,000
payment,  rights  to  the  intellectual  property  acquired through the Purchase
Agreement  will  revert  to  ESI,  resulting  in  an impairment of the Company's
intangible  assets  See  Note  15  "Subsequent  Events."

COMPUTER EQUIPMENT
------------------

Computer  equipment is stated at cost and is depreciated using the straight-line
method  over  the  estimated  useful  life  of  three years.  The Company begins
depreciating  computer  equipment  the  month  after  it is placed into service.

VALUATION  OF  WARRANTS
-----------------------

The  Company estimates the value of warrants using a Black-Scholes pricing model
based  on  management  assumptions  regarding  the  warrant  lives,  expected
volatility,  and  risk  free  interest  rates.

INCOME TAXES
------------

Income  taxes  are accounted for under the asset and liability method.  Deferred
tax  assets  and  liabilities  are  recognized  for  the future tax consequences
attributable  to differences between the financial statement carrying amounts of
existing  assets  and  liabilities  and their respective tax bases and operating
loss  and  tax  credit  carry forwards.  Deferred tax assets and liabilities are
measured  using  enacted  tax  rates  expected to apply to taxable income in the
years  in  which  those  temporary  differences  are expected to be recovered or
settled.  The  effect  on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.  A
valuation  allowance  is recorded for deferred tax assets when it is more likely
than  not  that  such  deferred  tax  assets  will  not  be  realized.

GOODWILL
--------

In connection with the acquisition of EasyTrivia, the Company recorded $9,512 of
goodwill.  As  a  result  of the sale of EasyTrivia, the Company determined that
goodwill  was  impaired  and the entire amount was written off during the fiscal
year ended September 30, 2004.  The goodwill impairment is included in loss from
operations  of  discontinued  segment.

RESEARCH AND DEVELOPMENT COSTS
------------------------------

All of the Company's research and development costs are expensed as incurred.
Through September 30, 2006, all research and development costs were paid to
third parties and are included in professional fees and research and development
consulting in the Consolidated Statements of Operations.  During the years ended
September 30, 2006 and September 30, 2005, the Company incurred $1,817,387 and
$4,708,789, of research and development expense  During the period from
September 1, 2000 (date of inception) to September 30, 2006, the Company
incurred $6,627,059 of research and development expense.

SOFTWARE AND WEB SITE DEVELOPMENT COSTS
---------------------------------------

The  costs  of  computer software developed or obtained for internal use, during
the  preliminary  project  phase,  as  defined  under Statement of Position 98-1
"Accounting  for  the  Costs  of  Computer  Software  Developed  or Obtained for
Internal  Use,"  are  expensed  as incurred.  The costs of web site development,
during  the planning stage, as defined under Emerging Issues Task Force No. 00-2
"Accounting for Web Site Development Costs," are expensed as incurred.  Computer
software  and  web  site  development  costs incurred during the application and
infrastructure  development  stage,  including  external  direct  costs  of


                                      F-9
<PAGE>
materials  and  services  consumed in developing the software, creating graphics
and web site content, payroll, and interest costs, are capitalized and amortized
over the estimated useful life, beginning when the software is ready for use and
after  all  substantial  testing  is  completed and the web site is operational.

As  described  in  Note  1,  in  July  2004,  the Company sold EasyTrivia to its
original  owner  for  $200.  Therefore,  the  unamortized  software  and website
development  costs  of $11,301 had been written down to the selling price during
the  year  ended  September 30, 2004 and included in the loss from operations of
discontinued  segment.

DISCONTINUED  OPERATIONS
------------------------

As  described  in  Note  1, in July 2004, the Company sold all of the issued and
outstanding shares of EasyTriva, Inc. and, accordingly, the operating results of
this  subsidiary  have  been  presented  as  discontinued  operations  in  these
financial  statements.  Operations of this subsidiary have generated no revenues
since  inception.

SEGMENT  REPORTING
------------------

The  Company  operates  in  only  one  segment  since  its  disposal  of  its
internet-based  entertainment  website.

NET  LOSS  PER  SHARE
---------------------

Basic  net  loss  per share is computed by dividing the net loss by the weighted
average  number of common shares outstanding during the period. Diluted net loss
per share is computed by dividing the net loss by the weighted average number of
common  and  dilutive common equivalent shares outstanding during the period. As
the  Company  had  a net loss attributable to common shareholders in each of the
periods  presented,  basic  and  diluted  net  loss  per  share  are  the  same.

Excluded  from  the computation of diluted net loss per share for the year ended
September  30, 2006, because their effect would be antidilutive, are warrants to
acquire 16,632,919 shares of common stock with a weighted-average exercise price
of  $0.59  per  share.

Excluded  from  the computation of diluted net loss per share for the year ended
September  30, 2005, because their effect would be antidilutive, are warrants to
acquire  5,945,025 shares of common stock with a weighted-average exercise price
of  $1.33  per share. Also excluded from the computation of diluted net loss per
share  for  the year ended September 30, 2005 are 418,533 shares of common stock
that  may  be  issued  if  investors  exercise  their conversion right under the
Convertible  Debentures  and  the  Convertible  Note  as  discussed  in  Note 9,
"Short-Term  Convertible  Debt,"  because  their  effect  would be antidilutive.

During  the  years  ended September 30, 2006 and 2005, services were received by
the  Company  for  common  shares  that were issued subsequent to year-end.  For
purposes  of  net  loss  per share computations, these issuable shares have been
included  as  outstanding  as  of  the  date  the  services were received by the
Company.

In  January  2005,  a  majority of the Company's stockholders voted to amend the
Company's  Articles of Incorporation to increase the number of authorized shares
of  common stock from 50,000,000 shares to 100,000,000 shares and reduce the par
value  from  $0.01  per  share  to  $0.001  per  share.

On  January  4, 2005, the Company declared a stock dividend equal to one-half of
one share of common stock for each share of common stock issued and outstanding.
The  effect of the stock dividend has been recognized in all share and per share
data  in  the  accompanying  financial  statements  and  notes  to the financial
statements  for  periods  presented.

On  December  29,  2003, the Board of Directors declared a stock dividend of one
share  of  common  stock  for  every  one  share  of  common  stock  issued  and
outstanding.  The  effect  of  the  stock  dividend  has  been


                                      F-10
<PAGE>
recognized  in  all  share  and  per share data in the accompanying consolidated
financial  statements  and  notes  to  the  financial  statements.

ESTIMATES
---------

The  preparation  of  these  financial  statements in conformity with accounting
principles  generally  accepted in the United States requires management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and  disclosure of contingent assets and liabilities at the date of
these consolidated financial statements and the reported amounts of revenues and
expenses  during  the period.  Actual results could differ from these estimates.

VENDOR  CONCENTRATION
---------------------

The  Company  relies  on the expertise of ESI and Bruce Redding, ESI's president
and  largest  stockholder  to  facilitate  the  development  and  testing of the
Company's  transdermal  drug  delivery  technology.  The loss of the specialized
knowledge  provided by ESI and Bruce Redding could have an adverse effect on the
ability  of  the  Company  to reach marketability of its technology.  During the
year  ended September 30, 2006, the Company incurred cash fees payable to ESI of
approximately  $425,000,  representing  23% of research and development expenses
for  the  year  ended  September  30, 2006.  During the year ended September 30,
2005,  the  Company incurred cash fees payable to ESI of approximately $225,000,
representing  5%  of  research  and  development  expenses  for  the  year ended
September  30,  2005.  As  of  September  30,  2006,  the  Company  owed  ESI
approximately  $305,000,  which  is  included  in  accounts  payable and accrued
expenses  at  September  30,  2006.

On  January  24,  2007,  Bruce  Redding resigned as the Company's Executive Vice
President.  Mr.  Redding did not resign as a member of the Board of Directors of
the  Company.  As  of  the  date  of  this  report,  the  Company  is  still  in
negotiations  with  Mr.  Redding  and ESI regarding various matters (see Note 15
"Subsequent  Events")  and  has  not  assessed  the  impact  that  Mr. Redding's
resignation will have on the ability of the Company to execute its business plan
or  continue  as  a  going  concern.

COMPREHENSIVE  INCOME
---------------------

The  Company  had  no  elements  of  comprehensive  income  for  the period from
September  1,  2000  to  September  30,  2006.

RECENTLY  ISSUED  ACCOUNTING  STANDARDS
---------------------------------------

In  July  2006,  the  Financial  Accounting  Standards  Board (FASB) issued FASB
Interpretation  (FIN)  No.  48,  "Accounting  for Uncertainty in Income Taxes-an
interpretation  of  FASB  Statement  No.  109."  This  Interpretation  provides
guidance  for  recognizing  and measuring uncertain tax positions, as defined in
Statement  of  Financial  Accounting  Standards  (SFAS) No. 109, "Accounting for
Income  Taxes."  FIN No. 48 prescribes a threshold condition that a tax position
must  meet  for any of the benefit of an uncertain tax position to be recognized
in the financial statements.  Guidance is also provided regarding derecognition,
classification  and  disclosure  of  uncertain  tax  positions.  FIN  No.  48 is
effective  for fiscal years beginning after December 15, 2006.  The Company does
not  expect  that  this  Interpretation  will  have  a  material impact on their
financial  position,  results  of  operations  or  cash  flows.

In  September  2006,  the  Securities and Exchange Commission (SEC) issued Staff
Accounting  Bulletin  No.  108  (SAB  108).  Due  to diversity in practice among
registrants,  SAB  108  expresses SEC staff views regarding the process by which
misstatements  in financial statements are evaluated for purposes of determining
whether  financial  statement restatement is necessary. SAB 108 is effective for
fiscal  years  ending  after  November  15,  2006,  and  early  application  is
encouraged.  The Company does not believe SAB 108 will have a material impact on
our  results  from  operations  or  financial  position.

In  September 2006, the FASB issued Statement No. 158, Employers' Accounting for
Defined  Benefit  Pension  and  Other Postretirement Plans, an amendment of FASB
Statements  No.  87,  88,  106,  and  132(R)


                                      F-11
<PAGE>
(Statement  158).  Among  other items, Statement 158 requires recognition of the
overfunded  or  underfunded status of an entity's defined benefit postretirement
plan  as  an  asset  or  liability  in  the  financial  statements, requires the
measurement  of defined benefit postretirement plan assets and obligations as of
the  end  of  the employer's fiscal year, and requires recognition of the funded
status  of  defined  benefit postretirement plans in other comprehensive income.
Statement  158 is effective for fiscal years ending after December 15, 2006, and
early application is encouraged. The Company does not expect that this Statement
will  have  a material impact on their financial position, results of operations
or  cash  flows.

NOTE  4.  ACQUISITION  OF  INTELLECTUAL  PROPERTY

As  described in Note 1, the Company purchased Intellectual Property in exchange
for  18,000,000  shares  of  common  stock, notes payable in the total amount of
$1,908,594, and cash of $500,000.  The aggregate purchase price was allocated to
the  value  of  assets  acquired  as  follows:

<TABLE>
<CAPTION>
<S>                        <C>
          Patent rights       $19,200,000
          Trademarks              248,594
                              -----------
                              $19,448,594
                              ===========
</TABLE>

During  the  quarter ended March 31, 2005, the Company capitalized an additional
$10,060  related  to  the  issuance  of a new patent.  As of September 30, 2006,
intangible  assets  was  $19,458,654.

On  January  24,  2007,  Mr.  Redding,  ESI's  president and largest stockholder
notified  the  Company that ESI considers the Company in breach of the Company's
final  payment obligation of $250,000 under the terms of the Purchase Agreement.
ESI asserts that rights to the U-Strip Technology will revert to ESI as a result
of  the Company's breach of the terms of the Purchase Agreement.  If the Company
cannot  cure this default and is unsuccessful in negotiating a settlement of the
dispute  with  ESI  over  the final $250,000 payment, rights to the intellectual
property  acquired  through the Purchase Agreement will revert to ESI, resulting
in  a  potential  impairment  of  the  Company's  intangible assets. See Note 15
"Subsequent  Events".

NOTE  5.  STOCK  BASED  COMPENSATION

Prior to January 1, 2006, the Company accounted for stock-based awards under the
intrinsic  value  method,  which  followed  the  recognition  and  measurement
principles  of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related  Interpretations.  The  intrinsic value method of accounting resulted in
compensation  expense  for  stock options to the extent that the exercise prices
were  set  below  the  fair  market  price of the Company's stock at the date of
grant.

As  of  January  1, 2006, the Company adopted SFAS No. 123(R) using the modified
prospective  method,  which  requires  measurement  of compensation cost for all
stock-based  awards  at  fair  value  on  date  of  grant  and  recognition  of
compensation over the service period for awards expected to vest. The fair value
of stock options is determined using the Black-Scholes valuation model, which is
consistent  with  the  Company's  valuation  techniques  previously utilized for
options  in  footnote  disclosures  required  under SFAS No. 123, Accounting for
Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition  and  Disclosure.

Since  the  Company  did  not  issue stock options to employees during the years
ended September 30, 2006 or 2005, there is no effect on net loss or earnings per
share  had the Company applied the fair value recognition provisions of SFAS No.
123(R)  to stock-based employee compensation.  When the Company issues shares of
common  stock  to  employees  and  others, the shares of common stock are valued
based  on  the  market price at the date the shares of common stock are approved
for  issuance.

NOTE  6.  DUE  TO  SHAREHOLDER  COMPANY

On  April  30,  2004, the Company entered into an oral agreement with Integrated
Inventions  (Canada), Inc. ("III") for services III rendered with respect to the
acquisition  by  the  Company  of  the  Intellectual  Property


                                      F-12
<PAGE>
described  in  Note  1.  During  the  year ended September 30, 2004, the Company
issued  shares of common stock in partial consideration for these services.  The
unpaid  balance  due for these services amounted to $375,000.  In February 2005,
the Company issued 416,667 shares of common stock and warrants to purchase up to
208,333  shares  of  common  stock  at  an  exercise price of $1.33 per share in
consideration  of  the  settlement of the $375,000 payable.  As a result, during
the  three  months  ended  March  31,  2005,  the  Company  recognized a loss of
approximately  $360,000  in  connection  with  the  settlement  of  this  debt.

NOTE  7.  SHORT-TERM  NOTES  PAYABLE  TO  STOCKHOLDER

Since  October  2003,  Ms.  Zennie  Morris, the former president of the Company,
loaned the Company an aggregate of $59,500, of which $50,000 is evidenced by two
promissory  notes  in  the  amounts  of  $20,000  and $30,000, which were due on
September  30,  2004.  The third promissory note in the amount of $9,500 was due
on August 31, 2004. These three promissory notes (the "Morris Notes) do not bear
interest.  As  of  September  30,  2006  the outstanding combined balance on the
Morris  Notes  was  $59,500.  As of September 30, 2006, the Morris Notes were in
default.  There  is  no  default  interest  rate.

NOTE  8.  SHORT-TERM  NOTE  PAYABLE

On  June  30, 2004, the Company received a $500,000 loan (the "Promissory Note")
from an unrelated individual in connection with the purchase of the Intellectual
Property  from ESI.  The $500,000 was used for part of the consideration for the
acquisition  of  the  Intellectual  Property.  The  Promissory  Note  was due on
December  17,  2004.  The stated interest rate is 10% but because the Promissory
Note  was  in default, default interest was accruing at $605 per day.  Since the
Company  was  in  default  under the Promissory Note, the Company entered into a
loan  extension  agreement ("the Extension Agreement") that extended the time in
which  to  repay  the  Promissory  Note.  In  accordance  with  the terms of the
Extension  Agreement,  the  Company  incurred  a  related  loan fee of $187,121,
$12,113 of which was paid in cash in January 2005 and $103,833 of which was paid
by  issuing  warrants  to  purchase  up  to 150,376 shares of common stock at an
exercise  price  of  $1.33  per  share.

On  September 22, 2005, the Company entered into an Agreement and Mutual Release
agreeing to pay the lender of the Promissory Note $653,880 to settle in full the
$500,000  outstanding  loan  principal  balance  of  the  Promissory  Note,  the
remaining  unpaid loan extension fee of $71,175, and $82,705 in accrued interest
through  September  22,  2005. Pursuant to the Agreement and Mutual Release, the
Company  also  agreed  to pay an additional $60,000 in consulting fees (of which
$20,000  was  paid in December 2005). The unpaid consulting fee at September 30,
2006  of  $40,000  is  included  in  accounts  payable  and  accrued  expenses.

Interest  expense  related  to the Promissory Note for the years ended September
30,  2006  and  2005  was  $0  and  $187,236.

NOTE  9.  SHORT-TERM  CONVERTIBLE  DEBT

CONVERTIBLE  DEBENTURES

In  November  and December 2004, and March 2005, the Company issued one-year, 8%
interest  bearing  debentures  (the  "Convertible Debentures") to five unrelated
individuals  in  the  aggregate  amount of $232,827.  The Convertible Debentures
were  originally  convertible into shares of common stock at the lesser of $0.90
per  share  or 60% of the five-day average trading price after the daily trading
volume  exceeded  100,000  shares  for  10 consecutive trading days ("Conversion
Reset  Price").  On  June  6, 2005, the Conversion Reset Price was triggered and
the  Debentures  became  convertible  at  $0.60  per  share.  The  Convertible
Debentures  originally  matured one-year from the issuance date, in November and
December  2005 and March 2006 (the "Maturity Date"), respectively. Principal and
interest  are  due  in  full  on  the  Maturity Date.  The Convertible Debenture
holders  agreed  to extend the Maturity Date of their Convertible Debentures six
months  from their original Maturity Date.  In consideration of the extension of
the  Maturity  Date for six months, the Company reduced the conversion price per
share  of  the Convertible Debentures to $0.40 per share, increasing the maximum
total  number  of  shares  issuable  upon conversion to 582,068 shares of common
stock.  The  reduction of the conversion price and the extension of the Maturity
Date


                                      F-13
<PAGE>
represent  a  modification of terms of the Convertible Debentures (the "Modified
Convertible Debentures").  Pursuant to EITF Issue No. 96-19, Debtors' Accounting
for  a  Modification  or  Exchange of Debt Instruments, and EITF Issue No. 05-7,
Accounting  for Modifications to Conversion Options Embedded in Debt Instruments
and  Related  Issues,  the  Company  accounted  for  this  modification  as  an
extinguishment  of  debt and the issuance of new debt.   Accordingly, during the
quarter  ended  December 31, 2005, the Company recorded a loss on extinguishment
of  debt  of  $99,621  related  to  the  $132,827  of  principal of the Modified
Convertible  Debentures that matured during the quarter ended December 31, 2005.
During  the  quarter  ended  March  31,  2006,  the  Company  recorded a loss on
extinguishment  of  debt  of $42,500 related to the $100,000 of principal of the
Modified  Convertible Debentures that matured during the quarter ended March 31,
2006.  As  a  result  of  the  modification  of  the Convertible Debentures, the
Company  recorded  the  fair  value  of  the  new debt of $232,827 and a related
discount  of  $33,206.  The  Company  amortized the discount using the effective
interest  method  over  the  remaining  extended  six-month life of the Modified
Convertible  Debentures.

In  September  2006,  the  Company  reached  an  agreement  with the Convertible
Debenture  holders  whereby  the  conversion price would be further reduced from
$0.40  per share to $0.16 per share and the Company would accrue interest at the
default  rate of 13% on the principal balance of the Convertible Debentures from
the  original  date  of  the  Convertible  Debenture through September 30, 2006.
Additionally,  since  the  Company  was  in  default  under  the  terms  of  the
Convertible Debentures and the Company did not have cash available to re-pay the
Convertible  Debentures,  the  Company  agreed that if the Convertible Debenture
holders converted their Convertible Debentures to equity at $0.16 per share, the
Company  would  also  issue  warrants  to  the  Convertible Debenture holders to
purchase a total 1,777,749, shares of common stock at an exercise price of $0.16
per  share.

In September 2006, all of the Convertible Debenture holders converted their then
outstanding principal balance of the Modified Convertible Debentures and related
accrued  interest  into an aggregate of 1,777,749 shares of common stock and the
Company issued warrants to the Convertible Debenture holders to purchase a total
of 1,777,749 shares of common stock at an exercise price of $0.16 per share. The
warrants  expire  on  September  30,  2009.

The  further  reduction of the conversion price and the issuance of the warrants
represent  another modification of terms of the Modified Convertible Debentures.
Accordingly, the Company accounted for this modification as an extinguishment of
debt  and  the issuance of new debt. As a result, in September 2006, the Company
recorded  a  loss  on  extinguishment  of  debt  of  $232,827.

Warrants  issued in connection with the conversion of the Convertible Debentures
were  recorded  based on their relative fair value as compared to the fair value
of  the  debt.  The  relative fair value of the warrants was recorded as paid-in
capital,  estimated  at  $165,211. The fair value of the warrants was determined
based  on  an option pricing model with the following assumptions: warrant lives
of  3  years,  risk  free interest rate of 4.62%, volatility of 182%, and a zero
percent  dividend  yield.

Accumulatively, the Company recorded a loss on extinguishment of debt related to
the Convertible Debentures of $374,948 during the year ended September 30, 2006.

ACCRETION  OF  DISCOUNT  RECORDED  AS  INTEREST  EXPENSE -CONVERTIBLE DEBENTURES

During  the  year  ended  September  30,  2006,  the  Company did not record any
interest expense related to the accretion of the discount initially recorded for
the Convertible Debentures as this discount was already fully amortized.  During
the year ended September 30, 2005, the Company recorded interest expense related
to  the  accretion  of  the  discount  initially  recorded  for  the Convertible
Debentures  of  $347,709.

ACCRETION  OF  DISCOUNT  RECORDED  AS  INTEREST  EXPENSE  - MODIFIED CONVERTIBLE
DEBENTURES

During  the  years  ended  September  30,  2006  and  2005, the Company recorded
interest  expense  related  to  the  accretion  of  the discount on the Modified
Convertible  Debentures  of  $33,206  and  $0.  As  of  September  30, 2006, the
discount  related  to  the  Modified Convertible Debentures was fully amortized.


                                      F-14
<PAGE>
8%  CASH INTEREST EXPENSE AND 13% DEFAULT INTEREST EXPENSE -MODIFIED CONVERTIBLE
DEBENTURES

Interest  expense for the years ended September 30, 2006 and 2005 related to the
Modified  Convertible  Debentures  was  $38,455  and  $13,158.

CONVERTIBLE  NOTE  PAYABLE

In  November  2004,  the Company issued an 8% interest-bearing note payable (the
"Convertible  Note") in the amount of $25,000, convertible into 30,488 shares of
common  stock  at  $0.82  per share.  The Convertible Note matures September 30,
2005.  Principal  and  interest are due in full upon maturity.  Interest expense
for  the years ended September 30, 2006 and 2005 related to the Convertible Note
Payable  was $3,987 and $1,742.  Warrants to purchase up to 15,283 common shares
were  also  issued in connection with the Convertible Note.  These warrants have
an  exercise  price of $1.33 and expired on October 31, 2005.  Proceeds from the
Convertible  Note  were  allocated pro-rata based on the relative fair values of
the  Convertible  Note  and  related  warrants.  The  amount attributable to the
warrants of $5,982 was recorded as a discount against the carrying amount of the
Convertible  Note  and a credit to additional paid-in-capital.  The discount was
amortized  as  interest  expense,  using the effective interest method, over the
term  of the Convertible Note.  Total interest expense recorded during the years
ended  September  30, 2006 and 2005 related to the accretion of the discount was
$1,652  and $4,330.  As of September 30, 2006, the entire discount of $5,982 had
been  accreted  as  interest  expense.

In  July  2006,  the  Company  repaid  the  outstanding principal balance on the
Convertible  Note  of  $25,000  and accrued interest as of the repayment date of
$5,729,  for  a  total  Convertible  Note  settlement  of  $30,729.

The  holders  of  the  Convertible  Debentures  and the Convertible Note had the
option to convert all or part of their notes into shares of the Company's common
stock  effective  as  of  the  date  of  the issuance of the debt.  Due to their
convertible  nature,  the  Company recorded a total charge due to the beneficial
conversion  feature of $420,372 ($257,871 in the quarter ended December 31, 2004
and  $116,667 in the quarter ended March 31, 2005) in accordance with EITF Issue
No.  98-5,  Accounting  for  Convertible  Securities  with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and EITF Issue No. 00-27,
Application  of  EITF  Issue  No.  98-5 to Certain Convertible Instruments.  The
value  of  the  beneficial  conversion  feature was measured using the intrinsic
value  method and was charged to interest expense with a corresponding credit to
additional  paid-in  capital  at the date of the issuance because the notes were
immediately  convertible.

STAPLES  CONVERTIBLE  NOTE

On  July  14,  2006, the Company issued a Convertible Promissory Note to Staples
Management,  Inc.  (the  "Staples  Convertible Note") in the amount of $500,000.
The  Staples  Convertible  Note  matures July 14, 2007.  The Staples Convertible
Note  is convertible into that number of shares of the Company's common stock at
a  conversion  price  equal to 75% of the average closing price per share during
the  10  trading  days  immediately  prior  to the conversion date.  The Staples
Convertible Note bears interest at a rate of 10% per annum, payable at maturity.
The  Company may, in its discretion, prepay the principal amount and all accrued
interest  at  anytime  prior  to  maturity  without  any  prepayment  penalty.

In connection with the Staples Convertible Note, the Company issued a warrant to
purchase  3,125,000  shares  of  common  stock at an exercise price of $0.16 per
share  (the  "Staples  Warrant").  The Staples Warrant expires on July 14, 2009.

The  Staples  Warrant issued in connection with the Staples Convertible Note was
recorded  based  on its relative fair value as compared to the fair value of the
debt at issuance. The relative fair value of the Staples Warrant was recorded as
paid-in  capital,  estimated at $265,400.  The fair value of the Staples Warrant
was  determined based on an option pricing model with the following assumptions:
warrant  life  of  three  years, risk free interest rate of 5.05%, volatility of
116%,  and  a  zero  dividend  yield.  The  intrinsic  value  of  the


                                      F-15
<PAGE>
Staples Convertible Note results in a beneficial conversion feature that reduces
the  book  value  of  the  Staples  Convertible  Note  to  not  less  than zero.
Accordingly,  the  Company  recorded  a  discount  of  $500,000  on  the Staples
Convertible  Note.  The  Company  amortizes  the  discount  using  the effective
interest  method  over  the  one-year  life  of  the  Staples  Convertible Note.

As  of  September 30, 2006, accrued interest on the Staples Convertible Note was
$10,685.  The  Company recorded interest expense related to the accretion of the
discount on the Staples Convertible Note of $26 for the year ended September 30,
2006.  As  of  September  30, 2006 the carrying value of the Staples Convertible
Note  was  $26,  net  of  unamortized  debt  discount  of  $499,974.

NOTE  10.  LONG-TERM  DEBT,  STOCKHOLDERS

ESI PROMISSORY NOTE 1

The  Company  has  two  long-term  notes  payable  to ESI in connection with the
Purchase  Agreement  dated  July  28, 2004. The original principal amount of the
first  note  ("Note 1") was $1,826,734 and is due on December 1, 2006. Quarterly
installment  payments  of $250,000 are payable on Note 1 starting March 1, 2005.
In the event of a default under Note 1, the entire amount then owing will become
due  and  payable  immediately,  together  with  all  costs  incurred by ESI and
reasonable  attorneys' fee. The following constitute events of default under the
Note:  (i) if the Company fails to make any payment due within 30 days after the
date  on  which the Company receives notice of such failure, (ii) if the Company
fails  to  observe and perform any of the covenants or agreements on its part to
be  observed  or  performed under Note 1 or the Security Agreement (as described
below), (iii) if the Company defaults under the terms of the Security Agreement,
or  (iv)  if  the  Company  take  steps  that  evince bankruptcy or liquidation.

The  Company  also executed a Patent Security Agreement in favor of ESI securing
the  Company's  obligations under the Purchase Agreement and Note 1 and granting
to  ESI  a  security interest in and to the Intellectual Property (the "Security
Agreement").  Under  the  Security  Agreement,  if the Company commits an act of
default  under  Note  1 or if the Company fails to pay the trailer fee within 30
days  after  the  Company  receives written notice from ESI of such failure, ESI
shall have the right to take back the Intellectual Property. ESI's right to take
back the technology is evidenced by a Patent Assignment Agreement dated July 28,
2004.

The  Company did not make the final $250,000 payment that was due on December 1,
2006  under  the  terms  of  the  Purchase  Agreement.  On January 24, 2007, Mr.
Redding  notified  the  Company  that ESI considers the Company in breach of the
final  $250,000  payment  obligation  under the terms of the Purchase Agreement.
ESI asserts that rights to the U-Strip Technology will revert to ESI as a result
of  the Company's breach of the terms of the Purchase Agreement.  If the Company
cannot  cure this default and is unsuccessful in negotiating a settlement of the
dispute  with  ESI  over  the final $250,000 payment, rights to the intellectual
property acquired through the Purchase Agreement will revert to ESI. See Note 15
"Subsequent  Events."

Note  1  has  no  stated  interest  rate but interest has been imputed at 6.25%.
Interest expense for the years ended September 30, 2006 and 2005 related to Note
1 was $47,098 and $127,082.  As of September 30, 2006, the outstanding principal
balance  under  Note  1  is  $493,207,  all  of which is included in the current
portion  of  long-term debt, stockholders in the consolidated balance sheet.  As
of  September  30,  2006,  accrued  interest  payable on Note 1 is $7,706 as the
scheduled loan payment due on September 1, 2006 was not made until subsequent to
September  30,  2006.  Note  1  is  secured  by  the  Intellectual  Property.

ESI PROMISSORY NOTE 2

The  original  principal amount of the second note ("Note 2") was $81,860 and is
payable  in  monthly  installments  of  $2,714.  The  interest  rate  is 16.25%.
Interest  expense  during the years ended September 30, 2006 and 2005 related to
Note  2  was  $31,808  and  $12,407.  As of September 30, 2006, accrued interest
payable  on Note 2 is $18,998.  At September 30, 2006, the outstanding principal
balance  on Note 2 is $62,805 all of which is included in the current portion of
long-term  debt,  stockholders  in  the  consolidated  balance sheet.  Note 2 is
unsecured.


                                      F-16
<PAGE>
STOCKHOLDER  NOTES

During  the  three months ended March 31, 2006, December 31, 2005, September 30,
2005,  June  30,  2005  and  March  31,  2005, the Company entered into 17 notes
payable  (collectively  the  "Stockholder  Notes")  totaling  $15,000, $224,000,
$674,976,  $190,000  and  $425,000,  respectively, to a stockholder company. The
Stockholder  Notes bear interest at 8% per annum. Principal and interest related
to  the  Stockholder Notes are due in full two years from the end of the quarter
during  which  they  were  entered  into.  Interest  expense for the years ended
September 30, 2006 related to the Stockholder Notes was $120,598 and $23,432. At
September  30,  2006, the outstanding principal balance on the Stockholder Notes
is  $1,528,976,  $1,289,976  of  which  is  included  in  the current portion of
long-term  debt, stockholders and $239,000 of which is included in the long-term
debt,  stockholders, less current portion, in the consolidated balance sheet. As
of  September  30,  2006,  accrued interest related to the Stockholder Notes was
$144,030  of  which  $126,672  is  included  in  the current portion of interest
payable  and  $17,358 of which is included in the interest payable, long term in
the  consolidated  balance  sheet.  The  Stockholder  Notes  are  unsecured.

The  following  is  a  schedule of the future minimum principal payments for the
twelve  months  ending  September  30:

<TABLE>
<CAPTION>
<S>                                  <C>
     2007                            $ 1,845,988
     2008                                239,000
                                     ------------

                                       2,084,988
     Less current portion             (1,845,988)
                                     ------------

                                     $   239,000
                                     ============
</TABLE>

NOTE  11.  CONVERTIBLE  PROMISSORY  NOTES,  LONG-TERM

CONVERTIBLE PROMISSORY NOTES

On  August  29,  2005  and  December  8,  2005,  the  Company issued convertible
promissory  notes  (the  "Convertible  Promissory  Notes") totaling $784,501 and
$296,579,  respectively.  The  Convertible Promissory Notes mature on August 29,
2007 and December 31, 2007, respectively (the "Maturity Date") at which time the
outstanding  principal  and  all  accrued  interest  is  due.  The  Convertible
Promissory  Notes  bear interest at a rate of 10% per annum and are payable upon
maturity.  Interest  expense  for  the  years  ended September 30, 2006 and 2005
related  to  the  Convertible  Promissory  Notes  was  $103,925  and  $6,973. At
September  30,  2006,  the  outstanding  principal  balance  on  the Convertible
Promissory  Notes  is  $1,081,080,  $784,501 of which is included in the current
portion of convertible promissory notes and $296,579 of which is included in the
convertible  promissory  notes, long-term, in the consolidated balance sheet. As
of  September  30,  2006, accrued interest related to the Convertible Promissory
Notes  was  $110,898  of  which  $86,513  is  included in the current portion of
interest  payable and $24,385 of which is included in the interest payable, long
term  in  the  consolidated  balance  sheet.

The Company may prepay, without premium or penalty, the principal amount and all
accrued  interest  related  to the Convertible Promissory Notes at any time upon
ten  days  prior  written  notice  to  the  Convertible  Promissory  Note holder
("Prepayment  Date"). The Convertible Promissory Note holders may convert on the
Maturity  Date  or  any  Prepayment  Date  all or any portion of the outstanding
principal  balance  of the Convertible Promissory Note and all or any portion of
the  accrued  interest into shares of the Company's common stock at a conversion
price  equal  to  80% of the average closing bid price per share of common stock
during the five trading days immediately prior to any such conversion; provided,
however, that the Company is not required to issue more than 2,021,053 shares of
common  stock  upon  the  conversion  of  the  Convertible  Promissory  Notes  .


                                      F-17
<PAGE>
The  intrinsic value of the Convertible Promissory Notes results in a beneficial
conversion  feature.  In  accordance  with  EITF  Issue No. 98-5, Accounting for
Convertible  Securities  with  Beneficial  Conversion  Features  or Contingently
Adjustable  Conversion  Ratios,  and  EITF  Issue No. 00-27, Application of EITF
Issue  No.  98-5 to Certain Convertible Instruments, the value of the beneficial
conversion  feature  was  recorded  as  a discount on the Convertible Promissory
Notes  with  a corresponding credit to additional paid-in capital at the date of
the  issuance.  Accordingly,  the  Company  recorded  a  discount of $58,457 and
$177,267  during the three months ended December 31, 2005 and September 30, 2005
related to the Convertible Promissory Notes.  The Company amortizes the discount
using  the  effective  interest method over the two-year life of the Convertible
Promissory  Notes.

During the years ended September 30, 2006 and 2005 the Company recorded interest
expense  related  to the accretion of the discount on the Convertible Promissory
Notes  of  $113,291 and $19,756. As of September 30, 2006, the carrying value of
the  current  portion  of  the Convertible Promissory Notes was $712,655, net of
unamortized  debt  discount  of  $71,846. As of September 30, 2006, the carrying
value of the long-term portion of the Convertible Promissory Notes was $265,747,
net  of  unamortized  debt  discount  of  $30,832.

In  connection  with  the Convertible Promissory Notes, the Company owes a 12.5%
financing fee, to an unrelated party, on all funds raised under the terms of the
Convertible  Promissory  Notes.  Accordingly,  the  Company  paid  $135,135  as
compensation  for  raising  the  funds.  The  Company  recorded  the  total cash
compensation  as  deferred  financing fees and is amortizing, on a straight-line
basis,  the total incurred over the two-year life of the related debt.  As such,
during  the  years  ended  September  30,  2006 and 2005, the Company recognized
$58,300  and  $4,086  as  interest  expense  in  the  Consolidated Statements of
Operations  related  to  these  deferred  financing  fees.

2006  CONVERTIBLE  NOTES

On December 21, 2005, the Company issued convertible promissory notes (the "2006
Convertible  Notes")  to four investors, totaling $130,000. The 2006 Convertible
Notes  bear  interest  at 12% per annum and mature on December 21, 2007. Accrued
interest  is  payable on the first anniversary of the 2006 Convertible Notes and
at  maturity.  Interest expense for the year ended September 30, 2006 related to
the  2006  Convertible  Notes  was  $19,929.  As  of September 30, 2006, accrued
interest on the 2006 Convertible Notes was $19,929. The Company may prepay, with
a prepayment penalty equal to two months' interest, the principal amount and all
accrued  interest  related  to the 2006 Convertible Notes at any time upon sixty
days  prior  written  notice  to  the  2006  Convertible  Note  holder. The 2006
Convertible Note holders may convert on the maturity date or any prepayment date
all  or any portion of the outstanding principal balance of the 2006 Convertible
Notes  and  all  or  any  portion  of  the  accrued  interest into shares of the
Company's common stock at a conversion price equal to the lesser of $1.00 or 80%
of  the  average  closing  bid  price  per  share of common stock during the ten
trading  days  immediately  prior  to  any  such  conversion.

In  connection with the 2006 Convertible Notes, the Company also issued warrants
to purchase 195,000 shares of the Company's common stock at an exercise price of
$1.00  per  share ("2006 Convertible Note Warrants").  The 2006 Convertible Note
Warrants  are  exercisable  until  December  21,  2007.

Warrants  issued  in  connection  with  the 2006 Convertible Notes were recorded
based  on their relative fair value as compared to the fair value of the debt at
issuance.  The  relative  fair  value  of  the  warrants was recorded as paid-in
capital with an offsetting debit to discount on the convertible debt , estimated
at  $71,330  during  the three months ended December 31, 2005. The fair value of
the  warrants  issued  during  the  three  months  ended  December 31, 2005, was
determined  based  on  an  option  pricing model with the following assumptions:
warrant  lives  of  two  years,  risk free interest rate of 4.43%, volatility of
383%,  and  a  zero  dividend yield. The intrinsic value of the 2006 Convertible
Notes  results in a beneficial conversion feature that reduces the book value of
the  2006 Convertible Notes to not less than zero. Accordingly, the Company also
recorded  a  discount of $58,670 during the three months ended December 31, 2005
on  the  2006 Convertible Notes. The total discount recorded related to the 2006
Convertible  Notes  was  $130,000.  The Company amortizes the discount using the
effective  interest  method  over  the  two-year  life  of  the  Debentures.


                                      F-18
<PAGE>
The  Company  recorded interest expense related to the accretion of the discount
on the 2006 Convertible Notes of $685 for the year ended  September 30, 2006. As
of September 30, 2006 the carrying value of the 2006 Convertible Notes was $685,
net  of  unamortized  debt  discount  of  $129,315.

In  connection with the 2006 Convertible Notes, the Company paid $15,792 in cash
and  issued two warrants to purchase a total of 14,444 shares of common stock to
one  of the 2006 Convertible Note holders as compensation for raising the funds.
The  warrants  have  an exercise price of $1.00 per share and expire on December
21,  2008.  The  warrants are fully vested upon issuance and had a combined fair
value  of  $11,897 at issuance. The Company recorded the total cash compensation
and  fair value of the warrants as deferred financing fees and is amortizing, on
a  straight-line basis, the total incurred over the two-year life of the related
debt.  As such, during the year ended September 30, 2006, the Company recognized
$11,437 as interest expense in the Consolidated Statements of Operations related
to  these  deferred  financing  fees.

NOTE  12.  RELATED  PARTIES

The  Company's  interim  Chief  Executive  Officer  and Chairman of the Board of
Directors  (the  "Interim  CEO") provides legal services to the Company.  During
the  year  ended  September 30, 2006, services provided by the Interim CEO's law
firm  totaled  $225,300. As of September 30, 2006, the Company owed the law firm
$134,300,  which  is  included  in  accounts payable and accrued expenses in the
consolidated  financial  statements.

As  of  September  30,  2006, the Company has various loans outstanding with Ms.
Zennie  Morris  (the  "Morris  Notes"),  the  former  president  of  the Company
totaling,  $54,500.  Pursuant  to  their  terms,  the  Morris  Notes do not bear
interest  and  the  Company  is  currently  in  default  with  respect  to their
repayment.  (See  Note  7,  Short-Term  Notes  Payable  to  Stockholder).

On  July  29, 2004, in accordance with the provisions of the Purchase Agreement,
the  Company entered into an employment agreement with Bruce K. Redding, Jr. Mr.
Redding  is  one  of  the  inventors  of  the  technologies  encompassing  the
Intellectual Property and the author or co-author of the various patents pending
transferred  to  the  Company  under  the  Purchase  Agreement.  Mr.  Redding's
employment agreement provides that he will serve as the Company's Vice President
of  Licensing  and Corporate Strategy for a period of three years at a salary of
$125,000  in  the  first  year,  $150,000 in the second year and $175,000 in the
third  year.  The  agreement  is renewable for two one-year terms at salaries of
$200,000  and  $225,000  unless  either party shall give the other 90 days prior
notice of its intent not to renew the agreement. Under the employment agreement,
the  Company  will  pay  Mr.  Redding  a signing bonus of $80,000 in eight equal
installments.  The  Company  also will provide Mr. Redding with (i) the use of a
car  during  the  term of the agreement, (ii) errors and omissions insurance for
the term of his employment, and (iii) a $1,000,000 life insurance policy payable
at  Mr.  Redding's  discretion. Under the agreement, Mr. Redding is obligated to
transfer  and  assign to the Company all inventions and improvements relating to
the  Intellectual Property. Mr. Redding is obligated to maintain all information
relating  to  the Intellectual Property and the Company in confidence during the
term  of  the  agreement  or thereafter. The Company may terminate Mr. Redding's
employment  agreement  at  any time upon notice from the Company either (i) upon
the  determination  by  the Company that his performance is not satisfactory for
any  reason (other than justifiable cause, as described below) and the giving of
notice  specifies  with  reasonable  particularity  how  such performance is not
satisfactory,  and  Mr.  Redding  has  failed  to  remedy his performance to the
reasonable  satisfaction  of  the Company within 30 days of such notice; or (ii)
upon  the  determination by the Company that there is justifiable cause, such as
his  conviction  of any crime involving the Company's money or other property or
which  constitutes  a  felony  or  the  unauthorized  disclosure of confidential
information,  any  attempt to secure improper personal profit in connection with
the  business  of the Company or his repeated and willful failure to comply with
his  duties  under  the  employment  agreement.  If  the  Company terminates Mr.
Redding's  employment  agreement  for  reasons  other  than  justifiable  cause,
disability  or  death, he will be entitled to receive severance pay in an amount
equal to one-twelfth of the sum of his then annual salary plus the amount of the
last bonus awarded to him for a period equal to one month for each month that he
was  employed  by  the  Company,  provided  however,  that  in  no  event  shall


                                      F-19
<PAGE>
such  period  be  less  than six months nor more than 12 months. Mr. Redding may
terminate  his  employment  agreement  at  any  time upon 30 days' prior written
notice  to  the  Company.

On  September  7,  2005,  as a result of the Company's default under the initial
terms  of  Mr. Redding's employment agreement, the Company entered into a letter
agreement  amending  the  terms of his initial employment agreement. Mr. Redding
agreed  to  accept  152,135  shares  of  common  stock  in forgiveness of unpaid
compensation  earned  and  due  to  him  through December 31, 2005. Of the total
152,135  shares  of  common stock, 109,010 shares of common stock were issued to
settle  $94,792  of  unpaid  compensation due to Mr. Redding as of September 30,
2005.  The  109,010 shares of common stock had a fair market value of $98,109 on
September  30,  2005,  the date of issuance. Accordingly, the Company recorded a
loss  on  debt settlement of $3,317 during the quarter ended September 30, 2005.
The  remaining  43,125  shares  of common stock were issued to settle $37,500 of
unpaid  compensation due to Mr. Redding for his salary earned during the quarter
ended  December  31,  2005.  The 43,125 shares of common stock had a fair market
value  of  $38,813  on December 31, 2005, the date of issuance. Accordingly, the
Company  recorded  a  loss on debt settlement of $1,313 during the quarter ended
December  31,  2005.  As  of  September  30,  2006, the Company owed Mr. Redding
$86,667  in  unpaid  compensation  and  $82,116  for  reimbursement  of expenses
incurred  by  Mr. Redding in the development of the transdermal technology, both
of  which  are  included  in  accounts  payable  and  accrued  expenses  on  the
Consolidated  Balance  Sheet  at  September  30,  2006.

As  a  result  of  the Company's default under Mr. Redding's original employment
agreement and various other factors, the Company concluded that Mr. Redding will
be  treated  as  a consultant rather than an employee. Accordingly, compensation
expense  incurred related to Mr. Redding's employment agreement will be recorded
as  professional  fees  and  research  and development consulting expense in the
Consolidated  Statements  of  Operations.

On  January  24, 2007, Mr. Redding notified Dermisonics that he was resigning as
the  Company's  Executive Vice President. Mr. Redding did not resign as a member
of  the  Board of Directors of the Company. The Company is not obligated to make
any  severance  payments  to  Mr.  Redding.

Prior to Mr. Redding's resignation as an officer of the Company, the Company and
Mr.  Redding  had  engaged  in settlement discussions concerning the issuance of
additional shares of common stock of the Company to Mr. Redding in settlement of
his  accrued  salary  through  December 31, 2005. In September 2005, the Company
agreed  to  issue Mr. Redding 152,135 shares of common stock valued at $1.00 per
share  in  accordance  with  a  registration  statement to be filed on Form S-8;
however,  the  Company  failed to issue the shares under a Form S-8 registration
statement, and Mr. Redding was issued 153,135 restricted shares of common stock.
No  definitive agreement to settle Mr. Redding's claim has been reached, but Mr.
Redding  has  demanded  that  the Company issue him 800,000 additional shares of
common  stock  registered  on  Form  S-8 to fully compensate him for the accrued
compensation  due  him  at  December  31,  2005.

ESI  provides  research  and  development  services  to  the  Company  on  a
month-to-month  basis.  During  the  year  ended September 30, 2006, the Company
incurred  a  total  of approximately $425,000 for such services. As of September
30,  2006,  the  Company  owed  ESI approximately $305,000, which is included in
accounts  payable and accrued expenses in the consolidated financial statements.
Mr. Redding is ESI's president and largest stockholder, and ESI is the Company's
largest  stockholder.

NOTE  13.  COMMON  STOCK  AND  WARRANTS

WARRANTS

On  October  20,  2004,  the  Company  issued Current Capital Corp. a warrant to
purchase  300,752 shares of common stock at an exercise price of $1.33 per share
as  partial consideration pursuant to a consulting agreement under which Current
Capital  agreed  to provide financial and investor public relations services and
related  matters  in  Canada. The warrant was fully vested upon issuance. During
the  year ended September 30, 2005, the Company recognized consulting expense of
$195,700  related  to  the  issuance  of  this  warrants. The warrant expired on
September  30,  2006.


                                      F-20
<PAGE>
On  December  3,  2004,  the  Company  issued Gary M. Scott warrants to purchase
3,609,023  shares  of  common  stock  at  an  exercise price of $1.33 per share,
exercisable  through December 31, 2007. Of these warrants, 150,376 warrants were
issued  pursuant to the terms of an agreement whereby Mr. Scott agreed to extend
the  due  date  of a loan to the Company in the principal amount of $500,000 and
3,458,647  warrants were issued pursuant to the terms of a consulting agreement.
The  3,458,647  warrants  were  fully vested upon issuance and had a fair market
value  of  $2,466,563  at  issuance. The Company was amortizing the value of the
warrants  over  the  three-year  term  of  the consulting agreement. However, on
September  22,  2005,  the  Company entered into an Agreement and Mutual Release
with  the  Mr. Scott, whereby releasing Mr. Scott from being required to perform
any  further  consulting  obligations.  Accordingly,  the  Company  expensed the
remaining  unamortized  amount  of the warrants. During the year ended September
30,  2005,  the Company recorded the entire $2,466,563 related to these warrants
as  consulting  expense.

On December 3, 2004, the Company issued Adil Saleh a warrant to purchase 225,564
shares  of  common  stock  at  an exercise price of $1.33 per share, exercisable
through  September  30, 2007 pursuant to a consulting agreement. The warrant was
fully  vested  upon  issuance.  During  the  year  ended September 30, 2005, the
Company  recognized  consulting  expense  of  $160,228  related to this warrant.

On  January  17,  2005, the Company issued Georg Hochwimmer warrants to purchase
225,000  shares  of  common  stock  at  an  exercise  price  of $1.33 per share,
exercisable  through  December  31, 2007 pursuant to a consulting agreement. One
hundred fifty thousand of the warrants were vested as of September 30, 2005; the
remaining  75,000  warrants  vested  on  January  31,  2006.

On  April  13,  2005,  the Company issued Robert L. Watson a warrant to purchase
225,000  shares  of  common  stock  at  an  exercise  price  of $1.33 per share,
exercisable  through  September  30,  2007. The warrant was subject to a vesting
schedule;  however,  pursuant to a termination agreement with Mr. Watson on June
30,  2005,  the  Company  agreed  to vest 100,000 of the warrants and cancel the
remaining  125,000  warrants.  During  the  year  ended  September 30, 2005, the
Company  recognized consulting expense of $74,792 related to these warrants. See
"  -  Common  Stock"  below.

On  October  5,  2005,  the  Company  issued  Trilogy  Capital  Partners,  Inc.
("Trilogy")  a  warrant  to  purchase  2,616,806  shares  of  common stock at an
exercise  price  of  $.72  per  share, exercisable through September 30, 2008 as
partial  consideration  pursuant  to  a consulting agreement under which Trilogy
agreed  to  provide marketing, financial, investor public relations, and related
matters. The warrant was fully vested at issuance and had a fair market value of
$1,236,454  at  issuance.  The  Company amortizes, on a straight-line basis, the
fair  value of this warrant over the one-year consulting agreement as consulting
expense, beginning in October 2005. As such, during the year ended September 30,
2006,  the  Company  recognized  consulting expense of $1,236,454 related to the
issuance  of  this  warrant.

COMMON STOCK

On  October  18,  2004,  the  Company  issued  to  Ananda Capital Partners, Inc.
("Ananda")  150,000  shares  of  common stock pursuant to a consulting agreement
under  which  Ananda  agreed  to provide financial and investor public relations
service  and  related  matters  in  the  United  States.  During  the year ended
September  30,  2005,  the  Company  recognized  consulting  expense of $240,000
related  to  these  shares  of  common  stock.

On  October  18,  2004,  the  Company  issued to DD Investment 600,000 shares of
common stock pursuant to a consulting agreement under which DD Investment agreed
to  provide consulting services in connection with financial and investor public
relations  and  related  matters in Germany. During the year ended September 30,
2005,  the  Company  recognized  consulting expense of $960,000 related to these
shares  of  common  stock.

On  December  4, 2004, the Company agreed to issue to ESI shares of common stock
equal  to  half of the shares ESI transferred to ReactMed in connection with the
Asset  Purchase.  Consequently,  the  Company


                                      F-21
<PAGE>
issued  75,807  shares  of  common  stock  to  ESI on February 2, 2005 to settle
liabilities  assumed  from  ESI.  The  shares were valued at $118,764 at date of
issuance.

On  March 30, 2005, the Company issued 288,462 shares of common stock to Michael
Stock,  an  accredited  investor,  at  a  price  of  $.52  per  share  for total
consideration  of  $150,000.

On  April  13, 2005, the Company issued 150,000 shares of common stock to Robert
L.  Watson at a value of $127,500 pursuant to a consulting agreement under which
Mr.  Watson  agreed to provide management consulting services. On June 30, 2005,
the  Company  entered  into  a  termination  letter  with Mr. Watson whereby the
Company  agreed to pay Mr. Watson $27,500 owed to him pursuant to his consulting
agreement.  The $27,500 owed was settled by paying Mr. Watson $10,000 in cash in
August  2005  and  issuing  him 15,487 shares of common stock valued at $17,500.
Pursuant  to  the  termination  letter the Company agreed to vest 100,000 of the
225,000  warrants  originally  issued.  See  "  -  Warrants"  above.

On  May 2, 2005, the Company issued common stock at a price of $.52 per share to
Hyman  Fein  (48,077  shares of common stock for total consideration of $25,000)
and  Victor  Fein  (163,462  shares  of  common stock for total consideration of
$85,000),  both  accredited  investors  and  Convertible  Debenture  holders.

On May 26, 2005, the Company issued shares of common stock at $0.83 per share to
Ruffa  &  Ruffa  (213,298  shares  of  common  stock  for total consideration of
$177,038)  and  Gibson,  Haglund  &  Paulsen (221,256 shares of common stock for
total  consideration  of  $183,642)  in settlement of legal services rendered by
such  law  firms.

On  September  7, 2005, the Company entered into a letter agreement amending the
terms of Mr. Redding's employment agreement. The Company agreed to issue 250,000
shares  of  common  stock  as  an  incentive  bonus  at such time as the Company
received approval to conduct its second human pilot trial on the Technology from
an  investigative  review  board,  which approval was received in November 2005.
Accordingly, the 250,000 shares of common stock were issued in November 2005 and
recorded  as compensation expense in the amount of the fair value on the date of
issuance  of  $275,000.  Additionally,  pursuant to the September 7, 2005 letter
agreement, Mr. Redding agreed to accept shares of common stock in forgiveness of
unpaid  salary  due  him.  On September 30, 2005, the Company issued Mr. Redding
109,010 shares of common stock in forgiveness of $94,792 of unpaid salary due to
him  as  of  September  30,  2005. The 109,010 shares of common stock had a fair
market  value  of  $98,109  on  the  date  of issuance. Accordingly, the Company
recorded  a loss on debt settlement of $3,317 during the quarter ended September
30,  2005. On December 31, 2005, the Company issued Mr. Redding 43,125 shares of
common  stock  in  forgiveness  of  $37,500  of  unpaid  salary due to him as of
December  31, 2005. The 43,125 shares of common stock had a fair market value of
$38,813  on  the  date  of issuance. Accordingly, the Company recorded a loss on
debt  settlement  of  $1,313  during  the  quarter  ended  December  31,  2005.

On  September  27, 2005, the Company issued 11,765 shares of common stock to The
van  de  Kamp  Group  at  a  value  of  $10,000 ($0.85 per share) for consulting
services  to  the  Company.

On  November  3,  2005, The Company entered into a consulting agreement with The
van  de  Kamp  Group to provide investor relations support. As compensation, the
Company  issued  20,000 shares of common stock, which had a fair market value on
the date of grant of $18,200. As such, during the year ended September 30, 2006,
the  Company recognized consulting expense of $18,200 related to the issuance of
these  shares  of  common  stock.

On  December  7,  2005, the Company entered into a one-year consulting agreement
with  Robert  Trainor  to  provide marketing, consulting, and strategic planning
advice in connection with the development, maintenance and growth of a market in
the European Union for the U-Strip.  As compensation, the Company issued 275,000
shares  of  common  stock, which had a fair market value on the date of grant of
$236,500.  The  Company  amortizes,  on a straight-line basis, over the one-year
term  of  the consulting agreement the fair value of the common stock.  As such,
during  the  year  ended  September  30, 2006, the Company recognized consulting
expense  of  $197,083  related  to the issuance of these shares of common stock.


                                      F-22
<PAGE>
On March 14, 2006, the Company entered into a one-year consulting agreement with
Alan  Fein  to  provide  advice  and  consult  with  the  Company concerning the
capitalization  of  the  Company  and  helping  with  private  financings.  As
compensation,  the  Company  issued  300,000 shares of common stock, which had a
fair market value on the date of grant of $171,000.  The Company amortizes, on a
straight-line basis, over the one-year term of the consulting agreement the fair
value  of  the common stock.  As such, during the year ended September 30, 2006,
the  Company recognized $99,750 as consulting expense related to the issuance of
these  shares  of  common  stock.

On March 15, 2006, the Company entered into a one-year consulting agreement with
Michael  Stock  to provide advice and help with marketing and strategic planning
in  connection  with  the development, maintenance and growth of a market in the
U.S.  for  the  U-Strip  and  ancillary  products.  As compensation, the Company
issued 325,000 shares of common stock, which had a fair market value on the date
of grant of $172,250.  The Company amortizes, on a straight-line basis, over the
one-year  term  of  the consulting agreement the fair value of the common stock.
As  such,  during  the  year  ended  September  30, 2006, the Company recognized
$100,479 as consulting expense related to the issuance of these shares of common
stock.

On March 16, 2006, the Company entered into a one-year consulting agreement with
International  Market  Trend to provide financial and investor public relations.
As  compensation, the Company issued 400,000 shares of common stock, which had a
fair market value on the date of grant of $212,000.  The Company amortizes, on a
straight-line basis, over the one-year term of the consulting agreement the fair
value  of  the common stock.  As such, during the year ended September 30, 2006,
the Company recognized $123,667 as consulting expense related to the issuance of
these  shares  of  common  stock.

On  April 5, 2006, the Company entered into a one-year consulting agreement with
EurXchange  Consulting  Ltd.  to provide financial and investor public relations
and  related  matters  in the Federal Republic of Germany.  As compensation, the
Company  issued 300,000 shares of common stock, which had a fair market value on
the date of grant of $201,000.  The Company amortizes, on a straight-line basis,
over  the one-year term of the consulting agreement the fair value of the common
stock.  As  such,  during  the  year  ended  September  30,  2006,  the  Company
recognized  $100,500  as  consulting  expense  related  to the issuance of these
shares  of  common  stock.

On April 18, 2006, pursuant to a consulting agreement, the Company issued 50,000
shares  of  common  stock  to  Avalon  International Group to provide advice to,
undertake  for,  and consult with the Company concerning strategic planning, and
corporate  development  in  connection with the operation of the business of the
Company.  The  50,000 shares of common stock had a fair market value on the date
of  grant  of  $27,500.  As  such, during the year ended September 30, 2006, the
Company  recognized  $27,500  as  consulting  expense related to the issuance of
these  shares  of  common  stock.

On  May  15, 2006, the Company entered into a one-year consulting agreement with
Aaron  Lasry  to  provide  advice to, undertake for and consult with the Company
concerning  the  capitalization  of  the  Company  and  shall  be  specifically
responsible  for  assisting  in  the  negotiation  and  completion  of  private
financings  for the Company.  As compensation, the Company issued 160,000 shares
of  common stock, which had a fair market value on the date of grant of $46,400.
The  Company  amortizes, on a straight-line basis, over the one-year term of the
consulting  agreement  the  fair value of the common stock.  As such, during the
year  ended  September  30,  2006,  the Company recognized $15,467 as consulting
expense  related  to  the  issuance  of  these  shares  of  common  stock.

During  the  year  ended  September  30, 2006, the Company was in the process of
settling  an intellectual property claim with an unrelated party. The settlement
agreement  required  the  Company to issue 200,000 shares of common stock to the
unrelated  party  in  consideration of any intellectual property claims that the
unrelated  party may have against the Company. As such, included in professional
fees  and  research  and  development  consulting  expense  for  the  year ended
September  30,  2006 is the estimated fair value of the common stock of $34,000.
As  part  of  the  settlement agreement, the Company is also required to pay the


                                      F-23
<PAGE>
unrelated party $30,000 in cash, of which $15,000 was paid by September 30, 2006
and  the  remaining  $15,000  is  due  by  December  31,  2006.

COMMON STOCK AND WARRANTS

On  October  18,  2004, the Company issued to BX Inc. ("BX") 1,425,000 shares of
common  stock  and  a  warrant  to purchase 714,286 shares of common stock at an
exercise  price  of  $1.33  per  share. The common stock and warrant were issued
pursuant  to  an  agreement  under which the Company agreed to compensate BX for
services  rendered  with  respect  to  the  acquisition  by  the  Company of the
Intellectual  Property.  The  warrant  expired  on  September  30,  2006.

On  October  18, 2004, the Company issued to Integrated Inventions (Canada) Inc.
("III")  1,090,833  shares  of  common  stock  and a warrant to purchase 546,784
shares of common stock at an exercise price of $1.33 per share. The common stock
and  warrant were issued pursuant to an agreement under which the Company agreed
to  compensate  III for services rendered with respect to the acquisition by the
Company  of  the Intellectual Property and reimburse it for expenses incurred in
connection  with  such  acquisition.  The warrant expired on September 30, 2006.

On  February  2,  2005,  the  Company  issued  416,667 shares of common stock to
Integrated  Inventions  (Canada) Inc. ("III") valued at $738,792 and warrants to
purchase  208,333 shares of common stock at an exercise price of $1.33 per share
exercisable  through  December  31,  2007.  The  fair  value  of the warrants to
purchase  208,333  shares  of  common  was  $97,125 at the date of issuance. The
common  stock  and  warrants were issued in consideration for the forgiveness of
$375,000  of  indebtedness  of  the Company to III. Accordingly, during the year
ended  September  30,  2005, the Company recognized a loss on debt settlement of
$363,792.

On  February 1, 2006, the Company approved the offering (the "2006 Offering") of
5,200,000  units  (the  "Units")  for  a  total  offering price of $1,300,000 to
accredited  investors,  consisting  of  shares  of  common  stock  and  attached
warrants.  The  purchase  price  of one Unit is $0.25. Each Unit consists of one
share  of common stock and a warrant to purchase one share of common stock at an
exercise  price  of $0.25. The warrants are exercisable at any time prior to the
second  anniversary  from the date of grant. During the year ended September 30,
2006,  the  Company  raised $711,000 and issued 2,844,000 shares of common stock
and  warrants to purchase up to 2,844,000 shares of stock in accordance with the
terms  of  the  2006  Offering.

In  accordance  with  the terms of the 2006 Offering, the Company is required to
file  a  Registration  Statement  on  Form  SB-2  (the "Registration Statement")
covering  the  common stock and warrants issued under the 2006 Offering with the
SEC  no  later  than  forty-five  (45)  days  after the closing date of the 2006
Offering  (the  "Filing  Date")  and use the Company's best efforts to cause the
Registration  Statement to become effective within one hundred twenty (120) days
after  the  closing  of  the 2006 Offering. If the Registration Statement is not
filed  by  the Filing Date or declared effective within one hundred twenty (120)
days,  then cash delay payments equal to 1.5% per month shall apply for a period
not  to  exceed  twelve  (12)  months  from  the date of the closing of the 2006
Offering  (the  "Cash Penalty"). The 2006 Offering closed on April 18, 2006 (the
"Closing  Date").  As  of  September  30,  2006,  the  Company  had  not filed a
Registration  Statement  and  is therefore in default with respect to the filing
requirements  of the 2006 Offering. As such, during the year ended September 30,
2006,  the  Company  recorded an accrual of $37,410 for the Cash Penalty owed to
the investors in the 2006 Offering. The Cash Penalty was accounted for as a cost
of  the  2006  Offering,  a  deduction from the proceeds received under the 2006
Offering  and  recorded  as  a  deduction  from  additional  paid-in  capital.

In  connection  with  the  2006  Offering,  the Company paid $65,500 in cash and
issued  five  warrants  to purchase a combined 262,000 shares of common stock as
compensation  for  raising  the  funds.  The  warrants have an exercise price of
$0.25  per share.  One warrant to purchase 20,000 shares of common stock expires
on  February  28, 2008.  The four warrants to purchase a combined 242,000 shares
of  common  stock  expire on March 31, 2008.  The warrants are fully vested upon
issuance.


                                      F-24
<PAGE>
During  the  quarter ended September 30, 2006, the Company sold 1,300,000 shares
of  its  common  stock  with  attached  warrants  to  Mercatus  &  Partners,  LP
("Mercatus")  for  a purchase price of $0.25 per share (the "Mercatus Offering")
for  total  proceeds  of  $325,000. In connection with the sale of the 1,300,000
shares  of  common  stock, the Company granted Mercatus a warrant to purchase an
additional  1,300,000  shares  of common stock at an exercise price of $0.25 per
share.  The  warrant  expires  on  September  30,  2009.

In  connection  with the Mercatus Offering, the Company granted a warrant Avalon
International  Group  to purchase 130,000 shares of common stock as compensation
for raising the funds.  The warrant has an exercise price of $0.25 per share and
expires  on  September  30,  2009.  The  warrant  is fully vested upon issuance.

CONVERTIBLE NOTES AND WARRANTS

On  November  16,  2004,  the  Company  issued  a convertible promissory note to
Kenneth  Hovden,  an accredited investor in the principal amount of $25,000 (the
"Hovden  Note").  The Hovden Note bears interest at the rate of 8% per annum and
is convertible into shares of common stock at $.82 per share. In connection with
the  Hovden  Note,  the  Company  issued Mr. Hovden a warrant to purchase 15,283
shares  of  common  stock  at  an exercise price of $1.33 per share. The warrant
expired  on  October  31,  2005.  On  July  18,  2006,  the  Company  repaid the
outstanding principal and related accrued interest of the Hovden Note. (see Note
9,  Short-Term  Convertible  Debt).

On  December  21,  2005,  the Company issued convertible promissory notes ("2006
Convertible  Notes") to four investors, totaling $130,000.  The 2006 Convertible
Notes  bear  interest  at  12%  per  annum  and mature on December 21, 2007.  In
connection  with  the  2006  Convertible  Notes,  the Company issued warrants to
purchase  195,000  shares  of the Company's common stock at an exercise price of
$1.00  per  share ("2006 Convertible Note Warrants").  The 2006 Convertible Note
Warrants  are  exercisable  until  December  21,  2007.

In  connection with the 2006 Convertible Notes, the Company paid $15,792 in cash
and  issued two warrants to purchase a total of 14,444 shares of common stock to
one  of the 2006 Convertible Note holders as compensation for raising the funds.
The  warrants  have  an exercise price of $1.00 per share and expire on December
21,  2008.  The  warrants  are  fully  vested  upon  issuance.

On  July  14, 2006, the Company issued a $500,000 convertible promissory note to
Staples  Management  (the  "Staples Convertible Note").  The Staples Convertible
Note  bears  interest  at  10%  per  annum  and  matures  on  July 14, 2007.  In
connection  with  the  Staples Convertible Note, the Company issued a warrant to
purchase  3,125,000 shares of the Company's common stock at an exercise price of
$0.16  per share ("Staples Convertible Note Warrants").  The Staples Convertible
Note  Warrants  are  exercisable  until  July  14,  2009.

CONVERTIBLE NOTES

On  August  29,  2005,  the  Company borrowed $784,501 from VEM Aktienbank AG, a
Munich,  German  investment  bank  ("VEM").  In  consideration  of the loan, the
Company  issued two convertible promissory notes in favor of VEM. The promissory
notes  mature  two years from the date of issuance and bear interest at the rate
of 10% per annum (payable at maturity). The notes are convertible into shares of
common stock at a conversion price equal to 80% of the average closing bid price
per  share of common stock during the five trading days immediately prior to any
such  conversion;  provided  however,  that the Company is not required to issue
more  than  1,389,474  shares  upon the conversion of the total amount due under
both  of  the  notes.

In September 2006, all five of the Convertible Debenture holders exercised their
conversion  right  pursuant to the terms of the Convertible Debentures (see Note
9:  Short  Term  Convertible  Debt,  Convertible  Debentures).  Accordingly, the
Company  issued  1,777,749  shares  of  common stock.  Additionally, the Company
agreed  to  issue  warrants  to  the  Convertible  Debenture holders to purchase
1,777,749  shares  of common stock at an exercise price of $0.16 per share.  The
warrants  expire  on  September  30,  2009.


                                      F-25
<PAGE>
A  summary  of  warrant-related  activity  is  as  follows:

<TABLE>
<CAPTION>
                                                                          Number of
                                                                          Warrants       Weighted Average
                                                                         Outstanding      Exercise Price
                                                                      -----------------  -----------------
<S>                                                                   <C>                <C>
Outstanding at September 30, 2005                                            5,945,025   $            1.33

Issued for services                                                          3,011,250                0.65
Issued for loan fees                                                            12,000                1.00
Issued in connection with convertible notes                                  3,320,000                1.00

Issued in connection with conversion of convertible debentures               1,777,749                0.16

Issued in connection with sale of common stock and attached warrants         4,144,000                0.25

Expired                                                                     (1,577,105)               1.33
                                                                      -----------------
Outstanding at September 30, 2006                                           16,632,919   $            0.59
                                                                      =================
</TABLE>

The following is a summary of warrants outstanding, all of which are exercisable
at  September  30,  2006:

<TABLE>
<CAPTION>
                                              WEIGHTED
                                               AVERAGE
                                              REMAINING          WEIGHTED
     EXERCISE                NUMBER       CONTRACTUAL LIFE        AVERAGE
      PRICES              OUTSTANDING          (YEARS)        EXERCISE PRICE
----------------------  ----------------  -----------------  -----------------
<S>  <C>                <C>               <C>                <C>
$         0.16                 4,902,749               2.87  $            0.16
          0.25                 4,536,000               1.97               0.25
          0.72                 2,616,806               2.00               0.72
          1.00                   209,444               1.29               1.00
          1.33                 4,367,920               1.23               1.33
                        ----------------
$    0.16-1.33                16,632,919               2.04  $            0.59
                        ================
</TABLE>

The  warrants  issued during the year ended September 30, 2006 were valued using
the  Black-Scholes option pricing model with the following assumptions: expected
volatility  ranging from 71% to 383%, risk free interest rates ranging from 3.7%
to  5.17%,  expected  lives  ranging  from two to three years, and a 0% dividend
yield.

NOTE  14.  INCOME  TAXES

The Company is liable for income taxes in the United States. As of September 30,
2006,  the  Company  did  not  have  any  income  for  income  tax purposes and,
therefore,  no  income  tax  liability  or  expense  has  been recorded in these
consolidated  financial  statements.

The Company has the following deferred tax assets at September 30:

<TABLE>
<CAPTION>
                                         2006           2005
                                     -------------  -------------
<S>                                  <C>            <C>

Net operating losses carry forwards  $  2,445,000   $  1,465,000

Stock compensation expense              1,802,000      1,370,000
                                     -------------  -------------
Accrued expenses                          180,000          5,000
                                     =============  =============
Total deferred tax assets            $  4,427,000   $  2,840,000

Less valuation allowance              ($4,427,000)   ($2,840,000)
                                     =============  =============
Net deferred tax assets              $          -   $          -
</TABLE>


                                      F-26
<PAGE>
The  net  increase  in  the  valuation  allowance  for  deferred  tax assets was
$1,587,000  and  $2,296,000 for the years ended September 30, 2006 and September
30,  2005.  The  Company  has  provided  a  full valuation allowance against the
deferred  tax assets because the Company believes the use of these assets cannot
be  reasonably  assured.

For  federal  tax purposes, the Company has net operating loss carry forwards at
September 30, 2006 available to offset future federal taxable income, if any, of
approximately  $6,985,000.  Due  to  stock  ownership changes in prior years the
Company's  ability  to  offset  future  taxable  income with these losses may be
limited.  These  operating  loss  carry  forwards  begin  expiring  in  2020.

The  effects  of  state  income  taxes  were  insignificant  for the years ended
September  30,  2006  and  September  30,  2005.

NOTE  15.  SUBSEQUENT  EVENTS

On  October  3,  2006,  the  Company issued a convertible promissory note in the
principal  amount of $250,000 to Staples Management. The promissory note accrues
interest at 10% per annum and matures on September 30, 2007. Interest is payable
at  maturity.  In  the event of default, the promissory note is convertible into
shares of common stock at a conversion price equal to 75% of the average closing
price  per  share during the 10 trading days immediately prior to the conversion
date.

On  December  1,  2006,  the  Company received a notice of default from ESI as a
result  of  the  Company's  inability  to make the final payment of $250,000 due
under  the  Purchase  Agreement  with  ESI.

On  January 24, 2007, Bruce K. Redding notified Dermisonics, Inc. (the "Company"
or  "Dermisonics")  that  he  was  resigning  as  the  Company's  Executive Vice
President.  Mr.  Redding did not resign as a member of the Board of Directors of
the  Company.  Mr.  Redding is also the Chief Executive Officer, a member of the
Board  of Directors, and majority shareholder of ESI, the largest shareholder of
the  Company.

On  January  24,  2007, Mr. Redding also notified the Company that ESI considers
the  Company  in breach of the Company's final $250,000 payment obligation under
the  terms  of  the  Purchase  Agreement.  The Purchase Agreement provided for a
$500,000 initial payment and eight quarterly payments of $250,000 as part of the
consideration  for  the  purchase  by  the  Company  of  patent and other rights
relating  to  the  U-Strip  Technology.  The  final  $250,000 payment was due on
December  1, 2006, subject to the Company's right to cure any default during the
30-day  period  following  receipt  of  notice  from  ESI  ("cure  period").

On  December 28, 2006, the Board of Directors of the Company considered an offer
for  a $500,000 capital infusion (the "$500,000 Offer"), which could if accepted
provide capital to make the final payment obligation of $250,000 during the cure
period.  Based  on  the  representation  by  Mr. Redding that ESI would permit a
further  extension of the cure period to allow the Company the time to raise the
capital for the payment on terms more favorable to the Company than the $500,000
Offer,  the  Company  rejected  the  $500,000  Offer.  On December 29, 2006, Mr.
Redding notified the Company that any decision to extend the cure period for the
final  payment  would  be  determined  by  the  ESI Board of Directors, with Mr.
Redding  abstaining  from  any  vote  on  the  matter.

In  an  attempt  to cure the default without having cash available, an agreement
was reached between the Company and Redmoor Investment Ltd. ("Redmoor") to apply
a portion of monies owed to Redmoor by ESI toward the $250,000 final payment the
Company  owes  ESI.  Under  the  proposed  agreement  with


                                      F-27
<PAGE>
Redmoor,  the  Company  would  be indebted to Redmoor for $250,000 and the final
$250,000  payment  obligation  to  ESI  would be cured. Redmoor was one of ESI's
creditors in ESI's chapter 11 bankruptcy, with a claim in excess of $600,000, of
which  $325,000  was  to have been paid to by ESI to Redmoor in cash in December
2006  but  had not been paid as of the date of this report. On January 23, 2007,
the  Company  notified  ESI's counsel that $250,000 of the funds owed to Redmoor
should  be  applied  to  the final $250,000 payment under the Purchase Agreement
(the "January 2006 Tender"). ESI rejected the January 2006 Tender on the grounds
that  the terms of the Purchase Agreement do not require ESI to accept the offer
from  the  Company to cure the default in the manner proposed by the Company and
that  the  cure  period had not been extended. ESI also asserted that the patent
rights  and  related technology comprising the U-Strip Technology purchased from
ESI by the Company pursuant to the Purchase Agreement have reverted to ESI under
the  terms  of  the  Purchase  Agreement.

Management  of the Company believes that the January 2006 Tender was a bona fide
attempt  to cure the default of the final $250,000 payment, will seek to enforce
its  rights  through  litigation against ESI if a satisfactory settlement of the
dispute  cannot  be  achieved.

If the Company does not succeed in negotiating a settlement or in litigation, it
will have no rights in the U-Strip Technology and will be forced to abandon its
current business plan.

In  January  2007,  as  a  result  of  not  having  the  capital to meet payroll
obligations,  the  Company laid off all of its employees. If and when additional
funding  is  obtained, the Company will re-hire former employees or may hire and
train  new  employees.  The  Company  was  not  obligated  to make any severance
payments for salaries, health benefits or accrued vacation and sick time related
to  the  termination  of  any  of  its  employees.

In  addition  to  what  ESI  has billed the Company for research and development
consulting  services,  ESI  has  informed  the  Company  that  it  has  spent
approximately  $385,000 on the development of one of the new applications of the
U-Strip  Technology  designed to deliver cosmetic formulations to the surface of
the skin (the "U-Wand"). ESI has asserted that it owns the rights to the U-Wand;
however,  the Company believes that the technology related to the U-Wand is part
of  the  U-Strip  Technology  owned  by  the  Company. If the Company is able to
demonstrate  that it is the owner of the rights to the U-Wand through litigation
or  settle  the  questions  of ownership of the U-Wand rights through settlement
negotiations  with  ESI,  the Company would have an additional liability for the
expenses  incurred  by ESI in the development of the U-Wand. The $385,000 is not
reflected  in  the  Company's  Consolidated  Financial  Statements.

ESI has also asserted that the Company owes ESI $90,000 for patent fees ESI paid
to  its  patent  counsel  at  the  time  of the Purchase Agreement; however, the
Company  believes  that  the  $90,000  patent  expense was included in the total
consideration  paid  in  accordance with the terms of the Purchase Agreement and
that  no  additional  amount  is  owed  to  ESI  with  regards  to  this matter.

Prior to Mr. Redding's resignation as an officer of the Company, the Company and
Mr.  Redding  had  engaged  in settlement discussions concerning the issuance of
additional shares of common stock of the Company to Mr. Redding in settlement of
his  accrued  salary  through  December 31, 2005. In September 2005, the Company
agreed  to  issue Mr. Redding 152,135 shares of common stock valued at $1.00 per
share  in  accordance  with  a  registration  statement to be filed on Form S-8;
however,  the  Company  failed to issue the shares under a Form S-8 registration
statement, and Mr. Redding was issued 153,135 restricted shares of common stock.
No  definitive agreement to settle Mr. Redding's claim has been reached, but Mr.
Redding  has  demanded  that  the Company issue him 800,000 additional shares of
common  stock


                                       29
<PAGE>
registered on Form S-8 to fully compensate him for the accrued compensation due
him at December 31, 2005.

On  February  15,  2007,  the  Company  issued,  one-year,  10% interest bearing
convertible  promissory  notes  (the  "Promissory  Notes")  to  two  unrelated
individuals  in  the  aggregate  amount  of  $50,000.  The  Promissory Notes are
convertible  into shares of common stock at the lesser of $0.10 per share or 70%
of  the  average  of the three lowest closing bid prices of the Company's common
stock  in  the  30-day  period  prior  to conversion. Warrants to purchase up to
1,000,000  shares  of  common  stock  were  also  issued  in connection with the
Promissory  Notes.  These warrants have an exercise price of $0.10 per share and
expire  on February 15, 2010. The terms of the Promissory Notes were approved by
the  Board  of  Directors.

ITEM  8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING AND
FINANCIAL  DISCLOSURE

     None.

ITEM 8A. CONTROLS AND PROCEDURES

     Under  the  supervision  and  with  the  participation  of  our management,
including  our  interim  Chief  Executive  Officer  and  interim Chief Financial
Officer,  we  evaluated  the  effectiveness  of  the design and operation of our
disclosure  controls  and  procedures  (as  defined  in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on that evaluation,
our  interim  Chief  Executive  Officer and interim Chief Financial Officer have
concluded  that,  as  of  the  end  of  the  period  covered by this report, our
disclosure  controls  and  procedures  are  adequately  designed and functioning
properly and effectively to ensure that the information required to be disclosed
by  us  in  the  reports  we  file or submit under the Exchange Act is recorded,
possessed,  summarized  and  reported,  within the time periods specified in the
applicable  rules  and forms. During the period covered by this Annual Report on
Form  10-KSB,  there  was  no  change  in  our  internal  control over financial
reporting  (as defined in Rule 13a-15(f) under the Exchange Act) that materially
effected,  or  is  reasonably  likely to materially effect, our internal control
over  financial  reporting.

MATERIAL WEAKNESS IDENTIFIED

     In connection with the preparation of our financial statements for the year
ended  September  30,  2006,  certain  significant internal control deficiencies
became  evident  to  management  which,  in  the  aggregate,  represent material
weaknesses,  including,

     (i) inadequate management oversight as evidenced by lack of independent
members of the board of directors, lack of a designated audit committee, and
lack of an audit committee financial expert;
     (ii) insufficient staffing in our daily accounting functions;
     (iv) insufficient segregation of incompatible duties; and
     (v) insufficient corporate governance policies.

     As  part  of the communications from our auditors, Peterson Sullivan, PLLC,
with  respect  to  Peterson  Sullivan's audit procedures for 2006, they informed
management  that  these deficiencies constituted material weaknesses, as defined
by  Auditing  Standard  No.  2,  "An  Audit  of  Internal Control Over Financial
Reporting  Performed  in  Conjunction  with  an  Audit of Financial Statements,"
established  by  the  Public  Company  Accounting  Oversight  Board.

     We  intend  to  take appropriate and reasonable steps to make the necessary
improvements  to remediate these deficiencies. We intend to consider the results
of  our  remediation  efforts  and  related testing as part of our year-end 2007
assessment  of  the  effectiveness  of  our  internal  control  over  financial
reporting.


ITEM 8B. OTHER INFORMATION


                                       30
<PAGE>

     None.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS  AND  EXECUTIVE  OFFICERS.

     The following table sets forth certain information about our directors and
executive officers as of February 14, 2007:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------
                                                        Year First
        Name                 Position         Age  Became a Director or
                                                    Executive Officer
---------------------  ---------------------  ---  --------------------
<S>                    <C>                    <C>  <C>
Bruce H. Haglund       Chairman and Director   55          2004

---------------------  ---------------------  ---  --------------------
Bruce K. Redding, Jr.  Director                54          2004

---------------------  ---------------------  ---  --------------------
Grant Atkins           Director                46          2006

-----------------------------------------------------------------------
</TABLE>

     Bruce  H. Haglund has served as the Chairman of the Company and its interim
Chief  Executive  Officer  and  interim  Chief Financial Officer since August 6,
2004.  Mr.  Haglund  has  practiced law in Orange County, California since 1980.
From  May  2003  to  August  2004,  Mr.  Haglund  was employed as Executive Vice
President  and  General Counsel of Veterinary Pet Services, Inc. In August 2004,
Mr.  Haglund  returned  to  the  private  practice of law with Gibson, Haglund &
Paulsen  in  Irvine,  California.  Mr.  Haglund  will serve as the interim Chief
Executive  Officer  of  the Company until the Company completes its search for a
full-time  Chief  Executive Officer with pharmaceutical industry experience. See
"Item  12.  Certain  Relationships  and  Related  Transactions."

     Bruce  K.  Redding,  Jr.  joined the Company as Executive Vice President of
Licensing and Corporate Strategy on July 9, 2004. Mr. Redding has been the Chief
Executive  Officer  of Encapsulation Systems, Inc. ("ESI") since its founding in
1988  and  has  been  employed  by  ESI  full-time since 1994. In July 2006, Mr.
Redding was appointed to the Board of Directors. In January 2007, he resigned as
an  officer  of the Company. See "Item 1. Description of Business - Overview and
Recent  Developments"  and  "Item  12.  Certain  Relationships  and  Related
Transactions."

     Grant  R.  Atkins  has  been a member of the Board of Directors since March
2006. Mr. Atkins has been self-employed for the last 10 years and has acted as a
financial  and  project  coordination  consultant  to  clients in government and
private  industry.  He  has extensive multi-industry experience in the fields of
finance,  administration  and  business  development.  He is currently the Chief
Executive  Officer of Lexington Resources, Inc. ("Lexington"), a position he has
held  since  July  2003,  and  has been a member of its Board of Directors since
September  1998.


                                       31
<PAGE>
Energy Corp. ("Morgan"). Mr. Atkins received a Bachelor of Commerce degree from
the University of British Columbia.

SECTION 16(A): BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

     Pursuant  to  Section  16(a)  of  the  Exchange  Act of 1934, the executive
officers  and  directors  of the Company in addition to any person who owns more
than  10%  of  the  common  stock  of  the  Company are required to report their
ownership  of the common stock of the Company and changes to such ownership with
the  Securities  and Exchange Commission.  Based on a review of such reports and
information  provided  to the Company, the Company believes that during the most
recent  fiscal  year  the  executive  officers and directors of the Company have
complied  with  applicable  filing  requirements  under  Section  16(a).

CODE OF CONDUCT AND ETHICS

     As  yet,  we have not adopted a code of conduct and ethics that would apply
to our directors, officers and employees. We expect to adopt such a code at such
time  as  we  appoint additional members to our Board of Directors and will post
the  code  of  conduct  and  ethics  on  our  Web  site.

ITEM 10.  EXECUTIVE COMPENSATION

DIRECTORS COMPENSATION.

     We  currently  have no provision for compensating or reimbursing directors.
We  expect  to adopt such a policy at such time as we appoint additional members
to  our  Board  of  Directors.

EXECUTIVE COMPENSATION.

     The  following  table  sets forth certain information concerning the annual
and  long-term  compensation  of  our  Chief  Executive  Officer  and  our other
executive  officer  having  annual compensation in excess of $100,000 during the
last  fiscal  year  (the  Named  Executives)  for  the  last three fiscal years.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                               SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------
                                                                       Long Term Compensation
                                                            -----------------------------------------
                                 Annual Compensation                 Awards                Payouts
------------------------  --------------------------------  --------------------------  -------------
                                                            Restricted    Securities
Name and                                     Other Annual      Stock      Underlying
Principle                  Salary    Bonus   Compensation    Award(s)    Options/SARs   LTIP Payouts      All Other
Position            Year    ($)       ($)         ($)           ($)           (#)            ($)       Compensation ($)
------------------  ----  --------  -------  -------------  -----------  -------------  -------------  ----------------
<S>                 <C>   <C>       <C>      <C>            <C>          <C>            <C>            <C>
Bruce H.            2006       -0-      -0-            -0-          -0-            -0-            -0-               -0-
Haglund,            2005       -0-      -0-            -0-          -0-            -0-            -0-               -0-
Chairman (1)        2004       -0-      -0-            -0-          -0-            -0-            -0-               -0-
------------------  ----  --------  -------  -------------  -----------  -------------  -------------  ----------------
Bruce K.            2006   154,167      -0-            -0-          -0-            -0-            -0-               -0-
Redding,            2005   129,167      -0-            -0-          -0-            -0-            -0-               -0-
Vice President (2)  2004    15,625   80,000            -0-          -0-            -0-            -0-               -0-
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       32
<PAGE>

(1)  Mr.  Haglund  joined  the  Company  as  its Chairman on August 6, 2004. Mr.
     Haglund receives no compensation for his service as an officer and director
     of the Company; however, Wilson, Haglund & Paulsen, a law firm in which Mr.
     Haglund  is  a principal, receives compensation for legal services provided
     to  the  Company.  See  "Item  12.  Certain  Relationships  and  Related
     Transactions."

(2)  Mr. Redding joined the Company as its Executive Vice President of Licensing
     and  Corporate  Strategy on July 29, 2004. Mr. Redding is employed pursuant
     to  the  terms of an employment agreement and a subsequent letter agreement
     entered  into  on  September 7, 2005 as described under "Item 10. Executive
     Compensation-Employment  Agreements  with Management." Although Mr. Redding
     was  entitled  to  $15,625  in salary and $80,000 in bonus payments for the
     year  ended  September  30,  2004,  the Company paid no compensation to him
     during  that  period.  Mr. Redding received payment of the $80,000 bonus in
     September 2005. Although Mr. Redding was entitled to $129,167 in salary for
     the year ended September 30, 2005, the Company paid him $50,000 in cash and
     issued  109,010  shares  of common stock as full repayment of the remaining
     $94,792  due  him  for  the  years  ended  September 30, 2005 and 2004. The
     109,010  shares  of  common  stock were issued pursuant to the terms of the
     amended Employment Agreement. Although Mr. Redding was entitled to $154,167
     in  salary  for  the  year  ended  September 30, 2006, the Company paid him
     $54,622  in  cash and issued 43,125 shares of common stock in settlement of
     $37,500  of  salary. As of September 30, 2006, the Company owes Mr. Redding
     $86,667  in  accrued  salary. See "Note 15 Subsequent Events" regarding the
     dispute  between  Mr. Redding and the Company as to the number of shares of
     the  Company's  common  stock  that  Mr.  Redding believes should have been
     issued  to  him  in  settlement  his  accrued  salary  for  the years ended
     September  30,  2006  and  2005.

EMPLOYMENT AGREEMENTS WITH MANAGEMENT.

     On  July  29,  2004,  in  accordance  with  the  provisions of the Purchase
Agreement,  we  entered  into an employment agreement with Bruce K. Redding, Jr.
Mr.  Redding  is  one  of  the  inventors  of  the technologies encompassing the
Intellectual Property and the author or co-author of the various patents pending
transferred  to  the  Company  under  the  Purchase  Agreement.  Mr.  Redding's
employment  agreement  provides  that  he  will  serve  as our Vice President of
Licensing  and  Corporate  Strategy  for  a period of three years at a salary of
$125,000  in  the  first  year,  $150,000 in the second year and $175,000 in the
third  year.  The  agreement  is renewable for two one-year terms at salaries of
$200,000  and  $225,000  unless  either party shall give the other 90 days prior
notice of its intent not to renew the agreement. Under the employment agreement,
the  Company  will  pay  Mr.  Redding  a signing bonus of $80,000 in eight equal
installments.  The  Company  also will provide Mr. Redding with (i) the use of a
car  during  the  term of the agreement, (ii) errors and omissions insurance for
the term of his employment, and (iii) a $1,000,000 life insurance policy payable
at  Mr.  Redding's  discretion. Under the agreement, Mr. Redding is obligated to
transfer  and  assign to the Company all inventions and improvements relating to
the  Intellectual Property. Mr. Redding is obligated to maintain all information
relating  to  the Intellectual Property and the Company in confidence during the
term  of  the  agreement  or thereafter. The Company may terminate Mr. Redding's
employment  at  any  time  upon  notice  from  the  Company  either (i) upon the
determination  by  the  Company that his performance is not satisfactory for any
reason  (other  than  justifiable  cause,  as described below) and the giving of
notice  specifies  with  reasonable  particularity  how  such performance is not
satisfactory,  and  Mr.  Redding  has  failed  to  remedy his performance to the
reasonable  satisfaction  of  the  Company


                                       33
<PAGE>
within  30  days  of  such notice; or (ii) upon the determination by the Company
that  there  is justifiable cause, such as his conviction of any crime involving
the  Company's  money  or  other  property  or which constitutes a felony or the
unauthorized  disclosure  of  confidential  information,  any  attempt to secure
improper  personal  profit in connection with the business of the Company or his
repeated  and  willful  failure  to  comply with his duties under the employment
agreement.  If  we  terminate  Mr.  Redding's  employment for reasons other than
justifiable cause, disability or death, he will be entitled to receive severance
pay  in an amount equal to one-twelfth of the sum of his then annual salary plus
the  amount of the last bonus awarded to him for a period equal to one month for
each  month  that  he  was employed by the Company, provided however, that in no
event  shall  such  period  be less than six months nor more than 12 months. Mr.
Redding  may  terminate  his  employment at any time upon 30 days' prior written
notice  to  the  Company.

     On January 24, 2007, Mr. Redding notified Dermisonics that he was resigning
as  the  Company's  Executive  Vice  President.  Mr. Redding did not resign as a
member  of  the  Board  of  Directors  of  the  Company.

     On September 7, 2005, we entered into a letter agreement amending the terms
of  Mr.  Redding's  employment  agreement.  Mr. Redding agreed to accept 152,135
shares  of  common  stock  in  forgiveness  of $132,292 in unpaid salary due him
through  December  31,  2005.  We  also agreed to issue 250,000 shares of common
stock  as  an  incentive  bonus at such time as the Company received approval to
conduct  its  second  human  pilot trial on the Technology from an investigative
review  board,  which  approval was received in November 2005. We also agreed in
the  September  2005  letter  agreement  to renegotiate Mr. Redding's employment
agreement;  however, due to the Company's lack of capital and on-going inability
to  meet  the terms of the employment agreement with Mr. Redding, he resigned as
an  officer of the Company in January 2007. See "Item 1. Description of Business
-  Overview  and  Recent  Developments"

OPTION GRANTS IN THE LAST FISCAL YEAR

     We  have  not  adopted  any  form of employee stock option or benefit plan.

FISCAL YEAR-END OPTION NUMBERS AND VALUES

     N/A

EQUITY COMPENSATION PLAN INFORMATION

     N/A

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following table sets forth certain information as of February 14, 2007
by (i) all persons who are known to the Company to beneficially own more than 5%
of  the  outstanding  shares  of  the  Company's  common stock, and (ii) by each
director,  director  nominee,  and  executive officer and (iii) by all executive
officers  and  directors  as  a  group:


                                       34
<PAGE>
<TABLE>
<CAPTION>
Name of                                                           Amount of
Beneficial Owner (2)                 Positions and Offices Held   Beneficial Ownership (1)  Percent Class (1)
----------------------------------  ----------------------------  ------------------------  -----------------
<S>                                 <C>                           <C>                       <C>
Encapsulation Systems, Inc.(3)      Stockholder                                 17,265,023             35.1 %
Trilogy Capital Partners, Inc. (4)  Stockholder                                  2,616,806               5.1%
Bruce K. Redding, Jr. (5)           Executive Vice President and                   402,135               0.8%
                                    Director
Bruce H. Haglund                    Chairman and Director,                         221,256               0.5%
                                    Interim Chief Executive
                                    Officer and Interim Chief
                                    Financial Officer
Staples Management (6)              Stockholder                                  3,125,000               6.0%
Mercatus & Partners LP (7)          Stockholder                                  2,600,000               5.2%
Grant R. Atkins                     Director                                           -0-                 0%
All officers and directors                                                         623,391               1.3%
as a group (3 persons)
</TABLE>
          Footnotes
     -----------------------
     (1)  Calculated pursuant to rule 13d-3(d) of the Exchange Act.
          Beneficial ownership is calculated based on 49,224,005 shares of
          Common Stock issued and outstanding on a fully diluted basis as of
          February 14, 2007. Unless otherwise stated below, each such person has
          sole voting and investment power with respect to all such shares.
          Under Rule 13d-3(d) of the Exchange Act, shares not outstanding which
          are subject to options, warrants, rights or conversion privileges
          exercisable within 60 days are deemed outstanding for the purpose of
          calculating the number and percentage owned by such person, but are
          not deemed outstanding for the purpose of calculating the percentage
          owned by each other person listed.

     (2)  The address for each of the persons identified in the foregoing
          table is care of the Company.

     (3)  Includes shares of common stock registered in the name of
          Encapsulation Systems, Inc. ("ESI"). Bruce K. Redding, Jr., our
          Executive Vice President of Licensing and Corporate Strategy is the
          president, chief executive officer, a director, and the owner of
          approximately 80% of the capital stock of ESI. These shares are being
          held by a third party escrow agent subject to release only as follows:

          (A)  ESI shall be entitled to distribute a number of the ESI
               Shares as may be required in order to satisfy claims of
               non-affiliates of ESI, as provided in a plan of reorganization of
               ESI to be approved by the Bankruptcy Court.

          (B)  Commencing after July 28, 2005, one ESI Share shall be
               released to ESI for each dollar of gross revenue derived by the
               Company from the commercial exploitation of the Intellectual
               Property.

          (C)  On February 28, 2007 any ESI Shares held in escrow shall be
               released to ESI.

          ESI is not entitled to vote the ESI Shares held in escrow on any
          matters put to the Company's stockholders, except as to any proposed
          capital reorganization or reclassification with respect to the
          Company's equity securities, until they are released from escrow as
          described above. While the ESI Shares are held in escrow, the holders
          shall be entitled to participate in any dividends or distributions
          made by the Company to all holders of common stock and to any payment
          or distribution upon the liquidation or winding-up of the Company.

     (4)  Represents a warrant to purchase 2,616,806 shares of the
          Company's common stock at an exercise price of $0.72 per share,
          expiring on September 30, 2008.

     (5)  Includes shares issuable to Mr. Redding based on an amendment of
          his employment agreement entered into on September 7, 2005. See "Item
          10. Executive Compensation-Employment Agreements with Management." See
          the discussion in item (3) above Mr. Redding's beneficial ownership of
          the ESI Shares. We have not included the ESI Shares in Mr. Redding's
          beneficial ownership because of the restrictions on voting and
          disposition of the ESI Shares, which are held in escrow.


                                       35
<PAGE>
     (6)  Represents a warrant to purchase 3,125,000 shares of common stock
          at an exercise price of $0.16 per share, expiring on July 14, 2009.

     (7)  Includes a warrant to purchase 1,300,000 shares of common stock
          at an exercise price of $0.25 per share, expiring on September 30,
          2009.

ITEM  12.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

     Since October 2003, Ms. Zennie Morris, the former president of the Company,
loaned the Company an aggregate of $59,500, of which $50,000 is evidenced by two
promissory  notes  in  the  amounts  of  $20,000  and $30,000, which were due on
September  30,  2004.  The third promissory note in the amount of $9,500 was due
on August 31, 2004. These three promissory notes (the "Morris Notes) do not bear
interest.  As  of  September  30,  2006  the outstanding combined balance on the
Morris  Notes  was  $59,500.  As of September 30, 2006, the Morris Notes were in
default.  There  is  no  default  interest  rate.

     We  are  party  to  an  employment agreement with Bruce K. Redding, Jr. Mr.
Redding  is  one  of  the  inventors  of  the  technologies  encompassing  the
Intellectual Property and the author or co-author of the various patents pending
transferred  to  the  Company  under  the Purchase Agreement. Mr. Redding is the
president, chief executive officer, principal stockholder and a director of ESI,
the  entity  from  which we acquired the Intellectual Property. The terms of Mr.
Redding's  employment  agreement  are  described  under  "Item  10.  Executive
Compensation-Executive  Compensation."

     ESI  provides  research  and  development  services  to  the  Company  on a
month-to-month  basis.  During  the year ended September 30, 2006, we incurred a
total  of approximately $425,000 for such services. As of September 30, 2006, we
owed  ESI  approximately  $305,000.

     In addition to what ESI has billed the Company for research and development
consulting  services,  ESI  has  informed  the  Company  that  it  has  spent
approximately  $385,000 on the development of one of the new applications of the
U-Strip  Technology  designed to deliver cosmetic formulations to the surface of
the skin (the "U-Wand"). ESI has asserted that it owns the rights to the U-Wand;
however,  the Company believes that the technology related to the U-Wand is part
f  the  U-Strip  Technology  owned  by  the  Company.  If the Company is able to
demonstrate  that it is the owner of the rights to the U-Wand through litigation
or  settle  the  questions  of ownership of the U-Wand rights through settlement
negotiations  with  ESI,  the Company would have an additional liability for the
expenses  incurred  by ESI in the development of the U-Wand. The $385,000 is not
reflected  in  the  Company's  Consolidated  Financial  Statements.

     ESI has also asserted that the Company owes ESI $90,000 for patent fees ESI
paid  to  its patent counsel at the time of the Purchase Agreement; however, the
Company  believes  that  the  $90,000  patent  expense was included in the total
consideration  paid  in  accordance with the terms of the Purchase Agreement and
that  no  additional  amount  is  owed  to  ESI  with  regards  to  this matter.

     Prior  to  Mr.  Redding's  resignation  as  an  officer of the Company, the
Company  and Mr. Redding had engaged in conversations concerning the issuance of
additional shares of common stock of the Company to Mr. Redding in settlement of
his  accrued  salary  through  December 31, 2005. In September 2005, the Company
agreed  to  issue Mr. Redding 152,135 shares of common stock valued at $1.00 per
share  in  accordance  with  a  registration  statement to be filed on Form S-8;
however,  the  Company  failed to issue the shares under a Form S-8 registration
statement, and Mr. Redding was issued 153,135 restricted shares of common stock.
No  definitive  agreement  to  settle  Mr. Redding's claim has been reached, but

                                       36
<PAGE>
Mr. Redding has demanded that the Company issue him 800,000 additional shares of
common  stock  registered  on  Form  S-8 to fully compensate him for the accrued
compensation  due  him  at  September  30,  2005.

     Wilson,  Haglund  & Paulsen, of which our Chairman, interim Chief Executive
Officer,  and  interim  Chief  Financial  officer is a principal, provides legal
services  to  the  Company.  During  the  year ended September 30, 2006, Wilson,
Haglund  & Paulsen billed us $225,300. As of September 30, 2006, we owed Wilson,
Haglund  &  Paulsen  $134,300.

ITEM 13.     EXHIBITS

<TABLE>
<CAPTION>
                                                                                 Location
Exhibit Number  Description                                                      Reference
--------------  -----------                                                      ---------
<S>             <C>                                                              <C>
3.1             Articles of Incorporation.                                               1

3.2             Articles of Incorporation, as amended.                                   1

3.3             First Amended and Restated Bylaws.                                       1

4.1             Form of Subscription Agreement.                                          1

10.1            Promissory Note payable to Ms. Zennie Morris
                issued by Second Stage Ventures, Inc. issued
                October 24, 2000.                                                        1

10.2            Promissory Note payable to Lindlay Equity Fund
                issued by Second Stage Ventures, Inc. on September 15, 2000.             1

10.3            Promissory Note payable to Second Stage Ventures, Inc.
                issued by EasyTrivia.com, Inc. on September 25, 2000.                    1

10.4            Share Purchase Agreement dated October 5, 2000 by and
                among Second Stage Ventures, Inc., EasyTrivia.com, Inc.,
                Brad W. Rudover and Brent Snejdar.                                       1

10.5            Financing Agreement dated October 5, 2000 by and among
                Second Stage Ventures, Inc., EasyTrivia.com, Inc.,
                Brad W. Rudover and Brent Snejdar.                                       1

10.6            Consulting Agreement dated October 5, 2000 by and
                between EasyTrivia.com, Inc., and Brent Snejdar.

10.7            Consulting Agreement dated October 5, 2000 by and
                between EasyTrivia.com, Inc. and Brad W. Rudover.                        1

10.8            Assignment and Release Agreement dated October 27,
                2000 by and between Brad W. Rudover and Brent Snejdar.                   1

10.9            Website development contract between EasyTrivia.com, Inc.
                and Niche Enterprises dated July 24, 2000.                               1

10.10           Promissory Note payable to Ms. Zennie Morris issued by
                Second Stage Ventures, Inc. dated January 12, 2001.                      1

10.11           Modification Agreement dated January 19, 2001 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.                                               1


                                       37
<PAGE>
10.12           Modification Agreement dated February 6, 2001 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.                                               1

10.13           Penny Web Inc. Terms and Conditions.                                     1

10.14           Click Agents Corp. Banner Placement Rules.                               1

10.15           Lindlay Equity Fund Letter of March 7, 2001.                             2

10.16           Memorandum of Engagement by and between
                EasyTrivia.com, Inc. and Sage Internet Solutions Ltd.
                dated July 2, 2001.                                                      2

10.17           Modification Agreement dated September 30, 2001 by
                and between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.                                               2

10.18           Modification Agreement dated June 30, 2002 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.                                               3

10.19           Agreement with AdDynamix dated October 29, 2002.                         3

10.20           Modification Agreement dated June 30, 2003 by and
                between Brad W. Rudover, EasyTrivia.com, Inc., and
                Second Stage Ventures Inc.                                               4

10.21           Modification Agreement dated September 30, 2003 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.                                               5

10.22           Promissory Note dated October 20, 2003 in favor of
                Zennie Morris.                                                           5

10.23           Letter of Intent dated January 5, 2004, as amended,
                January 29, 2004.                                                        6

10.24           Promissory Note dated March 1, 2004 in favor of
                Ms. Zennie Morris.                                                       7

10.25           Promissory Note dated May 14, 2004 in favor of
                Ms. Zennie Morris.                                                       8

10.26           Asset Purchase Agreement dated June 9, 2004 by and
                among Second Stage Ventures, Inc., Encapsulation Systems,
                Inc. and Echo RX, Inc.                                                   8

10.27           Promissory Note in the principal amount of $500,000 dated
                June 30, 2004 made by Second Stage Ventures, Inc. in favor
                of Gary Scott.                                                           8

10.28           Amendment to Asset Purchase Agreement dated July 28,
                2004 by and among Second Stage Ventures, Inc.,
                Encapsulation Systems, Inc. and Echo RX, Inc.                            8


                                       38
<PAGE>
10.29           Promissory Note dated July 28, 2004 made by Second Stage
                Ventures in favor of Encapsulation Systems, Inc.                         8

10.30           Patent Security Agreement dated July 28, 2004 made
                by Second Stage Ventures, Inc. in favor of
                Encapsulation Systems, Inc.                                              8

10.31           Employment Agreement date July 28, 2004 between Second
                Stage Ventures, Inc. and Bruce K. Redding, Jr.                           8

10.32           Amendment dated July 28, 2004, to Promissory Note dated
                June 30, 2004 in the principal amount of $500,000 executed
                in favor of Gary Scott.                                                  9

10.33           Asset Purchase Agreement dated July 23, 2004 between
                Valcor Resources, Inc., a wholly owned subsidiary of the
                registrant, and Valcor S.A. Nicaragua.                                   9

10.34           Share Purchase Agreement dated July 28, 2004 between
                Second Stage Ventures, Inc. and Brad Rudover.                            9

10.32           Agreement between Dermisonics, Inc. and Integrated
                Inventions (Canada) Inc. dated October 18, 2004.                        10

10.33           Warrant Agreement issued by Dermisonics, Inc. in favor
                of Integrated Inventions (Canada) Inc. dated October 18, 2004.          10

10.35           Agreement between Dermisonics, Inc. and BX Inc. dated
                October 18, 2004.                                                       10

10.36           Registration Rights Agreement between Dermisonics, Inc.
                and BX Inc. dated October 18, 2004.                                     10

10.37           Warrant Agreement issued by Dermisonics, Inc. in favor of
                BX Inc. dated October 18, 2004.                                         10

10.38           Agreement between Dermisonics, Inc. and Ananda Capital
                Partners, Inc. dated October 18, 2004.                                  10

10.39           Registration Rights Agreement between Dermisonics, Inc.
                and Ananda Capital Partners, Inc. dated October 18, 2004.               10

10.40           Agreement between Dermisonics, Inc. and DD Investment
                dated October 18, 2004.                                                 10

10.41           Agreement between Dermisonics, Inc. and Current Capital
                Corp. dated October 18, 2004.                                           10

10.42           Warrant Agreement issued by Dermisonics, Inc. in favor of
                Current Capital Corp. dated October 18, 2004.                           10

10.43           Registration Rights Agreement between Dermisonics, Inc.
                and Current Capital Corp. dated October 18, 2004.                       10


                                       39
<PAGE>
10.45           Extension Agreement between Dermisonics, Inc. and
                Gary Scott dated December 3, 2004.                                      11

10.46           Consulting Agreement between Dermisonics, Inc. and
                Gary Scott dated December 3, 2004.                                      11

10.47           Warrant Agreement issued by Dermisonics, Inc. in favor
                of Gary Scott dated December 3, 2004.                                   11

10.48           Registration Rights Agreement between Dermisonics, Inc.
                and Gary Scott dated December 3, 2004.                                  11

10.49           Consulting Agreement between Dermisonics, Inc. and
                Adil Saleh dated December 3, 2004.                                      11

10.50           Warrant Agreement issued by Dermisonics, Inc. in favor
                of Adil Saleh dated December 3, 2004.                                   11

10.51           Registration Rights Agreement between Dermisonics, Inc.
                and Adil Saleh dated December 3, 2004.                                  11

10.52           Agreement for placement of promissory notes between
                Dermisonics, Inc. and VEM Aktienbank AG dated
                July 1, 2005.                                                           12

10.53           Promissory Note dated August 29, 2005 in favor of
                VEM Aktienbank AG.                                                      14

10.54           Promissory Note dated August 29, 2005 in favor of
                VEM Aktienbank AG.                                                      14

10.55           Promissory Note dated December 8, 2005 in favor of
                VEM Aktienbank AG.                                                      14

10.56           Promissory Note dated December 8, 2005 in favor of
                VEM Aktienbank AG.                                                      14

10.57           Promissory Note dated December 21, 2005 in favor of
                James Ladner.                                                           14

10.58           Promissory Note dated December 21, 2005 in favor of
                Marguertie Ladner.                                                      14

10.59           Promissory Note dated December 21, 2005 in favor of
                Parmino Finance, Ltd.                                                   14

10.60           Promissory Note dated December 21, 2005 in favor of
                John Vargheses.                                                         14

10.61           Warrant Agreement dated December 21, 2005 in favor of
                James Ladner.                                                           14

10.62           Warrant Agreement dated December 21, 2005 in favor of
                Marguerite Ladner.                                                      14


                                       40
<PAGE>
10.63           Warrant Agreement dated December 21, 2005 in favor of
                Parmino Finance Ltd.                                                    14

10.64           Warrant Agreement dated December 21, 2005 in favor of
                John Varghese                                                           14

10.65           Warrant Agreement dated December 21, 2005 in favor of
                James Ladner.                                                           14

10.66           Warrant Agreement dated October 4, 2005 in favor of
                Trilogy Capital Partners, Ltd.                                          13

10.67           Warrant Agreement dated February 2, 2005 in favor of
                Intergrated Inventions (Canada) Inc.                                    14

10.68           Letter Agreement dated September 7, 2005 between
                Derminsonics, Inc. and Bruce K. Redding Jr. regarding
                Redding Employment Agreement.                                           14

10.69           Consulting Agreement between Robert Trainor and
                Dermisonics, Inc. dated December 7, 2005.                               14

10.70           8% Convertible Debenture dated November 4, 2004 issued
                in favor of Victor Fein.                                                14

10.71           8% Convertible Debenture dated November 17, 2004 issued
                in favor of Alan Fein.                                                  14

10.72           8% Convertible Debenture dated December 13, 2004 issued
                in favor of Hyman Fein.                                                 14

10.73           8% Convertible Debenture dated December 22, 2004 issued
                in favor of Shalom Maidenbaum.                                          14

10.74           8% Convertible Debenture dated November 4, 2004 issued
                in favor of Osborn Partners Internation, Ltd.                           14

10.75           Warrant Agreement dated January 17, 2005 in favor of
                Georg Hochwimmer.                                                       14

10.76           Letter Agreement dated September 27, 2005 between
                Derminsonics, Inc. and The van de Kamp Group.                           14

10.77           Letter Agreement dated November 3, 2005 between
                Derminsonics, Inc. and The van de Kamp Group.                           14

10.78           Agreement and Mutual Release with Gary M. Scott and
                Dermisonics, Inc. dated September 22, 2005.                             14

10.79           Form of Promissory Notes with Berra Holdings Ltd., the total
                Indebtedness in accordance with which Promissory Notes is
                $1,528,976 as of September 30, 2006.                                    15

10.80           Consulting Agreement between Avalon International Group and
                Dermisonics, Inc. dated November 21, 2005.                              17


                                       41
<PAGE>
10.81           Consulting Agreement between Alan Fein and Dermisonics,
                Inc. dated March 14, 2006.                                              17

10.82           Consulting Agreement between Michael Stock and
                Dermisonics, Inc. dated March 15, 2006.                                 17

10.83           Consulting Agreement between International Market Trend, Inc.
                and Dermisonics, Inc. dated March 16, 2006.                             17

10.84           Consulting Agreement EurXchange Consulting Ltd. and
                Dermisonics, Inc. dated April 5, 2006.                                  17

10.85           Consulting Agreement between Aaron Lasry and Dermisonics,
                Inc. dated May 15, 2006.                                                17

10.86           Form of $.25 Warrant for 2006 Private Placement Offering of
                Shares at $.25 per share.                                               17

10.87           Form of Settlement Agreement dated August __, 2006 among
                Sandra McElligott, Dermisonics, Inc. and Encapsulation
                Systems, Inc.                                                           17

10.88           Promissory Note dated July 14, 2006 in favor of Staples
                Management Inc.                                                         16

10.89           Warrant Agreement dated July 14, 2006 in favor of Staples
                Management Inc.                                                         16

21.1            Subsidiaries of the Registrant.                                          1

31.1            Certification of Acting Principal Executive Officer and
                Acting Principal Financial Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.

32.1            Certification of Acting Principal Executive Officer and
                Acting Principal Financial Officer pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
</TABLE>


                                       42
<PAGE>
--------------------------
(1) Previously filed as an exhibit to the registrant's registration statement on
Form SB-2 on March 12, 2001 as amended May 10, 2001.

(2) Previously filed as an exhibit to the registrant's annual report on Form
10-KSB on December 28, 2001.

(3) Previously filed as an exhibit to the registrant's Form 10-QSB for the
period ended June 30, 2002.

(4) Previously filed as an exhibit to the registrant's Form 10-QSB for the
period ended June 30, 2003.

(5) Previously filed as an exhibit to the registrant's Form 10-KSB for the
fiscal year ended September 30, 2003.

(6) Previously filed as an exhibit to the registrant's Form 8-K on January 7,
2004.

(7) Previously filed as an exhibit to the registrant's Form 10-QSB for the
period ended March 31, 2004.

(8)  Previously  filed  as an exhibit to the registrant's Current Report on Form
8-K  as  filed  with  the  Commission  on  August  12,  2004.


                                       43
<PAGE>
(9)  Previously  filed  as  an  exhibit  to the registrant's Form 10-QSB for the
period  ended  June  30,  2004

(10)  Previously  filed as an exhibit to the registrant's Current Report on Form
8-K  as  filed  with  the  Commission  on  October  21,  2004.

(11)  Previously  filed as an exhibit to the registrant's Current Report on Form
8-K  as  filed  with  the  Commission  on  December  9,  2004.

(12) Previously filed as an exhibit to the registrant's Form 8-K dated September
20,  2005.

(13)  Previously  filed as an exhibit to the registrant's Form 8-K dated October
12,  2005.

(14)  Previously filed as an exhibit to the registrant's Form 10-KSB for the
fiscal year ended September 30, 2005.

(15)  Previiously filed as an exhibit to the registrant's Form 10-QSB for the
fiscal quarter ended December 31, 2005.

(16)  Previously  filed  as  an exhibit to the registrant's Form 8-K on July 19,
2006.

(17)  Previously  filed  as  an  exhibit  to  the registrant's Form 10-Q for the
period  ending  June  30,  2006.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

INDEPENDENT  PUBLIC  ACCOUNTANTS

The  Board  selected  Peterson  Sullivan  PLLC  ("Peterson  Sullivan")  as  the
independent  certified  public  accountants. Peterson Sullivan was the Company's
independent  certified public accountant for the fiscal year ended September 30,
2006.  The  Board  has  selected  Peterson Sullivan as the independent certified
public  accountants  to  audit  the  financial statements of the Company for its
fiscal  year  ended  September 30, 2007. To the knowledge of management, neither
such  firm  nor any of its members has any direct or material indirect financial
interest  in  the  Company  nor  any connection with the Company in any capacity
otherwise  than  as  independent  accountants.

PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES

AUDIT AND RELATED FEES

The  following  table  sets forth the total fees billed by Peterson Sullivan for
audit  and  other  services  for  fiscal  year 2005, and the expected total fees
billed  for  audit  and  other  services  for  fiscal  year  2006:


----------------------------------------------------------------
                    Year Ended September   Year Ended September
                          30, 2006               30, 2005
                    ---------------------  ---------------------
Audit Fees          $              43,750  $              40,000
------------------  ---------------------  ---------------------
Audit Related Fees  $               4,544  $                   0
------------------  ---------------------  ---------------------
Tax Fees            $               2,500  $               2,000
------------------  ---------------------  ---------------------
All Other Fees      $                   0  $                   0
----------------------------------------------------------------

     Audit Fees: For professional services rendered by Peterson Sullivan and for
the  audits  of  the  Company's  annual  financial  statements and the review of
financial  statements  included  in  the

                                       44
<PAGE>
Company's  Forms 10-QSB and 10-KSB.  This category also includes advice on audit
and  accounting  matters  that arose during, or as a result of, the audit or the
review  of  interim  financial  statements.

     Audit-Related  Fees:  This  category  consists  of  assurance  and  related
services  by Peterson Sullivan that are reasonably related to the performance of
the audit or review of our financial statements and are not reported above under
"Audit  Fees."  The amount incurred during the year ended September 30, 2006 was
for  services related to the preparation of a response to an SEC comment letter.

     Tax  Fees:  This  category  consists  of  professional services rendered by
Peterson  Sullivan  for  tax  compliance  and  tax  advice.

     All  Other  Fees:  There  were  no  other professional services rendered by
Peterson  Sullivan  during  the  years  ended  December  31,  2006  or  2005.


Pre-Approval Policies and Procedures.

     The  Company  does  not at this time have an audit committee, therefore, no
policies  or  procedures  other  than  those  required  by  SEC rules on auditor
independence,  have  been  implemented.  The  Board  of  Directors  will have to
pre-approve the engagement of the Company's principal independent accountants to
provide non-audit services. No non-audit services, except for the preparation of
corporate  tax  returns, for which pre-approval has been obtained, were provided
by  the  Company's  principal  independent  accountants  in  2006.


                                   SIGNATURES

     In  accordance  with the Exchange Act, the registrant caused this report to
be  signed  on  its  behalf  by  the  undersigned,  thereunto  duly  authorized.

Dated:  February  16,  2007             By:/s/Bruce  H.  Haglund
                                        ----------------------------------------
                                        Bruce H. Haglund
                                        Chairman, Acting Chief Executive Officer
                                        and Acting Chief Financial Officer


     In  accordance  with the Exchange Act, this report has been signed below by
the  following  person  on behalf of the registrant and in the capacities and on
the  dates  indicated.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
       Person                               Capacity                              Date
--------------------  ----------------------------------------------------  -----------------
<S>                   <C>                                                   <C>
/s/ Bruce H. Haglund  Chairman, Acting Principal Executive Officer, Acting  February 16, 2007
Bruce H. Haglund      Principal Financial Officer and Acting Principal
                      Accounting Officer

--------------------  ----------------------------------------------------  -----------------
/s/ Grant R. Atkins   Director                                              February 16, 2007
Grant R. Atkins
---------------------------------------------------------------------------------------------
</TABLE>


                                       45
<PAGE>
<TABLE>
<CAPTION>
                              EXHIBIT INDEX
Exhibit Number  Description of Exhibit
--------------  ----------------------
<S>             <C>
X3.1            Articles of Incorporation.

3.2             Articles of Incorporation, as amended.

3.3             First Amended and Restated Bylaws.

4.1             Form of Subscription Agreement.

10.1            Promissory Note payable to Ms. Zennie Morris
                issued by Second Stage Ventures, Inc. issued
                October 24, 2000.

10.2            Promissory Note payable to Lindlay Equity Fund
                issued by Second Stage Ventures, Inc. on September 15, 2000.

10.3            Promissory Note payable to Second Stage Ventures, Inc.
                issued by EasyTrivia.com, Inc. on September 25, 2000.

10.4            Share Purchase Agreement dated October 5, 2000 by and
                among Second Stage Ventures, Inc., EasyTrivia.com, Inc.,
                Brad W. Rudover and Brent Snejdar.

10.5            Financing Agreement dated October 5, 2000 by and among
                Second Stage Ventures, Inc., EasyTrivia.com, Inc.,
                Brad W. Rudover and Brent Snejdar.

10.6            Consulting Agreement dated October 5, 2000 by and
                between EasyTrivia.com, Inc., and Brent Snejdar.

10.7            Consulting Agreement dated October 5, 2000 by and
                between EasyTrivia.com, Inc. and Brad W. Rudover.

10.8            Assignment and Release Agreement dated October 27,
                2000 by and between Brad W. Rudover and Brent Snejdar.

10.9            Website development contract between EasyTrivia.com, Inc.
                and Niche Enterprises dated July 24, 2000.

10.10           Promissory Note payable to Ms. Zennie Morris issued by
                Second Stage Ventures, Inc. dated January 12, 2001.

10.11           Modification Agreement dated January 19, 2001 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.

10.12           Modification Agreement dated February 6, 2001 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.

10.13           Penny Web Inc. Terms and Conditions.

10.14           Click Agents Corp. Banner Placement Rules.


                                       46
<PAGE>
10.15           Lindlay Equity Fund Letter of March 7, 2001.

10.16           Memorandum of Engagement by and between
                EasyTrivia.com, Inc. and Sage Internet Solutions Ltd.
                dated July 2, 2001.

10.17           Modification Agreement dated September 30, 2001 by
                and between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.

10.18           Modification Agreement dated June 30, 2002 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.

10.19           Agreement with AdDynamix dated October 29, 2002.

10.20           Modification Agreement dated June 30, 2003 by and
                between Brad W. Rudover, EasyTrivia.com, Inc., and
                Second Stage Ventures Inc.

10.21           Modification Agreement dated September 30, 2003 by and
                between Brad W. Rudover, EasyTrivia.com, Inc. and
                Second Stage Ventures Inc.

10.22           Promissory Note dated October 20, 2003 in favor of
                Zennie Morris.

10.23           Letter of Intent dated January 5, 2004, as amended,
                January 29, 2004.

10.24           Promissory Note dated March 1, 2004 in favor of
                Ms. Zennie Morris.

10.25           Promissory Note dated May 14, 2004 in favor of
                Ms. Zennie Morris.

10.26           Asset Purchase Agreement dated June 9, 2004 by and
                among Second Stage Ventures, Inc., Encapsulation Systems,
                Inc. and Echo RX, Inc.

10.27           Promissory Note in the principal amount of $500,000 dated
                June 30, 2004 made by Second Stage Ventures, Inc. in favor
                of Gary Scott.

10.28           Amendment to Asset Purchase Agreement dated July 28,
                2004 by and among Second Stage Ventures, Inc.,
                Encapsulation Systems, Inc. and Echo RX, Inc.

10.29           Promissory Note dated July 28, 2004 made by Second Stage
                Ventures in favor of Encapsulation Systems, Inc.

10.30           Patent Security Agreement dated July 28, 2004 made
                by Second Stage Ventures, Inc. in favor of
                Encapsulation Systems, Inc.


                                       47
<PAGE>
10.31           Employment Agreement date July 28, 2004 between Second
                Stage Ventures, Inc. and Bruce K. Redding, Jr.

10.32           Amendment dated July 28, 2004, to Promissory Note dated
                June 30, 2004 in the principal amount of $500,000 executed
                in favor of Gary Scott.

10.33           Asset Purchase Agreement dated July 23, 2004 between
                Valcor Resources, Inc., a wholly owned subsidiary of the
                registrant, and Valcor S.A. Nicaragua.

10.34           Share Purchase Agreement dated July 28, 2004 between
                Second Stage Ventures, Inc. and Brad Rudover.

10.32           Agreement between Dermisonics, Inc. and Integrated
                Inventions (Canada) Inc. dated October 18, 2004.

10.33           Warrant Agreement issued by Dermisonics, Inc. in favor
                of Integrated Inventions (Canada) Inc. dated October 18, 2004.

10.35           Agreement between Dermisonics, Inc. and BX Inc. dated
                October 18, 2004.

10.36           Registration Rights Agreement between Dermisonics, Inc.
                and BX Inc. dated October 18, 2004.

10.37           Warrant Agreement issued by Dermisonics, Inc. in favor of
                BX Inc. dated October 18, 2004.

10.38           Agreement between Dermisonics, Inc. and Ananda Capital
                Partners, Inc. dated October 18, 2004.

10.39           Registration Rights Agreement between Dermisonics, Inc.
                and Ananda Capital Partners, Inc. dated October 18, 2004.

10.40           Agreement between Dermisonics, Inc. and DD Investment
                dated October 18, 2004.

10.41           Agreement between Dermisonics, Inc. and Current Capital
                Corp. dated October 18, 2004.

10.42           Warrant Agreement issued by Dermisonics, Inc. in favor of
                Current Capital Corp. dated October 18, 2004.

10.43           Registration Rights Agreement between Dermisonics, Inc.
                and Current Capital Corp. dated October 18, 2004.

10.45           Extension Agreement between Dermisonics, Inc. and
                Gary Scott dated December 3, 2004.

10.46           Consulting Agreement between Dermisonics, Inc. and
                Gary Scott dated December 3, 2004.

10.47           Warrant Agreement issued by Dermisonics, Inc. in favor
                of Gary Scott dated December 3, 2004.


                                       48
<PAGE>
10.48           Registration Rights Agreement between Dermisonics, Inc.
                and Gary Scott dated December 3, 2004.

10.49           Consulting Agreement between Dermisonics, Inc. and
                Adil Saleh dated December 3, 2004.

10.50           Warrant Agreement issued by Dermisonics, Inc. in favor
                of Adil Saleh dated December 3, 2004.

10.51           Registration Rights Agreement between Dermisonics, Inc.
                and Adil Saleh dated December 3, 2004.

10.56           Agreement for placement of promissory notes between
                Dermisonics, Inc. and VEM Aktienbank AG dated
                July 1, 2005.

10.57           Promissory Note dated August 29, 2005 in favor of
                VEM Aktienbank AG.

10.58           Promissory Note dated August 29, 2005 in favor of
                VEM Aktienbank AG.

10.59           Promissory Note dated December 8, 2005 in favor of
                VEM Aktienbank AG.

10.56           Promissory Note dated December 8, 2005 in favor of
                VEM Aktienbank AG.

10.57           Promissory Note dated December 21, 2005 in favor of
                James Ladner.

10.58           Promissory Note dated December 21, 2005 in favor of
                Marguertie Ladner.

10.60           Promissory Note dated December 21, 2005 in favor of
                Parmino Finance, Ltd.

10.60           Promissory Note dated December 21, 2005 in favor of
                John Vargheses.

10.61           Warrant Agreement dated December 21, 2005 in favor of
                James Ladner.

10.62           Warrant Agreement dated December 21, 2005 in favor of
                Marguerite Ladner.

10.63           Warrant Agreement dated December 21, 2005 in favor of
                Parmino Finance Ltd.

10.64           Warrant Agreement dated December 21, 2005 in favor of
                John Varghese

10.65           Warrant Agreement dated December 21, 2005 in favor of
                James Ladner.

10.66           Warrant Agreement dated October 4, 2005 in favor of
                Trilogy Capital Partners, Ltd.


                                       49
<PAGE>
10.67           Warrant Agreement dated February 2, 2005 in favor of
                Intergrated Inventions (Canada) Inc.

10.68           Letter Agreement dated September 7, 2005 between
                Derminsonics, Inc. and Bruce K. Redding Jr. regarding
                Redding Employment Agreement.

10.70           Consulting Agreement between Robert Trainor and
                Dermisonics, Inc. dated December 7, 2005.

10.70           8% Convertible Debenture dated November 4, 2004 issued
                in favor of Victor Fein.

10.71           8% Convertible Debenture dated November 17, 2004 issued
                in favor of Alan Fein.

10.72           8% Convertible Debenture dated December 13, 2004 issued
                in favor of Hyman Fein.

10.73           8% Convertible Debenture dated December 22, 2004 issued
                in favor of Shalom Maidenbaum.

10.74           8% Convertible Debenture dated November 4, 2004 issued
                in favor of Osborn Partners Internation, Ltd.

10.75           Warrant Agreement dated January 17, 2005 in favor of
                Georg Hochwimmer.

10.76           Letter Agreement dated September 27, 2005 between
                Derminsonics, Inc. and The van de Kamp Group.

10.77           Letter Agreement dated November 3, 2005 between
                Derminsonics, Inc. and The van de Kamp Group.

10.78           Agreement and Mutual Release with Gary M. Scott and
                Dermisonics, Inc. dated September 22, 2005.

10.89           Form of Promissory Notes with Berra Holdings Ltd., the total
                Indebtedness in accordance with which Promissory Notes is
                1,528,976 as of September 30, 2006.

10.90           Consulting Agreement between Avalon International Group
                and Dermisonics, Inc. dated November 21, 2005.

10.91           Consulting Agreement between Alan Fein and
                Dermisonics, Inc. dated March 14, 2006.

10.92           Consulting Agreement between Michael Stock and
                Dermisonics, Inc. dated March 15, 2006.

10.93           Consulting Agreement between International Market Trend, Inc.
                and Dermisonics, Inc. dated March 16, 2006.


                                       50
<PAGE>
10.94           Consulting Agreement EurXchange Consulting Ltd. and
                Dermisonics, Inc. dated April 5, 2006.

10.95           Consulting Agreement between Aaron Lasry and
                Dermisonics, Inc. dated May 15, 2006.

10.96           Form of $.25 Warrant for 2006 Private Placement Offering of
                Shares at $.25 per share.

10.97           Form of Settlement Agreement dated August __, 2006 among Sandra
                McElligott, Dermisonics, Inc. and Encapsulation Systems, Inc.

10.98           Promissory Note dated July 14, 2006 in favor of
                Staples Management Inc.

10.99           Warrant Agreement dated July 14, 2006 in favor of
                Staples Management Inc

21.1            Subsidiaries of the Registrant.

31.1            Certification of Acting Principal Executive Officer and
                Acting Principal Financial Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.

32.1            Certification of Acting Principal Executive Officer and
                Acting Principal Financial Officer pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
</TABLE>


                                       51