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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549

FORM 10-KSB

(Mark One)

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

For the fiscal year ended August 31, 2007

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to__________

Commission file number 000-49664

IKONA GEAR INTERNATIONAL,
INC.(Name of small business issuer in its charter)

|Delaware                                         | 88-0474903                          
|------------------------------------------------ | ------------------------------------
|(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.)
|organization)                                    |                                     

|1650 Brigantine Drive, Unit #100        
|----------------------------------------
|Coquitlam, British Columbia             
|Canada, V3K 7B5                         
|(Address of principal executive offices)
|                                        
|604-523-5500                            
|(Issuer's telephone number)             

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.00001 par value

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 twelve 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 [ ] No [X]

Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of 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. [ ]

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

The issuers revenues for its most recent fiscal year were:
$1,041,789.

The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the public trading price
on November 30, 2007 was $10,557,915.

As of November 30, 2007, there were 34,057,791 shares of common
stock issued and outstanding.Transitional Small Business Disclosure
Format (Check one): Yes [ ] No [X]

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IKONA GEAR INTERNATIONAL, INC.

TABLE OF CONTENTS

|PART I     |                                                                                                            | 3 
|---------- | ---------------------------------------------------------------------------------------------------------- | --
|Item 1.    | Description of
      Business                                                                              | 3 
|Item 2.    | Description of Property                                                                                    | 10
|Item 3.    | Legal
      Proceedings                                                                                    | 10
|Item 4.    | Submission of Matters to a Vote of Security Holders                                                        | 10
|PART II    |                                                                                                            | 10
|Item 5.    | Market for Common Equity and Related Stockholder Matters                                                   | 10
|Item 6.    | Management's
      Discussion and Analysis or Plan of Operations                                           | 14
|Item 7.    | Financial Statements                                                                                       | 20
|Item 8.    | Changes In and
      Disagreements with Accountants on Accounting and Financial Disclosure.                | 46
|Item 8.A   | Controls and Procedures                                                                                    | 46
|Item 8.B   | Other
      Information                                                                                    | 46
|PART III   |                                                                                                            | 46
|Item 9.    | Directors,
      Executive Officers, Promoters and Control Persons;                                        | 46
|Item 10.   | Code of Ethics                                                                                             | 50
|Item 11.   | Compliance
      With Section 16(a) of the Exchange Act                                                    | 50
|Item 12.   | Executive Compensation                                                                                     | 50
|Item 13.   | Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters | 59
|Item 15.   | Exhibits and Reports on Form 8-K                                                                           | 61
|Item 16.   | Principal
      Accountant Fees and Services                                                               | 62
|SIGNATURES | 63                                                                                                        

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PART I

Item 1. Description of BusinessForward Looking
Statements

This report contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (which is codified in Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933).
When we use the words, anticipate, assume, estimate, project, intend,
expect, plan, believe, should, likely and similar expressions, we are
making forward-looking statements. Forward-looking statements in this report
include, but are not limited to, statements about our beliefs, assumptions,
estimates or plans regarding the following topics: our estimated future capital
expenditures; our belief that our working capital will be sufficient to meet our
operating requirements for the next 4 months; our belief about the potential
litigation on our business, our revenue; our business and licensing strategy;
our product development costs; our business development costs; our staffing
levels. These forward-looking statements, wherever they occur in this report,
are estimates reflecting the best judgment of the senior management of Ikona. We
caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date they were made. Except as required by law, we do
not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events. All subsequent
forward-looking statements attributable to Ikona or any person acting on our
behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this report. Because forward-looking statements
involve future risks and uncertainties, actual results could differ materially
from those expressed or implied. Such risks and uncertainties include but are
not limited to risks and uncertainties as a result of factors including:

- the general volatility of the capital markets and the establishment of a
  market for our shares,
- our ability to raise capital on favorable terms, necessary to sustain our
  anticipated operations and implement our proposed business plan,
- our ability to generate sufficient cash to pay our creditors,
- our dependence on the efforts and abilities of our current employees and
  executive officers,
- our ability to employ and retain qualified management and employees,
- general market, business, and industry conditions,
- failure of our products to generate revenue or obtain customer acceptance,
- changes in currency exchange rates, or interest rates,
- our ability to implement our business plan,
- changes in government regulations that are applicable to our business,
- availability of labor or materials or increases in their costs,
- adverse weather conditions and natural disasters,
- competitive conditions in the gear design and manufacturing industry,
  including product and pricing pressures,
- the introduction of new gear technologies by our competitors that may have
  advantages over our products and may make our products less attractive to our
  potential customers,
- disruption in the economic and financial conditions primarily from the
  impact of past terrorist attacks in the United States, threats of future
  attacks, police and military activities overseas and other disruptive
  worldwide political events,
- the risks inherent in litigation,
- misjudgments in the course of preparing forward-looking statements, and
- additional risks and uncertainties, many of which are beyond our control,
  referred to in our other SEC filings.

General

Ikona Gear International, Inc.
(previously Oban Mining, Inc.) (Ikona or the Company) is commercializing
proprietary patented gearing technology (the "Ikona Gearing System") as well as
superior application-specific designs for power transmission applications in the
lead markets of Oil & Gas, Industrial and Automotive . The Ikona Gearing
System utilizes a proprietary, patented tooth shape which enables gears to be
smaller, lighter, stronger and more energy efficient than conventional planetary
gears. The Ikona Gearing Systems allows what we believe to be the highest single
stage reduction ratio, zero backlash gear currently available on the market. In
high-ratio applications, the Ikona Gearing System can replace multiple stage
planetary gearing systems with a single stage reduction ratio, and is thus more
cost effective to manufacture. The companys lead products, which have been
specifically designed and

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manufactured for oil and gas drilling rigs, have established
new standards within the industry as they weigh less, present a smaller
footprint, and are more energy efficient than competitive products. Their
innovative product design has made them relatively maintenance free  another
factor that reduces the overall cost of the drilling process.

In targeting the lead markets of Oil
& Gas, Industrial and Automotive our commercialization strategy is twofold:

| | 1. | incorporate our intellectual property and/or superior
      application-specific designs into our own engineered power train products;
      and, 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | license our core intellectual property into our lead
      customers products, leveraging their manufacturing and development
      capabilities.

Our business strategy is based on
enabling key innovators (lead customers/ integrators) in our target markets.
Ikona will work to establish strategic partnerships with these key innovators,
enabling application development around our power train products and the
delivery of superior products to end users in the target markets.

Our current product offerings
include innovative proprietary products for various applications where
transmission of mechanical power is being accomplished with the help of geared
equipment.

Over the past 12 months, Ikona
has commercialized products designated for various applications in the Oil &
Gas machinery market, securing the first substantial order for its Drawworks
products. These products offer a wide array of new features, currently not
offered by other products sold to this market. Our products enable drilling
systems and equipment manufacturers to build more efficient, lightweight,
compact systems and equipment, thus enhancing the value they provide to the end
users, the drilling rig operators.

In the Industrial market, our
relationship with a tier two US defense contractor has moved into the
commercialization stage of the development and introduction of a new satellite
antenna pedestal, which incorporates Ikona Gear as the enabling technology for
achieving high performance in satellite tracking systems. We are entering into
the development of products for the Wind Energy market. The Ikona Technology
offers significant advantages to existing windmill products and Ikona is
currently in the process of finalizing the business case and securing the
appropriate development partners for commercializing this application.

In the Automotive market, the
Ikona Gear technology is licensed by Magna Drivetrain AG & Company KG
(Magna), a subsidiary of Magna International Inc., for their new electric
parking brake actuator.

Our sales channels are both
direct and indirect through a number of industry specific resellers. Ikona has
secured distribution agreements with established industry leaders in the Oil
& Gas market and is actively pursuing agreements with established industry
leaders in representing and commercializing Ikonas products in the remaining
lead markets of Industrial and Automotive.

Ikona continues to successfully
employ an outsourced manufacturing strategy, first established in the last
quarter of 2005. Our North-American, European and international supply chain has
been developed to include established industry manufacturers of gearing and
gearing components, able to provide the high level of quality and performance
required by our proprietary product designs. The continued refinement and growth
of our supply chain has enables is to realize significant reductions in the cost
of good of our Oil & Gas products in particular.

We maintain our principal
engineering offices at 1650 Brigantine Drive, Unit #100, Coquitlam, BC, Canada,
V3K 7B5. Our office telephone number is (604) 523-5500. Our internet website is
located at www.ikona.ca .

HISTORY OF THE IKONA GEAR SYSTEM

The Ikona gear design was
originally developed by Ukrainian scientists working in the former USSR for the
purpose of reducing the weight of an attack helicopter known as the MIL MI-28
Havoc, a long-range Russian military helicopter. In September 1993, Laith Nosh,
our president and founder traveled to Dnepropetrovsk, Ukraine on a trade mission
to acquire technology developed by the USSR military. There, Mr. Nosh met with
Boris A.Koriakov-Savoysky, Igor V. Aleksahin, and Ivan P. Vlasov, the inventors
of the new gear design technology. During 1993, Mr.

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Nosh collaborated with the Ukrainian inventors and in mid-1994
acquired the rights to the technology from its inventors.

In October 1994, Mr. Nosh
introduced the gear technology to Dr. J. R. Colbourne, a Ph.D. in mechanical
engineering, gear industry specialist, and professor emeritus at the University
of Alberta in Edmonton, Canada. Dr. Colbourne did technical due diligence on the
gear design, enhanced the technology, and then assisted Mr. Nosh with preparing
and filing patents for the technology in the USA, Canada and Europe. The patents
were filed in August 1994 and issued in the US as patent 5,505,668 in April
1996. The patent was issued in Europe as patent 0770192 in November 1998, and in
Canada in September 1999, as patent 2,129,188.

Dr. Colbourne then assisted Mr.
Nosh with recruiting gear specialists in 2001, and Ikona Gear USA (previously
Ikona Gear International, Inc.) (Ikona USA) was incorporated in August 2001 to
carry on the business in the US and Canada. The US patents were originally filed
by Ikona Gears Limited, Nicosia, Cyprus (a prior owner of the technology
rights), and were transferred by Mr. Nosh to Diversified Sciences Limited (an
Alberta corporation) in 1997 (Diversified). Diversified completed the patents
for Europe and Canada, and subsequently transferred the patents to Ikona USA in
August 2001, just after the company was incorporated.

HISTORY OF OUR COMPANY

Ikona was incorporated in the state of
Nevada on September 20, 2000. From our incorporation until October 2003, we
pursued our business as a mineral resource exploration company from Vancouver,
Canada, which was ultimately unsuccessful and abandoned.

Effective October 30, 2003, we
consummated an Agreement and Plan of Reorganization (the "Agreement") pursuant
to which we acquired 100% of the issued and outstanding shares of common stock
of Ikona USA. Under the terms of the Agreement, the shareholders of Ikona USA
received, pro rata, an aggregate of 15,041,633 shares of common stock of the
Company in exchange for 100% of the outstanding shares of Ikona USA. A principal
shareholder of the Company surrendered for cancellation 14,500,000 shares of
common stock, which resulted in the Ikona USA shareholders acquiring shares
representing approximately 70% of the total issued and outstanding shares of the
Company. As a result, the transaction was accounted for as a recapitalization of
Ikona USA.

On October 31, 2003, we incorporated a
wholly-owned subsidiary, Ikona Gear Corp. (Ikona Gear), a British Columbia
Corporation. On March 13, 2006, Ikona Gear changed its name to Ikona Industries
Corporation (IIC). The audited consolidated statements of operations,
stockholders' equity (deficiency) and cash flows of the Company prior to October
30, 2003, are those of Ikona USA. The Company's consolidated date of
incorporation is considered to be August 16, 2001, the date of inception of
Ikona USA. Following the acquisition, we changed our name from Oban Mining, Inc.
to Ikona Gear International, Inc. On June 7, 2007, the Company completed it
redomestication as a corporation formed and organized under the laws of the
state of Delaware. The redomestication was accomplished by consummating the
statutory merger of Ikona Gear International, Inc., a Nevada corporation into
Ikona Gear International, Inc., a Delaware corporation formed April 20, 2007
with Ikona Gear International, Inc., a Delaware corporation being the surviving
corporation. The redomestication had an effective date of May 17, 2007, the Date
the Certificate of Merger was filed with the Delaware Secretary of State.

We are now focusing on
commercializing and further developing Ikona's patented gear technology, the
Ikona Gearing System. Today, our Company comprises a series of corporations
organized in a multi-tiered arrangement depicted in the following schematic:

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The functions and relationships of
these entities to one another can be summarized as follows:

Ikona is a corporation
incorporated in Delaware and quoted on the OTC Bulletin Board (OTCBB) under
the ticker symbol IKGI. We are also listed and trading in the Regulated
Unofficial Market on the Frankfurt Stock Exchange under the ticker symbol IG2
and on the Berlin Stock Exchange under the ticker symbol A0BLY1.

Ikona is based in Coquitlam, a
suburb of the Greater Vancouver Metropolitan Area (GVMA), British Columbia,
and is primarily involved in capital formation, investor relations and head
office and executive office administration. We have two wholly-owned
subsidiaries:

| | * | Ikona Gear USA, Inc., incorporated in Nevada, is a
      non-operating entity holding all intellectual property owned by the Ikona
      group of companies and was formed on August 16, 2001.                                                                                                                                                
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                               
| | * | Ikona Industries Corporation, incorporated in British
      Columbia, Canada, was formed on October 31, 2003. This company is
      currently carrying out the operations of the Ikona group of companies,
      consisting of gear engineering design services, manufacturing, and
      licensing of patented gearing intellectual
property.

ABOUT GEARING TECHNOLOGIES AND THE IKONA GEARING SYSTEM

A gear is a toothed wheel, which
is usually round. The purpose of gearing is to transmit motion from one shaft to
another. This motion transfer may or may not be uniform and may be accompanied
by change in direction, speed and shaft torque (rotational force). A gear
reducer is used to reduce and convert the higher turning speed of a motor into
power or torque for such diverse items as winches and helicopters. Conversely, a
gear speed increaser (speed multiplier) converts a higher torque and lower
rotational speed into a higher-speed turning shaft that can be used to turn a
power generator for the production of electricity such as in windmills.

In general, gears may be divided
into several broad classifications based on the arrangement of the axes and of
the gear pair. Examples of these classifications include worm, bevel, helical,
parallel shaft, spur and planetary. Planetary gears are generally the most
energy efficient class of gears and account for approximately 35% of all gearing
applications (managements estimates). The Ikona Gearing System can be broadly
classified as a planetary gearing system.

The essence of any gear is its
tooth form. Gear teeth are classified as being either involute or non-involute.
An involute tooth has a specific geometrical curve. The contacting gear teeth on
two separate gear system components (i.e. the internal and external gears) are
identical in shape. An involute tooth is constructed such that constant angular
velocity (rotation rate) is maintained throughout gear contact. This constant
angular velocity is what is known as conjugate action and is a necessary feature
for many applications. A non-involute tooth is any tooth form that does not have
the specific geometry of an involute tooth form.

There are many forms of
non-involute teeth. With the Ikona non-involute tooth form - the contacting gear
teeth on two separate components of the gear system are complementary in shape
to one another. The pinion teeth have convex profiles, while those of the
internal gear are concave, making for favourable gear tooth contact conditions.

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The Ikona Gearing System improves
significantly upon the shortcomings of the planetary gear (i.e. gear backlash
and low ratios of contact between gear teeth), and as a result, the Ikona
Gearing System has technical advantages over other types of gear systems
presently being used (e.g. worm gears). The Ikona Gearing System has generally a
higher contact ratio than conventional planetary gears. In addition, the contact
ratio increases as the gearing reduction ratio increases. As a result, in high
torque applications (with a high gearing reduction ratio) the Ikona Gear System
can maintain several times more teeth in contact than a conventional planetary
gear. As a result it is possible to reduce the overall size of the gear and
maintain the same strength and reliability of a gear system several times the
size of a comparable Ikona Gearing System.

The Ikona Gearing System can
result in significant weight reductions in applications where high torque and
high gearing reduction ratios are required, for example, in aviation where fuel
consumption is directly reduced by weight savings.

ADVANTAGES OF THE IKONA GEARING SYSTEM

The Ikona Gearing System is superior
to conventional gearing systems for the following reasons:

| | * | High tooth contact ratio - in gearing, contact ratio can
      be thought of as the average number of teeth pairs in contact at any one
      time. Traditional involute gears may have only 1.77 pairs of teeth in
      contact at a time. In the Ikona Gearing System, up to 40 or more pairs of
      teeth can be in contact. With more mating teeth, the Ikona Gearing System
      is stiffer and stronger than its counterparts. With the inherent strength
      of the Ikona Gearing System, it is also possible to make gearing systems
      smaller and lighter. These particular benefits are important for the
      robotics, automotive and aerospace industries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Low noise level - the Ikona Gearing System is designed to
      operate with a noise level lower than most gear systems due to the unique
      meshing features of its teeth and the rolling motion inherent in the gear
      system design. Low noise levels are important in the aviation and robotics
      industries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | * | High single stage reduction ratio - reduction ratio is a
      measurement of the ability of a gear to convert speed from the input,
      high-speed shaft into power at the output, slow-speed shaft. A single gear
      stage is comprised of one input shaft and one output shaft. In multi-stage
      gear systems, the output shaft of one gear system will be the input shaft
      of the gear system that follows. When a high reduction ratio is required,
      such as for winches and cranes, which convert enormous torque (i.e. more
      than 30:1 gear reduction ratios), most gear systems must be designed as
      multi-stage systems to achieve the high torque required for that
      application. Every stage added to the system equates to an increase in
      cost and a decrease in gearbox efficiency (i.e. more friction, bearings
      and weight in a larger gearbox). The Ikona Gearing System is capable of a
      single stage reduction ratio of up to 5,000:1, which means higher
      efficiency and lower cost. This feature is ideal for winches and cranes
      since they typically require significant amounts of power or torque and
      therefore a high reduction ratio to lift or pull heavy objects.
| | * | Cost effectiveness - devices that have more components or
      high part counts are inherently more expensive due to production and
      maintenance costs. They also waste a significant amount of energy because
      of the added number of moving pieces. While doing the work of competitors'
      multi-stage gear systems in a single stage, the Ikona Gearing System is
      more cost effective because of its reduced part count.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | * | Conjugate system - the Ikona Gearing System is conjugate,
      meaning that it operates at a constant speed. Conjugate action equates to
      repeatability, which is an essential characteristic of precise machinery
      and positioning devices. In applications such as robotics, this feature is
      a necessity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | * | Zero backlash - backlash can be thought of as the
      movement of one gear while the mating gear is held stationary. This
      freedom of movement implies imprecision (e.g. putting a car's transmission
      into park still allows the vehicle to roll a few inches before reaching a
      complete stop). With present involute technology, zero backlash is only
      realized using a gear reducer with very tight tolerances. These tight
      tolerances are expensive and the result is still not absolutely zero
      backlash. With the Ikona Gearing System, zero backlash is theoretically
      inherent in the design of the tooth form. Absolutely zero backlash is not
      practical as it impedes the assembly process of a gearing system. The
      Ikona Gearing System has the lowest backlash presently available in
      current gear design and manufacture. Robotics is an ideal application for
      the Ikona Gearing System due to the necessity of extreme
  precision.                                                                                                                                                                                                                                              

Intellectual Property, Patents and Licenses

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Our technology includes a number of
proprietary and patented technologies. We hold patents issued from the United
States (5,505,668), Canada (2,129,188), Europe (including France, Great Britain,
Germany, Italy and Sweden) (0770192). All intellectual property, including
original patents for the Ikona Gearing System, provisional patent applications,
design specifications, trade secrets, improvements to the technologies,
software, contractual provisions with third parties, were assigned to us
according to an acquisition agreement dated August 31, 2001, between Diversified
Sciences Limited and Ikona Gear International, Inc. (now Ikona Gear USA, Inc.).
We have subsequently ensured that all patents have been duly re-assigned under
the name of Ikona Gear USA, Inc.

Although we intend to continue to
protect the technology and any improvements to the technology with additional
patent applications, no assurance can be given that any patent will be issued or
that the scope of any patent protection will exclude competitors or that any
patent, if issued, will be held valid if subsequently challenged.

It was brought to our attention
in meetings with a potential client Magna Advanced Technologies in 2005 that we
had omitted a filing with the US patent office of all material correspondences
with the European patent office during the application period for the US
patent.

We had our patent attorneys
conduct an independent review in which this assertion was confirmed. In
particular, we had received a patent search report from the European patent
office on November 23, 1995, that indicated an existing relevant patent (GB, A,
1 101 522 issued on 31 January 1966) which was interpreted as similar to the
patent we filed with the European patent office. As we subsequently convinced
the European patent office as to why our patent was unique and dissimilar to the
pre-existing patent GB, A, 1 101 522, we neglected to bring this correspondence
with the European patent office to the attention of the US patent office.
Regardless, whether or not the correspondence occurred and did not impair our
ability to file a European patent convention treaty, it is possible that through
a strict interpretation of our responsibilities under US patent law that
management had a responsibility to disclose to the US patent office the European
search report and its findings, and our subsequent response and our successful
conclusion in achieving a European patent convention treaty.

We have been advised that a
resolution to this omission is possible through requesting a re-examination of
our US patent, a process that could take two years to complete. We were also
advised that it is difficult to forecast the outcome of a reexamination
procedure if we requested one, and since we cannot be assured that the outcome
would be favorable to our company, we have not requested one. We are uncertain
as to the effect, if any, that this matter will have on our US patent rights.

|Jurisdiction/       | Patent/         |                   |                                   | Assigned             |                  
|------------------- | --------------- | ----------------- | --------------------------------- | -------------------- | -----------------
|Title               | Application No. | Issue Date        | Applicant                         | To                   | Expiry Date      
|                    |                 |                   |                                   |                      |                  
|USA/ Gear system    | 5,505,688       | April 9, 1996     | Ikona Gears Limited (Nicosia, CY) | Ikona Gear USA, Inc. | November 11, 2015
|                    |                 |                   |                                   |                      |                  
|Canada/ Gear system | 2,129,188       | September 7, 1999 | Ikona Gears Limited & Ikona Inc.  | Ikona Gear USA, Inc. | July 29, 2014    
|                    |                 |                   |                                   |                      |                  
|Europe/ Gear system | 0770192         | November 11, 1998 | Ikona Gears Limited & Ikona Inc.  | Ikona Gear USA, Inc. | July 26, 2015    

We also intend to rely on a
combination of trade secrets, license agreements, non-disclosure and other
contractual provisions, and technical measures to establish and protect the
proprietary aspects of the Ikona Gearing System. All of our current employees,
consultants and advisers have signed non-disclosure agreements. We believe that
our intellectual property rights are appropriately protected having regard for
the technical complexity of the systems, and the expertise required to design
and manufacture gearing systems that are unique to their applications.

8

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Other Intellectual Property

Our Company has registered the domain
name www.ikona.ca.

Limitations of Intellectual Property Protection

The Ikona trademark and domain name
play an important role in expanding the awareness of our technology on the
Internet and in developing partnerships between those who use the Internet to
retrieve information and many providers of products and services available on
the Internet. We have applied for Canadian registration of Ikona trademarks and
we have registered our domain name in an effort to protect them, our efforts may
be inadequate to prevent others from claiming violations of our marks and may be
inadequate to protect our use of those names as unique. In addition, trademark
protection and the uncertainty surrounding the legal protections of domain names
may be unenforceable or limited in other countries, and the global nature of the
Internet makes it impossible to control the ultimate destination of our
Company's communications. The regulation of web addresses in the US and in
foreign countries is subject to change. As a result, we may not be able to
maintain our domain name in the future. Furthermore, the relationship between
regulations governing such domain names and the laws protecting trademarks is
unsettled.

Competition

Ikona's Gearing System is based on a
design similar to the cycloidal drive system, originally developed in Japan and
now manufactured by a number of large Japanese companies. We have identified the
following five competing companies as those with technology most comparable to
the Ikona Gearing System. We believe the Ikona Gearing System is technologically
superior to technologies marketed by these companies. However, as these
companies have the legacy of lengthy historical operations and well established
reputations, it is our challenge to continue to establish Ikona as a company and
to prove the importance of the superior technological characteristics of the
Ikona Gearing System, including low weight, high strength, near-zero backlash
and reduced friction and wear.

Sumitomo Heavy Industries ("Sumitomo")
- Operating since 1888, Sumitomo serves the steel, heavy machinery, ship, bridge
manufacturing, automotive, chemical, construction, materials handling, medical,
timber, and utility industries. Sumitomo has more than 30 major subsidiaries and
affiliates operating in Japan and other Asian countries in addition to the US
and Europe. Sumitomo is part of Japan's Sumitomo Group and, while it has a
global customer base, Japan and North America account for about 90% of sales.
Its mass-produced industry segment (which includes the manufacturing of gears)
generated ¥140 billion ($1.1 billion) in 2000.

Sumitomo gear manufacturing, with an
approximately 9% share of the global gearing market (managements estimates),
may be considered one of Ikona's largest competitors. Its main gear product uses
a cycloidal drive system similar to the Ikona Gearing System; however,
Sumitomo's technology uses a wave plate and pins (a non-conjugate gear system)
as opposed to meshed teeth. As a result, its product performance is inferior
when compared to Ikona's system.

SEW-Eurodrive (SEW) - has focused on
the following five technologies: gear reducers, adjustable speed drives,
electric motors, brakes, and electronic controls. SEW-Eurodrive has grown during
the past 65 years in drive technology, with more than 38,000 employees in 142
countries and sales in excess of DM1.9 billion ($880 million).

Flender USA ("Flender") - has over
9,500 employees located in 15 manufacturing operations with over 70 sales
offices worldwide. Each product line and facility is supported by ongoing
research, development, the latest in manufacturing techniques, and a rapid
transfer of today's technologies to Flender operations throughout the world.
Flender offers gear reducer packages with helical or bevel gearing with smooth
action and low noise and a maximum reduction ratio of 450:1.

Harmonic Drive Technologies
(Harmonic) - is a leading manufacturer of precision gearing systems,
gearboxes, servo actuators and custom assemblies based on the unique principle
of harmonic drive. It is also an importer of heavy-duty precision gear and servo
actuator systems based on the cycloidal gear system.

9

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Fairfield Manufacturing Company, Inc.
(Fairfield)  is a manufacturer of custom gears, gear sets and transmission
assemblies. Services also include design engineering, heat treating, and
testing. Fairfield has over 1,300 employees with a 600,000 square foot
manufacturing space.

TechnologyDevelopment

We charge technology development
expenditures to operations as expended. In the two years ended August 31, 2007,
and 2006, our expenditures on technology development were $238,167, and
$584,440, respectively.

Employees and Consultants

At November 30, 2007, we had 17
full-time and part-time employees and consultants.

Item 2. Description of Property

As of August 31, 2007, we
occupied our premises at 1650 Brigantine Drive, Unit #100, Coquitlam, BC V3K
7B5, under a sublease- for office and workshop facilities for a period of 42
months commencing December 1, 2006. The premises lease commits the Company to a
net annual rental expense of $131,000 in 2007, $132,600 in 2008, $134,600 in
2009 and additional annual operating costs estimated at $40,016 for a period of
42 months ending May 29, 2010. We are currently looking to sublease our old
premises.

Item 3. Legal Proceedings

As of November 30, 2007, there
are no pending legal proceedings into which the Company is a party and we are
not aware of any threatened legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Common Equity and Related Stockholder
Matters

Since December 5, 2003, our
common stock has been quoted on the OTCBB under the symbol IKGI. The OTCBB has
been the principal trading market for our shares. We are also listed on the
Berlin and Frankfurt stock exchanges, although our trading on such exchanges has
been random and sporadic.

The following table sets forth
the high and low prices for our common stock on the OTCBB for each quarter since
August 31, 2005. The prices presented below are bid and ask prices which
represented prices between broker-dealers and do not include retail markups and
markdowns or any commission to the broker. The prices do not necessarily reflect
actual transactions.

Common StockQuarter Ended
    
    Low
    
    
    HighAugust 31, 2005
    
    0.54
    
    
    0.72November 30, 2005
    
    0.45
    
    
    0.90February 28, 2006
    
    0.46
    
    
    0.63May 31, 2006
    
    0.49
    
    
    0.65August 31, 2006
    
    0.27
    
    
    0.54November 30, 2006
    
    0.58
    
    
    0.64


10

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February 28, 2007
    
    0.60
    
    
    0.64May 31, 2007
    
    0.29
    
    
    0.35August 31, 2007
    
    0.35
    
    
    0.35


Holders

As of November 15, 2007, we had
approximately 100 shareholders of record. This does not include shareholders who
held stock in accounts at broker or dealers.

Dividends

We have never declared or paid cash
dividends on our common stock. We currently intend to retain all future
earnings, if any, to fund the operation of our business, and, therefore, do not
at this time anticipate paying dividends in the foreseeable future. Future cash
dividends, if any, will be determined by our board of directors, based upon such
factors as our historical and projected earnings, our working capital surplus
and anticipated demands for capital expenditures.

Recent Sales of Unregistered Securities.

1.      In October 2003, we completed
a private placement of 314,000 shares of common stock at $0.50 per share for
total proceeds of $157,000. The issuance was to a total of one investor who
acquired the securities in an offshore transaction pursuant to Regulation S
(Reg S) under the Securities Act (Securities Act). The securities, which
were taken for investment purposes, were subject to appropriate transfer
restrictions and restrictive legend, and were issued without registration under
the Securities Act in reliance upon the exclusion set forth in Regulation S
there under.

2.      In October 2003, we completed
the acquisition of Ikona Gear International, Inc. ("Ikona"). As consideration
for all of the common shares of Ikona, we issued 15,041,633 common shares to the
stockholders of Ikona of the Company. The issuance was to a total of 59
investors who acquired the securities in offshore transactions pursuant to
Regulation S under the Securities Act. The securities, which were taken for
investment purposes, were subject to appropriate transfer restrictions and
restrictive legend, and were issued without registration under the Securities
Act in reliance upon the exclusion set forth in Regulation S there under.

3.      In January 2004, we completed
a private placement consisting of 290,000 shares of common stock at a price of
$0.50 per share for gross proceeds of $145,000. The issuance was to a total of
11 investors who acquired the securities in offshore transactions pursuant to
Regulation S under the Securities Act. The securities, which were taken for
investment purposes, were subject to appropriate transfer restrictions and
restrictive legend, and were issued without registration under the Securities
Act in reliance upon the exclusion set forth in Regulation S there under.

4.      From February to April 2004,
we completed a private placement consisting of 2,384,026 units at a price of
$0.75 per unit for gross proceeds of $1,788,020 Each unit consisted of one share
of common stock and one-half of one non-transferable share purchase warrant
whereby each whole warrant entitles the holder to acquire one additional share
of common stock at a price of $3.00 per share for a period of one year. The
issuance was to a total of 63 investors who acquired the securities in offshore
transactions pursuant to Regulation S under the Securities Act. The securities,
which were taken for investment purposes, were subject to appropriate transfer
restrictions and restrictive legend, and were issued without registration under
the Securities Act in reliance upon the exclusion set forth in Regulation S
there under.

5.      From February to April 2004,
we sold an aggregate of 54,000 units at a price of $0.75 per unit for gross
proceeds of $40,500. Each unit consisted of one share of common stock and
one-half warrant, each whole warrant exercisable to purchase one share of common
stock at a price of $3.00 per share. The units were sold to two persons who
qualified as "accredited investors" within the meaning of Rule 502(a) of
Regulation D (Reg D). The securities, which were taken for investment purposes
and were subject to appropriate transfer restrictions and restrictive legend,
were issued without registration under the Securities Act in reliance upon the
exemption set forth in Section 4(2) of the Securities Act and Regulation D there
under.

6.      In July 2004, we sold an
aggregate of 6,666 units at a price of $0.75 per unit for gross proceeds of
$5,000. Each unit consisted of one share of common stock and one-half warrant,
each whole warrant exercisable to purchase

11

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one share of common stock at a price of $3.00 per share. The
issuance was to one investor who acquired the securities in an offshore
transaction pursuant to Regulation S under the Securities Act. The securities,
which were taken for investment purposes, were subject to appropriate transfer
restrictions and restrictive legend, and were issued without registration under
the Securities Act in reliance upon the exemptions set forth in Regulation S
there under.

7.      In March 2005, we sold an
aggregate of 1,046,667 units at a price of $0.75 per unit for gross proceeds of
$785,000. Each unit consisted of one share of common stock and one whole
warrant, each whole warrant exercisable to purchase one share of common stock at
a price of $1.00 per share, for a period of one year, after which each whole
warrant is exercisable to purchase one share of common stock at a price of $1.40
per share, for a further period of one year. The issuance was to six investors
who acquired the securities in offshore transactions pursuant to Regulation S
under the Securities Act. The securities, which were taken for investment
purposes, were subject to appropriate transfer restrictions and restrictive
legend, and were issued without registration under the Securities Act in
reliance upon the exemptions set forth in Regulation S there under.

8.      In October 2005, we sold an
aggregate of 400,000 units at a price of $0.75 per unit for gross proceeds of
$300,000. Each unit consisted of one share of common stock and one whole
warrant, each whole warrant exercisable to purchase one share of common stock at
a price of $1.00 per share, for a period of one year, after which each whole
warrant is exercisable to purchase one share of common stock at a price of $1.40
per share, for a further period of one year. The issuance was to one investor
who acquired the securities in an offshore transaction pursuant to Regulation S
under the Securities Act. The securities, which were taken for investment
purposes, were subject to appropriate transfer restrictions and restrictive
legend, and were issued without registration under the Securities Act in
reliance upon the exemptions set forth in Regulation S there under.

9.      In October 2005, we sold
issued an aggregate of 10,000 shares at a price of $0.50 per share in settlement
of accounts payable payment of corporate finance fees, for gross proceeds of
$5,000. The issuance was to one investor who acquired the securities in an
offshore transaction pursuant to Regulation S under the Securities Act. The
securities, which were taken for investment purposes, were subject to
appropriate transfer restrictions and restrictive legend, and were issued
without registration under the Securities Act in reliance upon the exemptions
set forth in Regulation S there under.

10.      On March 6, 2006 and March
14, 2006, pursuant to subscription agreements, escrow was released on a private
placement to an aggregate of 26 investors for an aggregate of 262,400,000 units,
and total gross proceeds of U$1,200,000. The units consisted on 10% convertible
notes and warrants. Please refer to our Form 8-K, filed with SEC on March 16,
2006.

11.      In May 2006, we sold issued
an aggregate of 100,000 shares at a price of $0.58 per share in payment of
business development fees. The issuance was to one investor who acquired the
securities in an offshore transaction pursuant to Regulation S under the
Securities Act. The securities, which were taken for investment purposes, were
subject to appropriate transfer restrictions and restrictive legend, and were
issued without registration under the Securities Act in reliance upon the
exemptions set forth in Regulation S there under.

12.      In July 2006, we sold issued
an aggregate of 500,000 shares at a price of $0.33 per share in payment of
corporate finance fees. Each unit consisted of one share to one individual of
who acquired the securities pursuant to Regulation D under the Securities Act.
The securities, which were taken for investment purposes, were subject to
appropriate transfer restrictions and restrictive legend, and were issued
without registration under the Securities Act in reliance upon the exemptions
set forth in Regulation D there under.

13.      In September 2006, we issued
1,990,000 units at a price of $0.50 per unit for cash proceeds of $905,000
(gross proceeds of $995,000 net of finders fees of $95,000). Each unit consists
of one common share and one-half share purchase warrant. Each whole warrant
entitles the holder to purchase one additional share of common stock at a price
of $0.60 per share for a period of one year from the date of issuance. The
securities, which were issued for investment purposes, were subject to
appropriate transfer restrictions and restrictive legend, and were issued
without registration under the Securities Act in reliance upon the exemptions
set forth in Reg S there under.

14.      In December 2006, we issued
an aggregate of 200,000 shares at a price of $0.35 per share pursuant to a
termination agreement of an executive officer of the Company. The securities,
which were taken for investment

12

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purposes, were subject to appropriate transfer restrictions and
restrictive legend, and were issued without registration under the Securities
Act in reliance upon the exemptions set forth in Reg D there under.

15.      In March 2007, we issued an
aggregate of 28,500 shares at a price of $0.67 per share in payment of corporate
finance fees. The issuance was to three investors who acquired the securities in
an offshore transaction pursuant to Reg S under the Securities Act. The
securities, which were taken for investment purposes, were subject to
appropriate transfer restrictions and restrictive legend, and were issued
without registration under the Securities Act in reliance upon the exemptions
set forth in Reg S there under.

16.      In April 2007, we issued an
aggregate of 500,000 units at a price of $0.50 per unit for cash proceeds of
$250,000. Each unit consists of one common share and one-half share purchase
warrant. Each whole warrant entitles the holder to purchase one additional share
of common stock at a price of $0.55 per share for a period of one year from the
date of issuance. The issuance was to one investor who acquired the securities
in an offshore transaction pursuant to Reg S under the Securities Act. The
securities, which were taken for investment purposes, were subject to
appropriate transfer restrictions and restrictive legend, and were issued
without registration under the Securities Act in reliance upon the exemptions
set forth in Reg S there under.

17.      In July 2007, we issued an
aggregate of 1,666,667 units at a price of $0.60 per unit for cash proceeds of
$860,000 (gross proceeds of $1,000,000, net of finders fees of $140,000). Each
unit consists of one common share and one-half share purchase warrant. Each
whole warrant entitles the holder to purchase one additional share of common
stock at a price of $0.64 per share for a period of two years from the date of
issuance. The issuance was to one investor who acquired the securities in an
offshore transaction pursuant to Reg S under the Securities Act. The securities,
which were taken for investment purposes, were subject to appropriate transfer
restrictions and restrictive legend, and were issued without registration under
the Securities Act in reliance upon the exemptions set forth in Reg S there
under.

18.      In August 2007, we issued an
aggregate of 35,000 shares at a price of $0.27 per share in payment of corporate
finance fees. The issuance was to one investor who acquired the securities in an
offshore transaction pursuant to Reg S under the Securities Act. The securities,
which were taken for investment purposes, were subject to appropriate transfer
restrictions and restrictive legend, and were issued without registration under
the Securities Act in reliance upon the exemptions set forth in Reg S there
under.

19.      In September 2007, we issued
an aggregate of 3,313,332 units at a price of $0.50 per unit for cash proceeds
of $1,424,733 (gross proceeds of $1,656,666, net of finders fees of $231,933).
Each unit consists of one common share and one-half share purchase warrant. Each
whole warrant entitles the holder to purchase one additional share of common
stock at a price of $0.54 per share for a period of two years from the date of
issuance. The issuance was to one investor who acquired the securities in an
offshore transaction pursuant to Reg S under the Securities Act. The securities,
which were taken for investment purposes, were subject to appropriate transfer
restrictions and restrictive legend, and were issued without registration under
the Securities Act in reliance upon the exemptions set forth in Reg S there
under.

20.      In October 2007, we issued an
aggregate of 85,000 shares at a price of $0.46 per share in payment of investor
relations fees. The issuance was to one investor who acquired the securities in
an offshore transaction pursuant to Reg S under the Securities Act. The
securities, which were taken for investment purposes, were subject to
appropriate transfer restrictions and restrictive legend, and were issued
without registration under the Securities Act in reliance upon the exemptions
set forth in Reg S there under.

13

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EQUITY COMPENSATION PLAN INFORMATION

Number of securities to be issued upon
      exercise of outstanding options, warrants and rights
      (a)
    Weighted average exercise price of
      outstanding options, warrants and rights (b)
    Number of securities remaining available
      for future issuances under equity compensation plans
      (excluding securities reflected in column (a)) (c)Equity compensation plans approved by
      security holders
      7,219,951(1)1,201,000(2)
          
        8,420,951
      $0.52 $0.54 
          
        $0.52
      1,100,049 -0- 
          
        1,100,049Equity compensation plans not approved by
      security holdersTotal


(1) Includes 1,810,000 options granted to directors (550,000
options at a price of$1.10 per share, 140,000 options at a price of $0.56 per
share, 270,000 options at a price of $0.27 per share and 850,000 options at a
price of $0.52 per share), 200,000 options at a price of $0.63 per share in
payment of investor relations fees and 150,000 options at a price of $0.52 per
share in payment of investor relations fees, 100,000 options at a price of $1.10
per share in payment of technology development fees and 4,959,951 directors and
employees options at various prices.

(2) Includes 50,000 warrants at a price of $0.75 per warrant in
payment of investor relations consulting fees, 751,000 warrants at an exercise
price of $0.50 per warrant in payment of corporate finance fees, and 400,000
warrants at a price of $0.59 per warrant in payment of investor relations fees.

Purchases of Equity Securities

None.

Item 6. Management's Discussion and Analysis or Plan of
Operations

Plan of Operations

Our mission is to become the
leading provider of high-value power-transmission solutions to the Oil &
Gas, Industrial and Automotive markets. In order to accomplish this aggressive
objective, Ikona will focus on a number of key priorities over the next twelve
months:

- On-time fulfillment of lead customer orders in the Oil & Gas market
- The highest degree of after-sale service and support of lead customers
- Successful Oil & Gas sales execution: the Company has built out a
  substantial sales pipeline in and must close on a significant percentage of
  those opportunities
- Continued growth and prototype development in the Industrial market
  segment: Ikona has entered into development relationships in the separate
  applications of Indexing and Wind Energy and would like to enhance those
  relationships and work toward prototype production in each case
- Continued development of licensing opportunities in the Automotive market:
  Ikona plans to continue the execution of our License Agreement for royalties
  with our current partner Magna and develop other similar potential customers

Ikona has made the transition
from a development-stage company to a manufacturing organization with a range of
high-value Oil & Gas products successfully commercialized throughout FY
2007. In order to support continuing commercialization efforts, the Company is
targeting aggressive growth for FY 2008 and will be ramping up activities in a
number of functional areas to support that growth.

14

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Marketing and Business
Development will be key to Ikonas continued commercialization efforts. Our
planned marketing activities include a significant tradeshow presence as well as
a high amount pf travel in order to meet prospective customers and joint
development partners. We intend to focus significantly on Oil & Gas
tradeshows in the next 12 months and plan to attend and exhibit our full range
of product at the leading events in North America and the Middle East. We intend
to promote Ikona technology to Middle East, European and North American industry
leaders through participating in gear industry trade shows, hybrid vehicle
conferences and through development and refining of joint development alliances
and licensing agreements for existing and potential customers. We anticipate our
annual business development operating costs will be approximately $490,000 over
the next 12 months.

We will be continuing our
Product Development activities in Oil & Gas while trying to secure
joint development arrangements with gearing application providers who wish to
incorporate Ikona designs into their applications. We also intend to secure
partnering relationships with gear manufacturers who can manufacture gears under
license from Ikona based on our design specifications. Our objective is to
maintain our focus as a gear design specialist and engineering solution provider
of patented gearing products, while delegating component fabrication to third
parties and keeping final assembly and testing in house. In order to meet the
substantial demand for our commercial Oil & Gas products, we will continue
to build out our Manufacturing and Operations team. The projected budget
for the next twelve months of manufacturing activities is $1,473,000, excluding
non-cash compensation expenses. Our planned manufacturing activities include
spending additional funds on tooling and miscellaneous shop expenses in order to
scale up our manufacturing operations.

We have focused substantially all
Technology Development activities over the past year on development of
applications of our gearing technology in the Oil & Gas and Industrial
sectors. Over the next 12 months we will focus our efforts on developing new
prototypes in the Oil & Gas and Industrial markets consistent with our
product roadmap. We anticipate that we will expend approximately $220,000on research and development over the next 12 months, excluding non-cash
compensation expenses.

We anticipate that our General
and Administrative expenses will increase approximately to $1.16 million per
year, excluding non-cash compensation expenses, due to increased variable
overheads associated with more staff and more commercial activities.

We presently have 14 employees(fulltime and part-time)and 3 contractors and we expect to grow to
19 employees plus 3 contractors over the next 12 months. These growth estimates
are contingent on access to sufficient funding and our ability to recruit
suitable candidates with requisite engineering academic qualifications and gear
industry work experience.

We anticipate our total cash
requirements for the next twelve months will be approximately $2.79 million, of
which we had $1.25 millionavailable at August 31, 2007. The balance of
our cash requirements will need to be raised through additional financings. We
estimate that an additional $1.54 million will be required to support our plan
of operations over the next 12 months. We have no current arrangements with
respect to sources of additional financing and there can be no assurance that
additional financing will be available to us on commercially reasonable terms.
The inability to obtain additional financing, when needed, would have a material
adverse affect on us, including possibly requiring us to curtail our operations.
To the extent that future financing involves the sale of our equity securities,
our then existing stockholders, could be substantially diluted.

We do not consider any specific
accounting policies to be critical to the economic success of our business.

Critical Accounting Policies and Estimates

There have been no significant
changes to our critical accounting policies and estimates during the year ended
August 31, 2006, compared to those disclosed in Item 6, Managements Discussion
and Analysis of Financial Condition and Results of Operations included in our
annual report on Form 10-KSB for the year ended August 31, 2006.

Off-Balance Sheet Arrangements

15

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We currently do not have any
off-balance sheet arrangements which have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our investors.

Operating and Financial Review and Prospects

The following discussion and
analysis of the financial condition and operating results of the Company for the
two fiscal years ended August 31, 2007 and 2006 should be read in conjunction
with the financial statements and related notes attached hereto. (See financial
statements.)

Our financial statements were
prepared in conformity with generally accepted accounted principles in the US.
They also comply, in all material respects, without requiring material
adjustments, with the rules and regulations of the Securities and Exchange
Commission (SEC).

Our business is in the
development stage and has limited revenues in its last two fiscal years. In the
past, we have acquired necessary capital through the limited issuance of common
shares. There is no assurance that this source of capital will continue to be
available in future operating periods.

Operating Results

The following describes the fiscal year ended August 31, 2007
compared to fiscal year ended August 31, 2006.

REVENUES. Revenues are generated from licensing royalties,
  the provision of engineering services and product revenues. In the years ended
  August 31, 2007 and 2006, we generated revenues of $1,041,789 and $464,213 respectively.

In the years ended August 31, 2007 and 2006, we generated
royalties of $7,997 in licensing royalties from Aircast Inc. and $186,462
respectively. Royalties revenues of $186,462 in the year ended August 31, 2006
relate to:

- $6,249 in licensing royalties from Aircast Inc.
- $180,213 from Magna, an Austrian corporation, pursuant to a license
  agreement dated December 15, 2005 and a Designation Addendum from Magna.

In the years ended August 31, 2007 and 2006, we generated engineering
  services revenues of $3,296 and $18,855 respectively, and product revenues of
  $1,030,496 and $258,896 respectively. The increase pertains to successful oil
  & gas sales execution.

COST OF ENGINEERING SERVICES.Our cost of engineering
services consists of engineering fees and salaries attributable directly to
project revenues. Our cost of engineering services in the year ended August 31,
2007, was $1,178,907. In the comparative period, we recorded cost of engineering
services of $269,138. The increase reflects costs associated with manufacturing
mud pumps and drawworks.

AMORTIZATION AND DEPRECIATION. We record amortization
expense on our capitalized patents and trademark costs and depreciation on our
property, plant and equipment. In the years ended August 31, 2007 and 2006, we
recorded depreciation and amortization expense of $167,645 and $96,172
respectively. The increase in expense reflects depreciation associated with
$272,624 of depreciable equipment purchased in the current year.

BUSINESS DEVELOPMENT. Business development expense
reflects internal and external costs to market our business opportunity to
existing clients and potential new clients. Business development expense
includes: the salaries and benefits of our president and our vice president of
business development; and fees paid to external consultants for web design and
web based marketing services. Business development expense was $622,011 and
$304,579 respectively for the years ended August 31, 2007 and 2006. The increase
in business development expense pertains to non-cash compensation expense in
amount of $290,709.

CORPORATE FINANCE. Corporate finance expense reflects
costs associated with fees paid to maintain the corporate finance function
within our company. These fees are paid to our former chief financial officer
and external consultants who oversee accounting, auditing, fund raising, and
regulatory reporting functions for our company.

16

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Corporate finance expense was $364,546 and $313,125
respectively for the years ended August 31, 2007 and 2006. Included in the 2007
corporate finance fees expense is non-cash compensation expense paid by common
stock and warrants in amount of $200,189.

GENERAL AND ADMINISTRATIVE. Our general and
administrative expenses consist primarily of clerical and administrative
salaries and benefits, office rents, office supplies, telephone and
telecommunications expenses, courier and other general costs not attributable
directly to other statement of operations line items. Our general and
administrative expenses were $685,236 and $108,071 for the years ended August
31, 2007 and 2006. The increase in general and administrative expense pertains
to salary expense of our executive vice-president in amount of $116,000,
increased office supplies purchases and maintenance fees in the current year.
Included in the August 31, 2007 expense is an amount of $379,625 of non-cash
compensation expense.

INVESTOR RELATIONS. Our investor relations expense
consists primarily of external consulting fees, a portion of which are non-cash
compensation expenses associated with stock option incentives. Investor
relations expenses also are associated with communications costs to increase
investors' awareness of our company. Investor relations expenses were $391,867
and $126,588 for the years ended August 31, 2007 and 2006. The increase in
expense is mainly due to non-cash compensation expense in amount of $207,119.

LISTING AND FILING FEES. Our listing and filing fees
expense consists primarily of external consulting fees and associated
communications costs to convert our regulatory filings into Edgar filing format.
Listing and filing fees expenses were $9,423 and $15,116 for the years ended
August 31, 2007 and 2006. The decrease in expense is mainly due to decreased
amount of filings.

PRODUCT DEVELOPMENT. Our product development expense
consists primarily of indirect costs that are attributable to costs of
engineering services, salaries, and materials and supplies consumed by our
department. Our product development expense was $735,266 and $nil for the years
ended August 31, 2007 and 2006. Included in the 2007 product development expense
is non-cash compensation expense in amount of $134,179.We recorded no expense in
the year ended August 31, 2006 as we did not have indirect costs attributable to
cost of product development.

PROFESSIONAL FEES. Our professional fees expense
consists primarily of external fees associated with our auditors, our securities
attorneys and our corporate contractual counsel. Professional fees expenses were
$218,179 and $102,913 for the years ended August 31, 2007 and 2006 respectively.
The increase in expense associated with increased legal and securities attorney
fees related to the settlement with our former CFO, increased audit fees and
increased external consulting fees related to preparation of our reports.

RENT.Our rent expenses consist primarily of an office
premises lease and associated variable costs such as property taxes,
maintenance, and costs passed on to us regarding our lease agreement. Rent
expense was $176,649 and $65,131 for the years ended August 31, 2007 and 2006.
The increase in rent expense relates to increased costs of our relocation to
larger premises in amount of $132,649 and to payments of previous leased
premises in amount of $44,000.

TECHNOLOGY DEVELOPMENT. Technology development expense
reflects internal and external costs to develop our technology including the
salaries of our engineers, fees paid to external consultants, and materials and
supplies consumed in advancing our core intellectual property. Research and
development expense was $238,167 and $584,440 respectively for the years ended
August 31, 2007 and 2006. The decrease technology development expense is due to
the utilization of our engineering team on client projects. Included in the 2007
technology development expense is non-cash compensation expense in amount of
$136,836.

TRAVEL AND RELATED. Travel and related expense includes
all of our travel costs associated with travel for reasons of business
development, research and development, and corporate finance. Included in travel
are the costs of flights, trains, automotive rentals, accommodations, meals and
other associated travel costs. Travel and related expense was $89,114 and
$50,140 respectively for the years ended August 31, 2007 and 2006. The increase
in expense is associated with travel arrangements around the globe during the
year ended August 31, 2007.

Liquidity and Capital Resources

17

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As at August 31, 2007, our total
cash was $1,227,579, our working capital deficiency was $(460,314), and our
stockholders' deficiency was $(120,098). Since inception in August 2001, we have
incurred cumulative losses of $9,390,679. Our current working capital is
expected to be sufficient to satisfy our operating requirements for four months.
Our ability to satisfy projected working capital requirements is dependent upon
our ability to generate revenue and to secure additional funding through public
or private sales of securities, including equity securities. In the month of
September, 2007, we completed process of private placement in amount of
$1,424,733 (gross proceeds of $1,656,666, net of finders fees of $231,933). As
of the date of this report, the Company repaid the convertible notes payable in
the amount of $1,380,356, including interest of $180,356.We are continuing to
actively pursue investments from a number of potential sources. There is no
assurance that we will secure the necessary capital on terms acceptable to us.
If we are unable to raise additional capital when needed, this could have a
material adverse affect on us, including possibly requiring us to curtail or
cease our operations.

At August 31, 2007, our current
working capital is expected to be sufficient to satisfy our operating
requirements for approximately four months. Our ability to satisfy projected
working capital requirements is dependent upon our liability to secure
additional funding through public or private sales of securities, including
equity securities. There is no assurance that we will secure the necessary
capital on terms acceptable to us. If we are unable to raise additional capital
when needed, this could have a material adverse affect on us, including possibly
requiring us to curtail or cease our operations.

During the year ended August 31,
2007, our operations consumed $1,872,044. Our net loss of $4,127,604 was
partially offset by depreciation and amortization of $147,645, also reduced by
$1,348,657 of various non-cash expenses, deferred non-cash interest expenses of
$267,136 and amortization of fees of $172,156. In arriving at our net cash
consumed in operations, our net loss was decreased by $4,151 non-cash loss on
disposal of assets, and decreased by $315,815 of cash consumed in our operating
assets and liabilities, resulting in net cash used in operations of $1,872,044.
In the year ended August 31, 2006, our operations consumed $1,224,755.

During the year ended August 31,
2007, we spent $272,624 on new furniture, machinery and equipment and leasehold
improvements, for net cash consumed in investing activities of $272,624. In the
year ended August 31, 2006, we spent $50,408 on machinery and equipment (net of
disposals).

During the year ended August 31,
2007, we generated $2,934,815 from financing activities. We received a net
private placement during the year ended August 31, 2007 of $2,031,600 (gross
proceeds of $2,266,600, net of issuance costs of $235,000). Our cash flow from
financing activities was increased by subscriptions advanced of $906,666 and
decreased by repayment of loan payable of $2,321 and repayment of lease payable
of $1,130.

In total, our cash increased by
$790,147 to $1,227,579 for the year ended August 31, 2007. Our cash was $437,432
as of the August 31, 2006.

Our current working capital is
not sufficient to meet our business operating objectives (see Plan of
Operations). Our ability to satisfy projected working capital requirements is
dependent upon our ability to secure additional funding through public or
private sales of securities, including equity securities. There is no assurance
that we will be able to secure the necessary capital on terms acceptable to us
or at all.

Trends

Ikona has experienced significant
commercial success in the launch of its Oil & Gas products during FY 07. We
expect substantial growth in awareness and interest in these products over the
course of FY 2008 supported by strong macroeconomic factors that include strong
demand in the US drilling sector and high oil prices. The high price and
continued strong demand for fossil fuel product will also provide continued
support for the alternative energy market, specifically wind energy. Ikonas
patented gear technology offers substantial improvements to windmill technology
and the companys diversified, but focused, business model positions us to take
advantage of these favorable market conditions. We expect steady demand in both
the communications markets, further supporting efforts to commercialize a
portable satellite pedestal with an Ikona gearbox to enable the automated
rotation and tilting of a 2.4 meter antenna.

18

---

Although we will continue to offer clients the option to
license our gear technology, we believe that the change in our business model to
include the manufacture and distribution of Oil & Gas products will lead
much higher near term revenues and further support our ability to refine and
develop our patented technology for use in the Industrial and Automotive
markets.

CRITICAL ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets  an amendment of APB
Opinion No. 29 (SFAS 153) which amends Accounting Principles Board Opinion
No. 29, Accounting for Nonmonetary Transactions to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005.

In December 2004, FASB issued
Statement of Financial Accounting Standards No. 123R, Share Based Payment
(SFAS 123R). SFAS 123R supersedes APB 25 and its related implementation
guidance by requiring entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards (with limited exceptions) and revises SFAS 123 as
follows:

| | i.   | Public entities are required to measure liabilities
      incurred to employees in share-based payment transactions at fair value
      and nonpublic entities may elect to measure their liabilities to employees
      incurred in share-based payment transactions at their intrinsic value
      whereas under SFAS 123, all share-based payment liabilities were measured
      at their intrinsic value.                                                                                                                                                                                                                               
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ii.  | Nonpublic entities are required to calculate fair value
      using an appropriate industry sector index for the expected volatility of
      its share price if it is not practicable to estimate the expected
      volatility of the entitys share price.                                                                                                                                                                                                                                                                                                                                                                                
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | iii. | Entities are required to estimate the number of
      instruments for which the requisite service is expected to be rendered as
      opposed to accounting for forfeitures as they occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | iv.  | Incremental compensation cost for a modification of the
      terms or conditions of an award is measured by comparing the fair value of
      the modified award with the fair value of the award immediately before the
      modification whereas SFAS 123 required that the effects of a modification
      be measured as the difference between the fair value of the modified award
      at the date it is granted and the awards value immediately before the
      modification determined based on the shorter of (1) its remaining
      initially estimated expected life or (2) the expected life of the modified
      award.

SFAS 123R also clarifies and
expands guidance in several areas, including measuring fair value, classifying
an award as equity or as a liability and attributing compensation cost to
reporting periods. SFAS 123R does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
SFAS 123 as originally issued and EITF 96-18. SFAS 123R also does not address
the accounting for employee share ownership plans which are subject to Statement
of Position 93-6, Employers Accounting for Employee Stock Ownership Plans.
Public entities (other than those filing as small business issuers) will be
required to apply SFAS 123R as of the first annual reporting period that begins
after June 15, 2005. Public entities that file as small business issuers will be
required to apply SFAS 123R in the first annual reporting period that begins
after December 15, 2005. For nonpublic entities, SFAS 123R must be applied as of
the beginning of the first annual reporting period beginning after December 15,
2005.

SFAS No. 151, Inventory Costs, is effective for fiscal years
beginning after June 15, 2005. This statement amends the guidance in APB Opinion
No. 43, Chapter 4, Inventory Pricing to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and waste material
(spoilage).

The adoption of these new
pronouncements are not expected to have a material effect on the Company's
consolidated financial position or results of operations, with the exception of
SFAS 123R which will have a material impact on compensation expense if stock
options are issued in subsequent years.

19

---

Item 7. Financial Statements

20

---

IKONA GEAR INTERNATIONAL, INC.Consolidated Financial Statements(Expressed in
United States Dollars)

21

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders Ikona Gear
International, Inc. and Subsidiaries Vancouver British Colombia

We have audited the accompanying consolidated balance sheets of
Ikona Gear International, Inc. and Subsidiaries (A Development Stage Company)
(the Company) as of August 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders equity (deficiency), and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of the Company as of August 31, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has
suffered recurring losses from operations, has used, rather than provided, cash
from operations and has an accumulated deficit of $9,390,679 that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

| | /s/ Dohan and Company, CPA's
| | ----------------------------

Miami, Florida November 30, 2007



22

---

|IKONA GEAR INTERNATIONAL, INC.
|------------------------------
|                              
|Consolidated Balance Sheets   
|August 31                     

|                                                                                             |   | 2007       |   |   | 2006       |  
|-------------------------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                                                             |   |            |   |   |            |  
|ASSETS                                                                                       |   |            |   |   |            |  
|Current assets:                                                                              |   |            |   |   |            |  
|Cash                                                                                         | $ | 1,227,579  |   | $ | 437,432    |  
|Accounts receivable, net
      of allowance of $-                                            |   | 445,591    |   |   | 2,708      |  
|Other
      receivables                                                                      |   | 12,075     |   |   | 6,107      |  
|Work in process inventory                                                                    |   | 344,327    |   |   | 72,767     |  
|Prepaid
      expenses                                                                       |   | 39,804     |   |   | 56,238     |  
|Deferred taxes, net of valuation allowance of
      $3,192,800 (2006 - $1,789,100) (Note 15) |   | -          |   |   | -          |  
|                                                                                             |   |            |   |   |            |  
|Total current assets                                                                         |   | 2,069,376  |   |   | 575,252    |  
|Property and equipment (Note 5)                                                              |   | 247,907    |   |   | 123,765    |  
|Deferred expenses
      (Note 6)                                                             |   | 100,833    |   |   | 272,989    |  
|                                                                                             |   |            |   |   |            |  
|Total assets                                                                                 | $ | 2,418,116  |   | $ | 972,006    |  
|                                                                                             |   |            |   |   |            |  
|LIABILITIES AND DEFICIENCY IN ASSETS                                                         |   |            |   |   |            |  
|Current liabilities:                                                                         |   |            |   |   |            |  
|Accounts payable and
      accrued liabilities                                               | $ | 432,213    |   | $ | 109,623    |  
|Accrued
      warranty                                                                       |   | 31,784     |   |   | -          |  
|Convertible notes payable
      (Note 8)                                                     |   | 1,300,699  |   |   | 1,033,562  |  
|Current
      portion of capital lease payable (Note 10)                                     |   | 1,850      |   |   | -          |  
|Current portion of loan
      payable (Note 9)                                               |   | 3,470      |   |   | 2,786      |  
|Unearned revenue                                                                             |   | 759,674    |   |   | 94,257     |  
|                                                                                             |   |            |   |   |            |  
|Total
      current liabilities                                                              |   | 2,529,690  |   |   | 1,240,228  |  
|Capital lease payable (Note 10)                                                              |   | 334        |   |   | -          |  
|Loan payable (Note 9)                                                                        |   | 8,190      |   |   | 11,195     |  
|                                                                                             |   |            |   |   |            |  
|Total liabilities                                                                            |   | 2,538,214  |   |   | 1,251,423  |  
|                                                                                             |   |            |   |   |            |  
|Commitments (Note 18)                                                                        |   |            |   |   |            |  
|Deficiency in assets                                                                         |   |            |   |   |            |  
|Common
      stock (Note 11)                                                                 |   |            |   |   |            |  
|Authorized                                                                                   |   |            |   |   |            |  
|100,000,000 common shares, $0.00001 par value                                                |   |            |   |   |            |  
|30,659,459 common shares (2006  26,159,292 shares) issued
      and outstanding             |   | 306        |   |   | 261        |  
|Additional paid-in capital                                                                   |   | 8,363,609  |   |   | 4,983,397  |  
|Subscriptions advanced                                                                       |   | 906,666    |   |   | -          |  
|Deficit                                                                                      |   | (9,390,679 | ) |   | (5,263,075 | )
|                                                                                             |   |            |   |   |            |  
|Total deficiency                                                                             |   | (120,098   | ) |   | (279,417   | )
|                                                                                             |   |            |   |   |            |  
|Total liabilities and deficiency in assets                                                   | $ | 2,418,116  |   | $ | 972,006    |  

The accompanying notes are an integral part of theses
consolidated financial statements.

23

---

|IKONA GEAR INTERNATIONAL, INC.       
|-------------------------------------
|                                     
|Consolidated Statements of Operations

|                                                                   |   | Year Ended August 31, |  
|------------------------------------------------------------------ | - | --------------------- | -
|                                                                   |   | 2007                  |  
|                                                                   |   |                       |  
|REVENUES                                                           |   |                       |  
|Royalties                                                          | $ | 7,997                 |  
|Engineering services                                               |   | 3,296                 |  
|Product revenues                                                   |   | 1,030,496             |  
|TOTAL REVENUE                                                      |   | 1,041,789             |  
|Cost of goods sold                                                 |   | (1,178,907            | )
|Gross margin (loss)                                                |   | (137,118              | )
|EXPENSES                                                           |   |                       |  
|Amortization and depreciation                                      |   | 147,645               |  
|Business
      development (Note 6)                                |   | 622,011               |  
|Corporate finance (Note 6
      and 12)                            |   | 364,546               |  
|Foreign exchange
      loss                                        |   | 31,756                |  
|General and administrative                                         |   | 685,236               |  
|Investor
      relations (Note 12)                                 |   | 391,867               |  
|Listing and filing fees                                            |   | 9,423                 |  
|Product development                                                |   | 735,266               |  
|Professional fees                                                  |   | 218,179               |  
|Rent                                                               |   | 176,649               |  
|Technology development (note
      12)                             |   | 238,167               |  
|Travel and related                                                 |   | 89,114                |  
|                                                                   |   |                       |  
|TOTAL EXPENSES                                                     |   | (3,709,859            | )
|                                                                   |   |                       |  
|OTHER INCOME/(EXPENSES)                                            |   |                       |  
|Interest income                                                    |   | 18,777                |  
|Interest
      expense (Note 8)                                    |   | (295,253              | )
|Gain on disposal of assets (Note 5)                                |   | (4,151                | )
|                                                                   |   |                       |  
|TOTAL OTHER INCOME/(EXPENSES)                                      |   | (280,627              | )
|Loss before income taxes                                           |   | (4,127,604            | )
|Income taxes                                                       |   | -                     |  
|Net loss for the period                                            | $ | (4,127,604            | )
|                                                                   |   |                       |  
|Basic and diluted net loss per share                               | $ | (0.15                 | )
|                                                                   |   |                       |  
|Weighted average number of common shares outstanding
       basic |   |                       |  
|and diluted                                                        |   | 28,424,150            |  

The accompanying notes are an integral part of theses
consolidated financial statements.

24

---

|IKONA GEAR INTERNATIONAL, INC.                             
|-----------------------------------------------------------
|                                                           
|Consolidated Statement of Stockholders Equity (Deficiency)

|                                                      |  | Common Stock |  |   |        |  |   |            |   |   |               |  |   |          |  
|----------------------------------------------------- |  | ------------ |  | - | ------ |  | - | ---------- | - | - | ------------- |  | - | -------- | -
|                                                      |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|                                                      |  |              |  |   |        |  |   | Additional |   |   |               |  |   |          |  
|                                                      |  | Number of    |  |   |        |  |   | Paid-in    |   |   | Subscriptions |  |   |          |  
|                                                      |  | Shares       |  |   | Amount |  |   | Capital    |   |   | Advanced      |  |   | Deficit  |  
|                                                      |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|Balance at August 16, 2001 (inception)                |  | -            |  | $ | -      |  | $ | -          |   | $ | -             |  | $ | -        |  
|Net Loss for the
      period                         |  | -            |  |   | -      |  |   | -          |   |   | -             |  |   | (5       | )
|Balance at August 31, 2001                            |  | -            |  | $ | -      |  | $ | -          |   | $ | -             |  | $ | (5       | )
|                                                      |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|Issuance of common shares on acquisition of           |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|patents at $0.04 per share, September 2001            |  | 2,725,000    |  | $ | 27     |  | $ | 108,973    |   | $ | -             |  | $ | -        |  
|Issuance of common shares on acquisition of           |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|trademark at $0.04 per share, September 2001          |  | 25,000       |  |   | -      |  |   | 1,000      |   |   | -             |  |   | -        |  
|Issuance of common shares to founders at              |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|$0.00001 per share, October 2001                      |  | 8,713,416    |  |   | 87     |  |   | (17        | ) |   | -             |  |   | -        |  
|Issuance of common shares for cash at $0.20
      per |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, November 2001                                  |  | 263,665      |  |   | 3      |  |   | 52,730     |   |   | -             |  |   | -        |  
|Issuance of common shares for cash at $0.20
      per |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, February 2002                                  |  | 1,286,335    |  |   | 13     |  |   | 257,253    |   |   | -             |  |   | -        |  
|Issuance of common shares for cash at $0.20
      per |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, May 2002                                       |  | 393,750      |  |   | 4      |  |   | 78,746     |   |   | -             |  |   | -        |  
|Net loss for the year                                 |  | -            |  |   | -      |  |   | -          |   |   | -             |  |   | (361,435 | )
|Balance at August
      31, 2002                      |  | 13,407,166   |  | $ | 134    |  | $ | 498,685    |   | $ | -             |  | $ | (361,440 | )
|                                                      |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|Issuance of common shares for cash at $0.20 per       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, November 2002                                  |  | 336,250      |  | $ | 3      |  | $ | 67,247     |   | $ | -             |  | $ | -        |  
|Issuance of common shares for corporate finance       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|fees at $0.20 per share, November 2002                |  | 85,800       |  |   | 1      |  |   | 17,159     |   |   | -             |  |   | -        |  
|Issuance of common shares for cash at $0.20 per       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, January 2003                                   |  | 175,000      |  |   | 2      |  |   | 34,998     |   |   | -             |  |   | -        |  
|Issuance of common shares for cash at $0.20 per       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, May 2003                                       |  | 175,000      |  |   | 2      |  |   | 34,998     |   |   | -             |  |   | -        |  
|Issuance of common shares for corporate finance       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|fees at $0.20 per share, May 2003                     |  | 67,625       |  |   | 1      |  |   | 13,524     |   |   | -             |  |   | -        |  
|Issuance of common shares for cash at $0.20 per       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, July 2003                                      |  | 526,792      |  |   | 5      |  |   | 105,353    |   |   | -             |  |   | -        |  
|Issuance of common shares for corporate finance       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|fees at $0.20 per share, July 2003                    |  | 7,500        |  |   | -      |  |   | 1,500      |   |   | -             |  |   | -        |  
|Issuance of common shares for cash at $0.40 per       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|share, August 2003                                    |  | 251,250      |  |   | 2      |  |   | 100,498    |   |   | -             |  |   | -        |  
|Issuance of common shares for corporate finance       |  |              |  |   |        |  |   |            |   |   |               |  |   |          |  
|fees at $0.40 per share, August 2003                  |  | 9,250        |  |   | 1      |  |   | 3,699      |   |   | -             |  |   | -        |  
|Net loss for the
      year                           |  | -            |  |   | -      |  |   | -          |   |   | -             |  |   | (369,303 | )
|Balance at August 31, 2003                            |  | 15,041,633   |  | $ | 151    |  | $ | 877,661    |   | $ | -             |  | $ | (730,743 | )

| | --Continued --
| | --------------

The accompanying notes are an integral part of theses
consolidated financial statements.

25

---

|IKONA GEAR INTERNATIONAL, INC.                             
|-----------------------------------------------------------
|                                                           
|Consolidated Statement of Stockholders Equity (Deficiency)
|--Continued--                                              

|                                                         |  | Common Stock |   |   |        |   |   |            |  |   |               |  |   |            |  
|-------------------------------------------------------- |  | ------------ | - | - | ------ | - | - | ---------- |  | - | ------------- |  | - | ---------- | -
|                                                         |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|                                                         |  |              |   |   |        |   |   | Additional |  |   |               |  |   |            |  
|                                                         |  | Number of    |   |   |        |   |   | Paid-in    |  |   | Subscriptions |  |   |            |  
|                                                         |  | Shares       |   |   | Amount |   |   | Capital    |  |   | Advanced      |  |   | Deficit    |  
|                                                         |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|Recapitalization, October 2003                           |  | 6,814,000    |   | $ | 68     |   | $ | 154,932    |  | $ | -             |  | $ | -          |  
|Shares cancelled, January 2004                           |  | (500,000     | ) |   | (5     | ) |   | 5          |  |   | -             |  |   | -          |  
|Issuance of common shares for cash at $0.50
      per    |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|share, January 2004                                      |  | 290,000      |   |   | 3      |   |   | 144,997    |  |   | -             |  |   | -          |  
|Issuance of common shares for cash at $0.75
      per    |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|share (gross proceeds $465,500, net of issuance          |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|costs of $29,225), February 2004                         |  | 620,666      |   |   | 6      |   |   | 436,269    |  |   | -             |  |   | -          |  
|Issuance of common shares for cash at $0.75 per          |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|share (gross proceeds $1,016,201, net of
      issuance  |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|costs of $51,275), March 2004                            |  | 1,354,933    |   |   | 14     |   |   | 964,912    |  |   | -             |  |   | -          |  
|Issuance of common shares for cash at $0.75
      per    |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|share (gross proceeds $346,822, net of issuance          |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|costs of $7,000), April 2004                             |  | 462,427      |   |   | 4      |   |   | 339,818    |  |   | -             |  |   | -          |  
|Issuance of common shares for cash at $0.75 per          |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|share, July 2004                                         |  | 6,666        |   |   | -      |   |   | 5,000      |  |   | -             |  |   | -          |  
|Stock based compensation expense                         |  | -            |   |   | -      |   |   | 38,758     |  |   | -             |  |   | -          |  
|Net loss for the year                                    |  | -            |   |   | -      |   |   | -          |  |   | -             |  |   | (1,016,640 | )
|Balance at August
      31, 2004                         |  | 24,090,325   |   | $ | 241    |   | $ | 2,962,352  |  | $ | -             |  | $ | 1,747,383  |  
|Issuance of common shares for cash at $0.75
      per    |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|share (gross proceeds $785,000, net of issuance          |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|costs of $54,950), March 2005                            |  | 1,046,667    |   |   | 10     |   | $ | 730,040    |  |   | -             |  |   | -          |  
|Issuance of common shares for corporate finance          |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|fees at $0.65 per share, April 2005                      |  | 12,300       |   |   | -      |   |   | 7,995      |  |   | -             |  |   | -          |  
|Stock based compensation expense                         |  | -            |   |   | -      |   |   | 178,150    |  |   | -             |  |   | -          |  
|Net loss for the year                                    |  | -            |   |   | -      |   |   | -          |  |   | -             |  |   | (1,691,204 | )
|Balance at August
      31, 2005                         |  | 25,149,292   |   | $ | 251    |   | $ | 3,878,537  |  | $ | -             |  | $ | 3, 438,587 |  
|Issuance of common shares for cash at $0.75
      per    |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|share (gross proceeds $300,000, net of issuance          |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|costs of $24,000), October 2005                          |  | 400,000      |   |   | 4      |   |   | 275,996    |  |   | -             |  |   | -          |  
|Issuance of common shares on settlement of               |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|accounts payable and accrued liabilities at
      $0.50  |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|per share, October 2005                                  |  | 10,000       |   |   | -      |   |   | 5,000      |  |   | -             |  |   | -          |  
|Issuance of common shares for business                   |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|development fees at $0.58 per share, May 2006            |  | 100,000      |   |   | 1      |   |   | 57,999     |  |   | -             |  |   | -          |  
|Issuance of common shares corporate finance
      fees   |  |              |   |   |        |   |   |            |  |   |               |  |   |            |  
|at $0.33 per share, July 2006                            |  | 500,000      |   |   | 5      |   |   | 164,995    |  |   | -             |  |   | -          |  
|Beneficial conversion feature on
      convertible notes |  | -            |   |   | -      |   |   | 96,000     |  |   | -             |  |   | -          |  
|Issuance of warrants on convertible notes                |  | -            |   |   | -      |   |   | 350,404    |  |   | -             |  |   | -          |  
|Stock based compensation expense                         |  | -            |   |   | -      |   |   | 154,466    |  |   | -             |  |   | -          |  
|Net loss for the
      year                              |  | -            |   |   | -      |   |   | -          |  |   | -             |  |   | (1,824,488 | )
|Balance at August 31, 2006                               |  | 26,159,292   |   | $ | 261    |   | $ | 4,983,397  |  | $ | -             |  | $ | (5,263,075 | )

The accompanying notes are an integral part of theses
consolidated financial statements.

26

---

|IKONA GEAR INTERNATIONAL, INC.                             
|-----------------------------------------------------------
|                                                           
|                                                           
|Consolidated Statement of Stockholders Equity (Deficiency)
|--Continued--                                              

|                                                         |  | Common Stock |  |   |        |  |   |            |  |   |               |  |   |            |  
|-------------------------------------------------------- |  | ------------ |  | - | ------ |  | - | ---------- |  | - | ------------- |  | - | ---------- | -
|                                                         |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|                                                         |  |              |  |   |        |  |   | Additional |  |   |               |  |   |            |  
|                                                         |  | Number of    |  |   |        |  |   | Paid-in    |  |   | Subscriptions |  |   |            |  
|                                                         |  | Shares       |  |   | Amount |  |   | Capital    |  |   | Advanced      |  |   | Deficit    |  
|                                                         |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|Issuance of 1,990,000 common shares for
      cash at    |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|$0.50 per share (gross proceeds $995,000, net of         |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|issuance costs of $95,000), September 2006               |  | 1,990,000    |  |   | 20     |  |   | 899,980    |  |   | -             |  |   | -          |  
|Issuance of 200,000 common shares for corporate          |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|finance fees at $0.35 per share, December
      2006     |  | 200,000      |  |   | 2      |  |   | 69,998     |  |   | -             |  |   | -          |  
|Issuance of 28,500 common shares for corporate           |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|finance fees at $0.67 per share, March 2007              |  | 28,500       |  |   | 1      |  |   | 19,095     |  |   | -             |  |   | -          |  
|Issuance of 500,000 common shares for cash at            |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|$0.50 per share, April 2007                              |  | 500,000      |  |   | 5      |  |   | 249,995    |  |   | -             |  |   | -          |  
|Issuance of 40,000 common shares on the exercise         |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|of option for cash at $0.27 per share,
      April 2007  |  | 40,000       |  |   | -      |  |   | 10,800     |  |   | -             |  |   | -          |  
|Issuance of 40,000 common shares on the exercise         |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|of option for cash at $0.27 per share, May
      2007    |  | 40,000       |  |   | -      |  |   | 10,800     |  |   | -             |  |   | -          |  
|Issuance of 1,666,667 common shares for cash at          |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|$0.60 per share (gross proceeds $1,000,000,
      net of |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|issuance costs of $140,000), July 2007                   |  | 1,666,667    |  |   | 17     |  |   | 859,983    |  |   | -             |  |   | -          |  
|Issuance of 35,000 common shares for
      corporate     |  |              |  |   |        |  |   |            |  |   |               |  |   |            |  
|finance fees at $0.27 per share, August 2007             |  | 35,000       |  |   | -      |  |   | 9,400      |  |   | -             |  |   | -          |  
|Subscriptions advanced                                   |  |              |  |   |        |  |   |            |  |   | 906,666       |  |   | -          |  
|Stock based compensation expense                         |  | -            |  |   | -      |  |   | 1,250,161  |  |   | -             |  |   | -          |  
|Net loss for the year                                    |  | -            |  |   | -      |  |   | -          |  |   | -             |  |   | (4,127,604 | )
|Balance at August
      31, 2007                         |  | 30,659,459   |  | $ | 306    |  | $ | 8,363,609  |  | $ | 906,666       |  | $ | (9,390,679 | )

27

---

|IKONA GEAR INTERNATIONAL, INC.                                                      |   |                       |   |   |            |  
|----------------------------------------------------------------------------------- | - | --------------------- | - | - | ---------- | -
|                                                                                    |   |                       |   |   |            |  
|Consolidated Statements of Cash Flows                                               |   |                       |   |   |            |  
|                                                                                    |   |                       |   |   |            |  
|                                                                                    |   |                       |   |   |            |  
|                                                                                    |   |                       |   |   |            |  
|                                                                                    |   | Year Ended August 31, |  
|                                                                                    |   | 2007                  |   |   | 2006       |  
|                                                                                    |   |                       |   |   |            |  
|CASH FLOWS FROM OPERATING
      ACTIVITIES:                                         |   |                       |   |   |            |  
|Net loss for the period                                                             | $ | (4,127,604            | ) | $ | (1,824,488 | )
|Adjustments to reconcile net income to net
      cash used in operating activities: |   |                       |   |   |            |  
|Amortization and
      depreciation                                                 |   | 147,645               |   |   | 96,172     |  
|Business
      development fees paid by stock options                               |   | 290,709               |   |   | -          |  
|Corporate finance fees
      paid by common stock and warrants                      |   | 200,189               |   |   | 101,713    |  
|General
      and administrative fees paid stock options                            |   | 379,625               |   |   | 46,767     |  
|Investor relations fees
      paid by stock options and warrants                    |   | 207,119               |   |   | -          |  
|Product
      development fees paid by stock options                                |   | 134,179               |   |   | -          |  
|Technology development
      fees paid by stock options                             |   | 136,836               |   |   | 5,986      |  
|Amortization of corporate finance fees                                              |   | 130,156               |   |   | 78,011     |  
|Amortization of business
      development fees                                     |   | 42,000                |   |   | 21,000     |  
|Interest
      expense on convertible notes payable                                 |   | 267,136               |   |   | 279,966    |  
|Loss (gain) on disposal
      of assets                                             |   | 4,151                 |   |   | (18,348    | )
|Change in operating assets and liabilities:                                         |   |                       |   |   |            |  
|Accounts receivable                                                                 |   | (442,883              | ) |   | 11,904     |  
|Other
      receivables                                                             |   | (5,968                | ) |   | (6,107     | )
|Work in process inventory                                                           |   | (271,560              | ) |   | (72,767    | )
|Prepaid
      expenses                                                              |   | 16,434                |   |   | (39,100    | )
|Accounts payable and
      accrued liabilities                                      |   | 322,591               |   |   | 6,995      |  
|Accrued
      warranty                                                              |   | 31,784                |   |   | -          |  
|Due to related party                                                                |   | -                     |   |   | (6,716     | )
|Unearned revenue                                                                    |   | 665,417               |   |   | 94,257     |  
|                                                                                    |   |                       |   |   |            |  
|Cash used in operating
      activities                                             |   | (1,872,044            | ) |   | (1,224,755 | )
|                                                                                    |   |                       |   |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                |   |                       |   |   |            |  
|Deferred expenses                                                                   |   | -                     |   |   | (149,000   | )
|Proceeds
      on loan payable                                                      |   | -                     |   |   | 14,200     |  
|Repayment of loan payable                                                           |   | (2,321                | ) |   | (219       | )
|Payment
      of capital lease payable                                              |   | (1,130                | ) |   | -          |  
|Convertible notes payable                                                           |   | -                     |   |   | 1,200,000  |  
|Issuance
      of common stock, net of issuance costs                               |   | 2,031,600             |   |   | 276,000    |  
|Subscriptions advanced                                                              |   | 906,666               |   |   | -          |  
|                                                                                    |   |                       |   |   |            |  
|Cash provided by financing activities                                               |   | 2,934,815             |   |   | 1,340,981  |  
|                                                                                    |   |                       |   |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                |   |                       |   |   |            |  
|Property
      and equipment acquired for cash                                      |   | (272,624              | ) |   | (71,199    | )
|Proceeds on disposal of assets                                                      |   | -                     |   |   | 20,791     |  
|                                                                                    |   |                       |   |   |            |  
|Cash used in investing activities                                                   |   | (272,624              | ) |   | (50,408    | )
|                                                                                    |   |                       |   |   |            |  
|NET INCREASE (DECREASE) IN CASH                                                     |   | 790,147               |   |   | 65,818     |  
|CASH AT BEGINNING OF PERIOD                                                         |   | 437,432               |   |   | 371,614    |  
|                                                                                    |   |                       |   |   |            |  
|CASH AT END OF PERIOD                                                               | $ | 1,227,579             |   | $ | 437,432    |  
|                                                                                    |   |                       |   |   |            |  
|CASH PAID FOR:                                                                      |   |                       |   |   |            |  
|Interest                                                                            | $ | -                     |   | $ | -          |  
|Income taxes                                                                        | $ | -                     |   | $ | -          |  

Supplemental disclosure with respect to cash flow (Note 13)

The accompanying notes are an integral part of theses
consolidated financial statements.

28

---

|IKONA GEAR INTERNATIONAL, INC.             
|-------------------------------------------
|Notes to Consolidated Financial Statements)
|(Expressed in United States Dollars)       
|August 31, 2007 and 2006                   
|                                           

Note 1  The Company and Nature of Operations

Ikona Gear International, Inc. (Ikona  Nevada) was
incorporated in the state of Nevada on September 20, 2000. On June 7, 2007,
Ikona - Nevada completed its redomestication as a corporation formed and
organized under the laws of the state of Delaware. The redomestication was
accomplished by consummating the statutory merger of Ikona  Nevada with and
into Ikona Gear International, Inc., a Delaware corporation formed April 20,
2007 (Ikona  Delawareor the Company) with Ikona  Delaware being the
surviving corporation. The redomestication had an effective date of May 17,
2007, the date the Certificate of Merger was filed with the Delaware Secretary
of State. Effective October 30, 2003, the Company consummated an Agreement and
Plan of Reorganization (the Agreement) pursuant to which it acquired 100% of
the issued and outstanding shares of common stock of Ikona Gear USA, Inc.
(formerly Ikona Gear International, Inc.)(Ikona USA). Under the terms of the
Agreement, the shareholders of Ikona USA received, pro rata, an aggregate of
15,041,633 shares of common stock of the Company in exchange for 100% of the
outstanding shares of Ikona USA. A principal shareholder of the Company
surrendered for cancellation 14,500,000 shares of common stock, which resulted
in the Ikona USA shareholders acquiring shares representing approximately 70% of
the total issued and outstanding shares of the Company. As a result, the
transaction was accounted for as a recapitalization of Ikona USA.

The consolidated statements of operations, stockholders' equity
(deficiency) and cash flows of the Company prior to October 30, 2003, are those
of Ikona USA. The Companys consolidated date of incorporation is considered to
be August 16, 2001, the date of inception of Ikona USA. Following the
acquisition, the Company changed its name from Oban Mining, Inc. to Ikona Gear
International, Inc.

On October 31, 2003, the Company incorporated a wholly-owned
subsidiary, Ikona Gear Corp., a British Columbia Corporation. In March 2006, the
Company changed the name of Ikona Gear Corp. to Ikona Industries Corporation.

Note 2  Going Concern

These financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America
(US GAAP) with the on-going assumption that the Company will be able to
realize its assets and discharge its liabilities in the normal course of
business rather than through a process of forced liquidation. However, certain
conditions noted below currently exist which raise substantial doubt about the
Company's ability to continue as a going concern. These financial statements do
not include any adjustments to the amounts and classifications of assets and
liabilities that might be necessary should the Company be unable to continue as
a going concern.

The operations of the Company have primarily been funded by the
issuance of capital stock and advances from related parties. Continued
operations of the Company are dependent on the Company's ability to complete
additional equity financings or generate profitable operations in the future.
Management's plan in this regard is to secure additional funds through future
equity financings. Such financings may not be available or may not be available
on terms reasonable to the Company.

|                                                       |   | 2007       |   |   | 2006       |  
|------------------------------------------------------ | - | ---------- | - | - | ---------- | -
|                                                       |   |            |   |   |            |  
|Accumulated deficit during the development
      stage | $ | (9,390,679 | ) | $ | (5,263,075 | )
|Working deficiency                                     | $ | (460,314   | ) | $ | (664,976   | )

29

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 3 - Significant Accounting Policies

The significant accounting policies adopted by the Company are
as follows:

(a) Basis of presentation

These financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America.
The Company is no longer considered to be a development stage company since its
planned principal operations have commenced as of March 1, 2007.

(b) Use of Estimates

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

(c) Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, deposits in
banks, and highly liquid investments with original maturities of three months or
less. To limit its credit risk exposure in excess of federally insured amounts,
the Company places its deposits with financial institutions with high credit
standing. As of August 31, 2006 and 2005, the Company had no cash equivalents.

(d) Property and Equipment

Property and equipment are stated at cost less accumulated
depreciation. Cost represents the purchase price of the asset and other costs
incurred to bring the asset into its existing use. Depreciation on property and
equipment is calculated to amortize their cost on a straight-line basis over
their estimated useful lives as follows:

|Computers and software | 2 years
|---------------------- | -------
|Furniture              | 5 years
|Equipment              | 3 years
|Leasehold improvements | 3 years

(e) Long-Lived or Disposal of Assets

The Company follows FASB Statement No. 144 (SFAS 144),
"Accounting for the Impairment of Long-Lived Assets." SFAS 144 requires that
long-lived assets to be held and use be reviewed for impairment whenever events
or changes in circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the fair value of the asset. Long-lived assets to be
disposed of, if any, are reported at the lower of carrying amount or fair value
less cost to sell.

(f) Revenue Recognition

The Company recognizes product revenue when persuasive evidence
of an arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is reasonably assured.

Revenue from products is recognized when title passes to the
customer and all revenue recognition criteria specified above is met. Revenue
from engineering services is recognized as services that are rendered and
predefined milestones that are achieved on the percentage of the completion
method of accounting. For contracts with multiple deliverables, the Company
allocates revenue to each element of the contract based on objective evidence of
the fair value of the element. Unearned or deferred revenue represents cash
received from customers in advance as deposits for work to be completed, in
excess of revenue recognized on uncompleted contracts. Revenues from royalties,
associated with intellectual property licensing, are recognized when legal
entitlement has been established and when collection is reasonably assured.

30

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 3 - Significant Accounting Policies (continued)

(g) Technology Development Expenses

Costs incurred for technology development are expensed as
incurred.

(h) Inventories

Inventories are valued at the lower of cost or market value.
Cost is determined as follows:

- Raw materials, ancillary materials and spare parts - at moving average
  method.
- Finished goods and work in progress - based on manufacturing costs
  (including materials, labor and subcontractor costs) plus allocated indirect
  manufacturing costs.

Work in progress under long-term contracts is stated at cost
less amounts charged to cost of revenues in the statement of operations and
associated with revenue recognized on the basis of the "percentage of
completion" method. Cost includes direct costs of materials, labor,
subcontractor and other direct costs.

(i) Warranty liability

A provision for warranty costs is recorded on product sales
when revenue is recognized. In establishing the accrued warranty liability, we
estimated the likelihood that products sold will experience warranty claims and
the estimated costs to resolve claims received. In making such determinations,
we use estimated based on 3% of product sales. Should these estimates prove to
be incorrect, we may incur costs different from those provided for in our
warranty provisions.

(j) Stock-Based Compensation

As a result of the amendments to Statement of Financial
Accounting Standards 123 R (SFAS 123R), the Company was required to expense
the fair value of employee stock options over the vesting period beginning with
the year ended August 31, 2007. The Company recorded the fair value of
stock-based compensation expense from the amortization of stock options issued
to employees of $941,349 (2006 - $nil) during the year ended August 31, 2007.
The Company recorded $290,709 as business development, $379,625 as general and
administrative, $134,179 as product development and $136,836 as technology
development expenses in the consolidated statement of operations for the year
ended August 31, 2007.

The Company accounts for stock-based compensation issued to
non-employees in accordance with the provisions of SFAS 123 and the consensus in
Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring or in Conjunction with Selling,
Goods or Services. During the year ended August 31, 2007, the Company recognized
stock-based compensation expense of $308,812 (2006 - $153,926) relating to the
fair value of stock options and warrants issued to non-employees which has been
recorded in investor relations in the amount of $207,119 (2006 - $46,767), in
technology development in the amount of $nil (2006 -$5,986) and in corporate
finance in amount of $ 101,692 (2006 - $101,173).

During the year ended August 31, 2006, the Company accounted
for its employee stock-based compensation arrangements using the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations. As such, compensation expense was recorded on the date of grant
only if the market value of the underlying stock at the date of grant exceeded
the exercise price. Statement of Financial Accounting Standards No. 123,
Accounting for Stock- Based Compensation (SFAS 123), requires entities that
continue to apply the provisions of APB 25 for transactions with employees to
provide pro forma income (loss) and pro forma income (loss) per share
disclosures for employee stock option grants made as if the fair value- based
method defined in SFAS 123 had been applied to these transactions..

31

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 3 - Significant Accounting Policies (continued)

(j) Stock-Based Compensation (continued)

| |                                                               |   | Year       |   |   | Year       |  
| | ------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
| |                                                               |   | Ended      |   |   | Ended      |  
| |                                                               |   | August 31, |   |   | August 31, |  
| |                                                               |   | 2007       |   |   | 2006       |  
| |                                                               |   |            |   |   |            |  
| | Net loss, as reported                                         | $ | (4,127,604 | ) | $ | (1,824,488 | )
| |                                                               |   |            |   |   |            |  
| | Deduct: Total stock-based employee
      compensation expense |   |            |   |   |            |  
| | determined under fair value based
      method for all        |   |            |   |   |            |  
| | awards, net of related tax effects                            |   | -          |   |   | (947,752   | )
| |                                                               |   |            |   |   |            |  
| | Pro-forma net loss                                            | $ | (4,127,604 | ) | $ | (2,772,240 | )
| |                                                               |   |            |   |   |            |  
| | Basic and diluted net loss per share, as reported             | $ | (0.15      | ) | $ | (0.07      | )
| |                                                               |   |            |   |   |            |  
| | Basic and diluted net loss per share, pro-forma               | $ | (0.15      | ) | $ | (0.10      | )
| |                                                               |   |            |   |   |            |  
| | Weighted average number of common shares
      outstanding   |   |            |   |   |            |  
| | basic and diluted                                             |   | 28,424,150 |   |   | 25,606,004 |  

(k) Loss Per Share

Basic loss per share is computed by dividing the loss for the
period attributable to common stockholders by the weighted average number of
shares of common stock outstanding during the period. Diluted loss per share
takes into consideration shares of common stock outstanding (computed under
basic loss per share) and potentially dilutive shares of common stock. Diluted
loss per share is not presented separately from loss per share since there are
no potentially dilutive shares of common stock outstanding. At August 31, 2007,
the total number of potentially dilutive shares of common stock excluded from
basic net loss per share was nil (August 31, 2006  10,601,516).

(l) Income Taxes

A deferred tax asset or liability is recorded for all temporary
differences between financial and tax reporting and net operating loss carry
forwards. Deferred tax expenses (benefits) result from the net change during the
period of deferred tax assets and liabilities.

Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

32

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 3 - Significant Accounting Policies (continued)

(m) Foreign Currency Translation

Transaction amounts denominated in foreign currencies are
translated at exchange rates prevailing at transaction dates. Carrying values of
monetary assets and liabilities are adjusted at each balance sheet date to
reflect the exchange rate at that date. Non-monetary assets and liabilities are
translated at the exchange rate on the original transaction date. Gains and
losses from restatement of foreign currency monetary and non-monetary assets and
liabilities are included in the statement of operations. Revenues and expenses
are translated at the rates of exchange prevailing on the dates such items are
recognized in the statement of operations. Foreign exchange losses of $31,756
(2006 - $3,443) are included in the results of operations.

(n) Deferred Expenses

Deferred expenses are amortized on a straight-line basis over
the expected period of benefit therefrom, and are initially recorded at cost.
These include: business development costs paid with capital stock, investment
banking fees paid with capital stock, and cost of raising capital. Business
development costs are related to a one year agreement for services dated May
2006 and were deferred and amortized over the term of the agreement. Investment
banking fees are related to a three year service agreement and are being
amortized on a straight line basis over the term of the agreement. Costs of
raising capital are related to a financing entered into in March 2006, and are
being amortized on a straight line basis over the term of the short term
promissory notes payable.

(o) Convertible Promissory Notes

The Company issues convertible debt securities with
non-detachable conversion features. The convertible promissory note holders have
the right (upon notice of redemption) to have the notes converted into a number
of shares of the Company's Common Stock at a conversion prices of $0.50. The
conversion prices on all the convertible notes are "in the money" on the date of
the agreement resulting in a beneficial conversion feature. The Company computes
the fair value of the beneficial conversion feature based on the intrinsic
method that computes the difference between the conversion price and the fair
market price of the Company's stock on the date of the agreement. The Company
records the fair value of the beneficial conversion feature as an increase to
paid in capital and a debt discount. The debt discount is amortized over the
period between the date of the agreement and the fixed conversion date. The
amortized debt discount is recorded as interest expense.

(p) Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 153, Exchanges
of Nonmonetary Assets  an amendment of APB Opinion No. 29 (SFAS 153) which
amends Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary
Transactions to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005.

33

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 3 - Significant Accounting Policies (continued)

(p) Recent Accounting Pronouncements (continued)

In December 2004, FASB issued Statement of Financial Accounting
Standards No. 123R, Share Based Payment (SFAS 123R). SFAS 123R supersedes
APB 25 and its related implementation guidance by requiring entities to
recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions) and revises SFAS 123 as follows:

| | i.   | Public entities are required to measure liabilities
      incurred to employees in share-based payment transactions at fair value
      and nonpublic entities may elect to measure their liabilities to employees
      incurred in share-based payment transactions at their intrinsic value
      whereas under SFAS 123, all share-based payment liabilities were measured
      at their intrinsic value.                                                                                                                                                                                                                               
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ii.  | Nonpublic entities are required to calculate fair value
      using an appropriate industry sector index for the expected volatility of
      its share price if it is not practicable to estimate the expected
      volatility of the entitys share price.                                                                                                                                                                                                                                                                                                                                                                                
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | iii. | Entities are required to estimate the number of
      instruments for which the requisite service is expected to be rendered as
      opposed to accounting for forfeitures as they occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | iv.  | Incremental compensation cost for a modification of the
      terms or conditions of an award is measured by comparing the fair value of
      the modified award with the fair value of the award immediately before the
      modification whereas SFAS 123 required that the effects of a modification
      be measured as the difference between the fair value of the modified award
      at the date it is granted and the awards value immediately before the
      modification determined based on the shorter of (1) its remaining
      initially estimated expected life or (2) the expected life of the modified
      award.

SFAS 123R also clarifies and expands guidance in several areas,
including measuring fair value, classifying an award as equity or as a liability
and attributing compensation cost to reporting periods. SFAS 123R does not
change the accounting guidance for share-based payment transactions with parties
other than employees provided in SFAS 123 as originally issued and EITF 96-18.
SFAS 123R also does not address the accounting for employee share ownership
plans which are subject to Statement of Position 93-6, Employers Accounting
for Employee Stock Ownership Plans. Public entities (other than those filing as
small business issuers) will be required to apply SFAS 123R as of the first
annual reporting period that begins after June 15, 2005. Public entities that
file as small business issuers will be required to apply SFAS 123R in the first
annual reporting period that begins after December 15, 2005. For nonpublic
entities, SFAS 123R must be applied as of the beginning of the first annual
reporting period beginning after December 15, 2005.

SFAS No. 151, Inventory Costs, is effective for fiscal years
beginning after June 15, 2005. This statement amends the guidance in APB Opinion
No. 43, Chapter 4, Inventory Pricing to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and waste material
(spoilage).

The adoption of these new pronouncements are not expected to
have a material effect on the Company's consolidated financial position or
results of operations, with the exception of SFAS 123R which will have a
material impact on compensation expense if stock options are issued in
subsequent years.

34

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 4  Inventory

Major classes of inventory are:

| |                 |   | Year       |  |   | Year       | 
| | --------------- | - | ---------- |  | - | ---------- | 
| |                 |   | Ended      |  |   | Ended      | 
| |                 |   | August 31, |  |   | August 31, | 
| |                 |   | 2007       |  |   | 2006       | 
| |                 |   |            |  |   |            | 
| |                 |   |            |  |   |            | 
| | Work-in-process | $ | 215,651    |  | $ | 268,530    | 
| |                 |   |            |  |   |            | 
| | Finished goods  |   | 128,676    |  |   | -          | 
| |                 |   |            |  |   |            | 
| |                 |   |            |  |   |            | 
| | Total           | $ | 344,327    |  | $ | 268,530    | 

Note 5  Property and Equipment

|                             |   | August 31, 2007 |  |   | August 31, 2006 | 
|---------------------------- | - | --------------- |  | - | --------------- | 
|                             |   |                 |  |   |                 | 
|                             |   |                 |  |   | Accumulated     | 
|                             |   | Cost            |  |   | Depreciation    | 
|                             |   |                 |  |   |                 | 
|Computers and software       | $ | 133,094         |  | $ | 109,143         | 
|Furniture                    |   | 39,380          |  |   | 20,063          | 
|Equipment                    |   | 304,893         |  |   | 117,070         | 
|Leasehold
      improvements |   | 20,410          |  |   | 3,579           | 
|                             |   |                 |  |   |                 | 
|                             | $ | 497,777         |  | $ | 249,855         | 

In October 2006, the Company experienced a theft of computers
and software with a net book value of $4,151. The Company removed computers and
software with a historical cost of $5,798 and accumulated depreciation of $1,647
from its records and recorded a loss on disposal of $4,151.

Note 6 - Deferred Expenses

The Company has incurred business development and financing
expenses which it has chosen to defer over the term of associated services being
provided.

|                              |   | Deferred    |     |   | Deferred |     |   | Deferred |     |   |          |  
|----------------------------- | - | ----------- | --- | - | -------- | --- | - | -------- | --- | - | -------- | -
|                              |   | Business    |     |   | Finance  |     |   | Finance  |     |   |          |  
|                              |   | Development |     |   | Expense  |     |   | Expense  |     |   | Total    |  
|Deferred Expense Incurred     | $ | 63,000      | (a) | $ | 165,000  | (b) | $ | 144,000  | (c) | $ | 372,000  |  
|Less: Amortization            |   | (63,000     | )   |   | (64,167  | )   |   | (144,000 | )   |   | (271,167 | )
|Unamortized Deferred Expenses | $ | -           |     | $ | 100,833  |     | $ | -        |     | $ | 100,833  |  

35

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 6 - Deferred Expenses (continued)

| | a) | The Company entered into a one-year business development
      agreement in May 2006. In consideration, the Company agreed to pay $10,000
      ($5,000 paid and $5,000 payable upon successful establishment of a joint
      venture or distribution partnership) and issued 100,000 shares at $0.58
      per share. The Company recorded deferred expenses of $63,000, and is
      amortizing the deferred expenses over the one year term of the agreement.
      For the year ended August 31, 2007, the Company recorded a charge to
      business development fees of $42,000.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b) | The Company entered into an investment banking agreement
      in July 2006 and issued 500,000 shares of common stock, subject to the
      release of 100,000 shares immediately, 100,000 shares in one year, and
      300,000 in two years, with all shares subject to normal trading
      restrictions. The Company recorded deferred expenses of $165,000, and is
      amortizing the amount over the 36 month term of the agreement. For the
      year ended August 31, 2007, the Company recorded a charge corporate
      finance fees of $55,000.                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c) | The Company completed a $1,200 000 financing of
      convertible promissory notes in March 2006 (Note 8) and incurred
      commissions of $144,000 at that time. The Company has recorded the
      commissions as deferred expenses and is amortizing the amount over the one
      year term of the promissory notes. For the year ended August 31, 2007, the
      Company recorded a charge to corporate finance fees of
  $75,156.                                                                                                                                               

Note 7 - Related Party Transactions

The Company entered into the following transactions with
related parties during the year ended August 31, 2007:

|a) | Paid or accrued business development fees of $121,546
      (2006 - $118,396) to a company controlled by a director of the
    Company.           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                   
|b) | Paid or accrued corporate finance fees of $43,600 (2006 -
      $104,483) to a company controlled by a former director of the
    Company.        
|   |                                                                                                                                                   
|c) | Paid or accrued business development fees of $nil (2006 -
      $12,750) to a company controlled by a relative of a director of the
      Company.

These transactions are in the normal course of operations and
are measured at the exchange amount which is the amount of consideration
established and agreed to by the related parties.

Note 8 - Convertible Notes Payable

On March 3, 2006, and March 13, 2006, the Company closed on a
private placement of 2,400,000 units for cash proceeds of $1,056,000 (gross
proceeds of 1,200,000, net of issuance costs of $144,000). Each unit consisted
of an unsecured convertible promissory note (the Note) convertible at the
option of the holder into common stock at a price of $0.50 per share, and a
detachable warrant to purchase shares of common stock at $0.59 per share until
March 13, 2011. If, one year after the issue date of the warrants, a
registration statement is not effective, the warrants may be exercised on a
cashless basis.

The fair value of the warrants granted by the Company was
$350,404. The Company has recorded a debit to convertible notes payable and a
credit to additional paid-in capital. The Company is amortizing the warrant
value over the one year term of the promissory notes. For year ended August 31,
2007, the Company recorded a charge to interest expense of $175,202. The fair
market value of the common stock into which the promissory notes were
convertible at that time of issuance was $1,296,000. The Company has recorded a
beneficial conversion feature of $96,000 and recorded a debit to convertible
notes payable and a credit to additional paid-in capital.

36

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 8 - Convertible Notes Payable (continued)

The Notes rank senior to other debt, bear interest at 10% per
year, which accrues and is added to the outstanding principal amount on a daily
basis. The holder of each Note has the right to convert the Note into shares of
common stock at a conversion price of $0.50 per share. Notes with a face value
of $600,000 are due on March 3, 2007 and Notes with a face value of $600,000 are
due on March 13, 2007. As of the date of this report, the Company has tendered
the funds in full for repayment of the Notes in the amount of $1,380,356,
including interest of $180,356.

Note 9 - Loan Payable

In March 2006, the Company entered into an agreement with for
the purchase of computer server equipment. The amount financed is $14,200
(C$15,954.52), amortization period is 48 months and interest rate is 17.99% .

Note 10  Capital Lease Payable

In September 2006, the Company entered into a lease agreement
for two computers. The amount of the lease is $3,314 (C$3,766), monthly payments
are $159, amortization period is 24 months, interest rate is 14% and the
purchase option is $1.

Note 11  Common Stock

In September 2001, the Company issued 2,725,000 common shares
at a value of $0.04 per share for $109,000 as partial consideration on
acquisition of patent rights (Note 4).

In September 2001, the Company issued 25,000 common shares at a
value of $0.04 per share for $1,000 as partial consideration on acquisition of a
trademark (Note 4).

In October 2001, the Company issued 8,713,416 shares to the
founders of the Company at a price of $0.00001 per share for cash proceeds of
$70.

In November 2001, the Company issued 263,665 common shares at a
price of $0.20 per share for cash proceeds of $52,733.

In February 2002, the Company issued 1,286,335 common shares at
a price of $0.20 per share for cash proceeds of $257,266.

In May 2002, the Company issued 393,750 common shares at a
price of $0.20 per share for cash proceeds of $78,750.

In November 2002, the Company issued 336,250 common shares at a
price of $0.20 per share for cash proceeds of $67,250.

In November 2002, the Company issued 85,800 common shares at a
price of $0.20 per share for corporate finance fees of $17,160.

In January 2003, the Company issued 175,000 common shares at a
price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 175,000 common shares at a
price of $0.20 per share for cash proceeds of $35,000.

In May 2003, the Company issued 67,625 common shares at a price
of $0.20 per share for corporate finance fees of $13,525.

In July 2003, the Company issued 526,792 common shares at a
price of $0.20 per share for cash proceeds of $105,358.

37

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 11  Common Stock (continued)

In July 2003, the Company issued 7,500 common shares at a price
of $0.20 per share for corporate finance fees of $1,500.

In July 2003, the Company issued 7,500 common shares at a price
of $0.20 per share for corporate finance fees of $1,500.

In August 2003, the Company issued 251,250 common shares at a
price of $0.40 per share for cash proceeds of $100,500.

In August 2003, the Company issued 9,250 common shares at a
price of $0.40 per share for corporate finance fees of $3,700.

In October, 2003, the Company acquired all the issued and
outstanding capital stock of Ikona USA, which was accounted for as a
recapitalization of the Company (Note 1). The issued number of shares of common
stock is that of the Company with adjustments made for differences in par value
between the Company and Ikona USA.

In January 2004, the Company cancelled 500,000 common shares at
a par value of $0.00001 per share.

In January 2004, the Company issued 290,000 common shares at a
price of $0.50 per share for cash proceeds of $145,000.

In February 2004, the Company issued 620,666 units at a price
of $0.75 per unit for cash proceeds of $436,275 (gross proceeds of $465,500 net
of finders fees of $29,225). Each unit consisted of one share of common stock
and one-half of one non-transferable share purchase warrant whereby each whole
warrant entitled the holder to acquire one additional share of common stock at a
price of $3.00 per share for a period of one year.

In March 2004, the Company issued 1,354,933 units at a price of
$0.75 per unit for cash proceeds of $964,926 (gross proceeds of $1,016,201 net
of finders fees of $51,275). Each unit consisted of one share of common stock
and one-half of one non-transferable share purchase warrant whereby each whole
warrant entitled the holder to acquire one additional share of common stock at a
price of $3.00 per share for a period of one year.

In April 2004, the Company issued 462,427 units at a price of
$0.75 per unit for cash proceeds of $334,197 (gross proceeds of $346,822 net of
finders fees of $7,000). Each unit consisted of one share of common stock and
one-half of one non-transferable share purchase warrant whereby each whole
warrant entitled the holder to acquire one additional share of common stock at a
price of $3.00 per share for a period of one year.

In July 2004, the Company issued 6,666 units at a price of
$0.75 per unit for cash proceeds of $5,000. Each unit consisted of one share of
common stock and one-half of one non-transferable share purchase warrant whereby
each whole warrant entitled the holder to acquire one additional share of common
stock at a price of $3.00 per share for a period of one year.

In March 2005, the Company issued 1,046,667 units at a price of
$0.75 per unit for cash proceeds of $730,050 (gross proceeds of $785,000 net of
finders fees of $54,950). Each unit consisted of one share of common stock and
one non-transferable share purchase warrant whereby each whole warrant entitled
the holder to acquire one additional share of common stock at a price of $1.00
per share for a period of one year, or at a price of $1.40 per share if
exercised after one year but before March 31, 2007.

In Apri1 2005, the Company issued 12,300 shares of common stock
for services at a price of $0.65 per share in payment of corporate finance
consulting fees of $7,995.

In October 2005, the Company issued 400,000 units at a price of
$0.75 per share for cash proceeds of $276,000 (gross proceeds of $300,000 net of
finders fees of $24,000). Each unit consisted of one share of common stock and
one non-transferable share purchase warrant. Each whole warrant entitled the
holder to acquire one additional share of common stock at a price of $1.00 per
share for a period of one year from the date of issuance, or $1.40 per share for
an additional one year period from the date of issuance.

38

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 11  Common Stock (continued)

In October 2005, the Company issued 10,000 common shares a
price of $0.50 per share on settlement of accounts payable.

In May 2006, the Company issued 100,000 shares of common stock
for services at a price of $0.58 per share in payment of business development
fees of $58,000 (Note 6).

In July 2006, the Company issued 500,000 shares of common stock
for services at a price of $0.33 per share in payment of corporate finance fees
of $165,000 (Note 6).

In September 2006, the Company issued 1,800,000 units at a
price of $0.50 per unit for cash proceeds of $810,000 (gross proceeds of
$900,000 net of finders fees of $90,000). Each unit consists of one common
share and one-half share purchase warrant. Each whole warrant entitles the
holder to purchase one additional share of common stock at a price of $0.60 per
share for a period of one year from the date of issuance.

In September 2006, the Company issued 190,000 units at a price
of $0.50 per unit for cash proceeds of $90,000 (gross proceeds of $95,000 net of
finders fees of $5,000). Each unit consists of one share of common stock and
one-half of one non-transferable share purchase warrant whereby each whole
warrant entitles the holder to acquire one additional share of common stock at a
price of $0.60 per share for a period of one year.

In December 2006, the Company issued 200,000 shares of common
stock at a price of $0.35 per share in payment of a termination settlement with
the former chief financial officer and director of the Company. The fees were
recorded as corporate finance fees.

In March 2007, the Company issued 28,500 shares of common stock
at a price of $0.67 per share in payment of corporate finance fees (Note 8).

In April 2007, the Company completed a private placement of
500,000 units at a price of $0.50 per unit for cash proceeds of $250,000. Each
unit consists of one common share and one-half share purchase warrant. Each
whole warrant entitles the holder to purchase on additional share of common
stock at a price of $0.55 per share for a period of one year from the date of
issuance.

In April 2007, the Company issued 40,000 common shares on the
  exercise of options for proceeds of $10,800.

In May 2007, the Company issued 40,000 common shares on the
  exercise of options for proceeds of $10,800.

In July 2007, the Company issued 1,666,667 units at a price of
$0.60 per unit for cash proceeds of $860,000 (gross proceeds of $1,000,000 net
of finders fees of $140,000). Each unit consists of one common share and
one-half share purchase warrant. Each whole warrant entitles the holder to
purchase one additional share of common stock at a price of $0.65 per share for
a period of two years from the date of issuance.

39

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 12  Stock Options and WarrantsStock Options

On October 28, 2003, the Company adopted a stock incentive plan
(the "2003 Stock Plan") to provide incentives to employees, directors and
consultants. On October 28, 2003, the Company's stockholders approved the 2003
Stock Plan which provides for the issuance of up to 4,400,000 options with a
maximum term of ten years. At the annual meeting of shareholders held on April
16, 2007, the 2003 Stock Plan was amended to increase the number of options that
may be issued under the plan to 8,400,000.

|                                           |  | Number
      of |   |   | Weighted Average |  
|------------------------------------------ |  | --------------- | - | - | ---------------- | -
|                                           |  | Options         |   |   | Exercise Price   |  
|Options outstanding, August 31, 2005       |  | 2,474,000       |   | $ | 1.93             |  
|Issued                                     |  | 2,958,500       |   |   | 0.35             |  
|Exercised                                  |  | -               |   |   | -                |  
|Expired                                    |  | (1,101,000      | ) |   | (1.00            | )
|Options outstanding, August 31, 2006       |  | 4,331,500       |   |   | 0.51             |  
|Issued                                     |  | 4,443,201       |   |   | 0.50             |  
|Exercised                                  |  | (80,000         | ) |   | (0.27            | )
|Expired                                    |  | (1,474,750      | ) |   | (0.44            | )
|Options outstanding, August 31, 2007       |  | 7,219,951       |   | $ | 0.52             |  
|Options
      exercisable, August 31, 2007 |  | 5,244,469       |   | $ | 0.53             |  

The weighted average fair value of options granted during the
current fiscal year was $0.40 per option (2006 - $0.29) .

A summary of stock options outstanding at August 31, 2007, is
as follows:

|               |  | Outstanding Options |  | Exercisable Options | 
|-------------- |  | ------------------- |  | ------------------- | 
|               |  |                     |  | Weighted            | 
|               |  |                     |  | Average             | 
|               |  |                     |  | Remaining           | 
|               |  |                     |  | Contractual         | 
|Exercise Price |  | Number              |  | Life                | 
|$ 0.27         |  | 270,000             |  | 4.90 years          | 
|0.34           |  | 23,000              |  | 4.97 years          | 
|0.35           |  | 1,837,500           |  | 5.19 years          | 
|0.36           |  | 108,000             |  | 5.25 years          | 
|0.38           |  | 50,000              |  | 4.90 years          | 
|0.41           |  | 150,000             |  | 5.66 years          | 
|0.45           |  | 300,000             |  | 4.18 years          | 
|0.52           |  | 3,414,451           |  | 5.62 years          | 
|0.56           |  | 140,000             |  | 3.87 years          | 
|0.63           |  | 200,000             |  | 5.38 years          | 
|1.10           |  | 727,000             |  | 2.83 years          | 
|               |  |                     |  |                     | 
|               |  | 7,219,951           |  |                     | 

40

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 12  Stock Options and Warrants (continued)

Stock Options (continued)

The Company uses the Black-Scholes option pricing model to
compute estimated fair value, based on the following assumptions:

| |                                                 | 2007            | 2006         
| | ----------------------------------------------- | --------------- | -------------
| |                                                 |                 |              
| |                                                 |                 |              
| | Risk-free interest rate                         | 4.25 %          | 4.25 %       
| | Dividend yield rate                             | 0.00 %          | 0.00 %       
| | Price volatility                                | 97.8 % - 109.8% | 103.7 %      
| | Weighted average
      expected life of options | 6
      years   | 6
      years

Warrants

In March 2005, the Company issued 50,000 warrants at a price of
$0.75 per warrant in payment of investor relations consulting fees. These
warrants were valued at $16,408 which was recognized over twelve months, being
the period of the service contract.

In February 2006, the Company entered into an investment
banking agreement and issued 751,000 warrants in March 2006, at an exercise
price of $0.50 per warrant, exercisable for a five year period ending March 13,
2011. The fair value of the warrants issued was $203,426. The Company is
recognizing this amount over the term of the agreement and accordingly has
recorded $101,694 as corporate finance fees for the year ended August 31, 2007.

In May 2006, the Company signed a one-year agreement for
investor relations services and issued 400,000 warrants exercisable for a two
year period at an exercise price of $0.59 per warrant. The fair value of the
warrants issued was $91,075. The Company is recognizing this amount over the
term of the agreement and accordingly has recorded $60,717 of investor relations
fees for the year ended August 31, 2007.

The Company uses the Black-Scholes option pricing model to
compute the estimated fair value of compensatory warrants, based on the
following weighted average assumptions:

| |                                                  | 2007            | 2006        
| | ------------------------------------------------ | --------------- | ------------
| |                                                  |                 |             
| |                                                  |                 |             
| | Risk-free interest rate                          | 4.25 %          | 4.25 %      
| | Dividend yield rate                              | 0.00 %          | 0.00 %      
| | Price volatility                                 | 97.8 % - 109.8% | 103.7 %     
| | Weighted average
      expected life of warrants | 1
      year    | 1
      year

41

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 12  Stock Options and Warrants (continued)

Warrants (continued)

|                                                                  |  |                    |   |   | Weighted Average |  
|----------------------------------------------------------------- |  | ------------------ | - | - | ---------------- | -
|                                                                  |  | Number of Warrants |   |   | Exercise Price   |  
|Warrants outstanding, August 31, 2005                             |  | 2,319,016          |   |   | 1.00             |  
|Issued                                                            |  | 3,951,000          |   |   | 0.61             |  
|Exercised                                                         |  | -                  |   |   | -                |  
|Expired                                                           |  | -                  |   |   | -                |  
|Warrants outstanding, August 31, 2006                             |  | 6,270,016          |   | $ | 0.76             |  
|Issued                                                            |  | 2,078,333          |   |   | 0.61             |  
|Exercised                                                         |  | -                  |   |   | -                |  
|Expired                                                           |  | (2,269,016         | ) |   | (1.40            | )
|Warrants outstanding, August 31, 2007                             |  | 6,079,333          |   | $ | 0.62             |  
|Warrants
      exercisable, August 31, 2007                       |  | 6,079,333          |   | $ | 0.62             |  
|Weighted average fair value of warrants granted in the
      year |  |                    |   | $ | 0.61             |  

In February 2005, the board of directors approved an extension
and repricing of certain previously issued warrants. The revised terms are
reflected in the table below.

The summary of warrants outstanding is as follows:

|                   |  |           |  |  |             |  |  | 2007     |  |  | 2008     |  |  |                     | 
|------------------ |  | --------- |  |  | ----------- |  |  | -------- |  |  | -------- |  |  | ------------------- | 
|                   |  |           |  |  |             |  |  | Exercise |  |  | Exercise |  |  | Expiry              | 
|Issuances          |  | Issued    |  |  | Outstanding |  |  | Price    |  |  | Price    |  |  | Date                | 
|March 31, 2005     |  | 50,000    |  |  | 50,000      |  |  | 0.75     |  |  | 0.75     |  |  | March 31, 2010      | 
|October 25, 2005   |  | 400,000   |  |  | 400,000     |  |  | 1.00     |  |  | 1.40     |  |  | October 25, 2007    | 
|March 13, 2006     |  | 751,000   |  |  | 751,000     |  |  | 0.50     |  |  | 0.50     |  |  | March 13, 2011      | 
|March 13, 2006     |  | 2,400,000 |  |  | 2,400,000   |  |  | 0.59     |  |  | 0.59     |  |  | March 13, 2011      | 
|May 2, 2006        |  | 400,000   |  |  | 400,000     |  |  | 0.59     |  |  | 0.59     |  |  | May 2, 2008         | 
|September 21, 2006 |  | 995,000   |  |  | 995,000     |  |  | 0.60     |  |  | 0.60     |  |  | September 21, 2007  | 
|April 5, 2007      |  | 250,000   |  |  | 250,000     |  |  | 0.55     |  |  | 0.55     |  |  | April 5, 2008       | 
|July 18, 2007      |  | 833,333   |  |  | 833,333     |  |  | 0.65     |  |  | 0.65     |  |  | July
      18, 2009 | 
|                   |  |           |  |  |             |  |  |          |  |  |          |  |  |                     | 
|Total outstanding  |  | 6,079,333 |  |  | 6,079,333   |  |  |          |  |  |          |  |  |                     | 

42

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 13 - Revenues

Revenues are generated from royalties, provision of engineering
  services and product sales. Royalties are associated with rights to manufacture
  using the Company’s patented gear system technology. Engineering services
  are associated with technology development and product revenues involve engineered
  mechanical gearboxes, mud pump drives and drawworks for use in the oil &
  gas applications.

Note 14  Supplemental Disclosure with Respects to Cash
Flows

The significant non-cash transactions for the year ended August
31, 2007, consisted of:

- The issuance of 200,000 common shares at a price of $0.35 for termination
  settlement with the former chief financial officer and director recorded as
  corporate finance fees.
- The issuance of 28,500 common shares at a price of $0.67 recorded as
  corporate finance fees.
- The issuance of 35,000 common shares at a price of $0.27 recorded as
  corporate finance fees.
- The issuance of 500,000 common shares at a price of $0.33 recorded as
  deferred expenses.

The significant non-cash transactions for the year ended August
31, 2006, consisted of:

- The recording of a beneficial conversion feature of $96,000.
- The issuance of 10,000 common shares at a price of $0.50 in settlement of
  accounts payable.
- The issuance of 2,400,000 warrants valued at $350,404 in connection with
  convertible notes.
- The issuance of 100,000 common shares at a price of $0.58 recorded as
  deferred expenses.
- The issuance of 500,000 common shares at a price of $0.33 recorded as
  deferred expenses.

Note 15 - Income Taxes

A reconciliation of income taxes at statutory rates with the
reported taxes is as follows:

| |                                                       |   | 2007       |   |   | 2006       |  
| | ----------------------------------------------------- | - | ---------- | - | - | ---------- | -
| | Loss before income taxes                              | $ | (4,127,604 | ) | $ | (1,824,488 | )
| | Expected income tax benefit                           | $ | 1,403,000  |   | $ | 620,000    |  
| | Unrecognized benefit of operating loss carry forwards |   | (1,403,000 | ) |   | (620,000   | )
| | Income tax benefit                                    | $ | -          |   | $ | -          |  

Significant components of the Companys deferred tax assets
based on statutory tax rates are as follows:

| |                                                   |   | 2007       |   |   | 2006       |  
| | ------------------------------------------------- | - | ---------- | - | - | ---------- | -
| |                                                   |   |            |   |   |            |  
| | Deferred tax assets:                              |   |            |   |   |            |  
| | Tax effect of operating loss carry
      forwards | $ | 3,192,800  |   | $ | 1,789,100  |  
| | Valuation allowance                               |   | (3,192,800 | ) |   | (1,789,100 | )
| |                                                   |   |            |   |   |            |  
| | Net deferred tax assets                           | $ | -          |   | $ | -          |  

43

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 15 - Income Taxes (continued)

The Company has approximately $9,390,000 of net operating loss
carry forwards which expire beginning in 2023. The Company has provided a
valuation allowance against its deferred tax assets given that it is in the
development stage and it is more likely than not that these benefits will not be
realized.

Note 16 - Segment Information

The Companys operations were conducted in one reportable
segment, being the development and commercialization of a unique patented
gearing technology, primarily in Canada and USA.

|                  |   |    |  |   | Year                  |  |   |           |  |   |         |  |   | Year                  |  |   |         | 
|----------------- | - | -- |  | - | --------------------- |  | - | --------- |  | - | ------- |  | - | --------------------- |  | - | ------- | 
|                  |   |    |  |   | Ended                 |  |   |           |  |   |         |  |   | Ended                 |  |   |         | 
|                  |   |    |  |   | August
      31, 2007 |  |   |           |  |   |         |  |   | August
      31, 2006 |  |   |         | 
|                  |   | US |  |   | Canada                |  |   | Total     |  |   | US      |  |   | Canada                |  |   | Total   | 
|                  |   |    |  |   |                       |  |   |           |  |   |         |  |   |                       |  |   |         | 
|REVENUES          | $ | -  |  | $ | 1,041,789             |  | $ | 1,041,789 |  | $ | 180,213 |  | $ | 284,000               |  | $ | 464,213 | 
|                  |   |    |  |   |                       |  |   |           |  |   |         |  |   |                       |  |   |         | 
|LONG-LIVED ASSETS | $ | -  |  | $ | 247,907               |  | $ | 247,907   |  | $ | -       |  | $ | 123,765               |  | $ | 123,765 | 

Note 17  Financial Instruments

a) Fair Value

The Company's financial instruments consist of cash,
receivables, accounts payable and accrued liabilities, convertible notes
payable, loan payable and capital lease payable. Unless otherwise noted, it is
management's opinion that the Company is not exposed to significant interest or
credit risks arising from these financial instruments. The fair value of these
financial instruments approximates their carrying values, unless otherwise
noted.

b) Currency Risk

Currency risk is the risk arising from fluctuations and changes
in foreign currency exchange rates. The Company does not use any derivative
instruments to reduce its exposure to fluctuations in foreign currency exchange
rates.

c) Credit Risk

The Company maintains cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced
losses in such accounts. Management believes the Company is not exposed to any
significant credit risk on cash in such bank deposit accounts.

Note 18  Commitments

On April 1, 2004, the Company amended a consulting agreement
with a director, officer and significant shareholder of the Company to pay
monthly management fees totaling approximately $8,500 (C$11,333) (2005 - $8,500
(C$11,333)). This agreement can be terminated with six months advance notice.

In September 2006, the Company entered into a premises sublease
for office and workshop facilities for a period of 42 months commencing December
1, 2006. The premises lease commits the Company to a net annual rental expense
of $131,000 in 2007 (C$148,864), $132,600 in 2008 (C$150,682), $134,600 in 2009
(C$152,955) and additional annual operating costs estimated at $40,016
(C$45,473) for a period of 42 months ending May 29, 2010. The Company provided a
deposit of two months of rent equaling $30,497 (C$34,656) which is included in
prepaid expenses as at August 31, 2006.

44

---

|IKONA GEAR INTERNATIONAL, INC.)               
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States Dollars)          
|August 31, 2007 and 2006                      
|                                              

Note 19  Subsequent events

In September 2007, the Company issued 1,813,332 units at a
price of $0.50 per unit for cash proceeds of $779,773 (gross proceeds of
$906,666, net of finders fees of $126,933). Each unit consists of one common
share and one-half share purchase warrant. Each whole warrant entitles the
holder to purchase one additional share of common stock at a price of $0.54 per
share for a period of two years from the date of issuance.

In September 2007, the Company has tendered the funds in full
for repayment of the Notes in amount of $1,380,356, including interest of
$180,356.

45

---

Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.

None.

Item 8.A Controls and Procedures

|a) | The Companys Principal Executive Officer and Principal
      Financial Officer, Laith Nosh, has established and is currently
      maintaining disclosure controls and procedures for the Company. The
      disclosure controls and procedures have been designed to provide
      reasonable assurance that the information required to be disclosed by the
      Company in reports that it files under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in
      the rules and forms of the SEC and to ensure that information required to
      be disclosed by the Company is accumulated and communicated to the
      Company's management as appropriate to allow timely decisions regarding
      required disclosure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Principal Executive Officer and Principal Financial
      Officer conducted a review and evaluation of the effectiveness of the
      Company's disclosure controls and procedures and has concluded, based on
      his evaluation as of the end of the period covered by this Report, that
      our disclosure controls and procedures are effective to provide reasonable
      assurance that information required to be disclosed in the reports that we
      file or submit under the Exchange Act is accumulated and communicated to
      management, including our principal executive officer and our principal
      financial officer, to allow timely decisions regarding required disclosure
      and we refer you to Exchange Act Rule 13a-15(e).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|b) | Except as otherwise noted above, there has been no change
      in our internal control over financial reporting during the year ended
      August 31, 2007 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|c) | Our principal executive and financial officer does not
      expect that our disclosure controls or internal controls will prevent all
      error and all fraud. Although our disclosure controls and procedures were
      designed to provide reasonable assurance of achieving their objectives and
      our principal executive and financial officer has determined that our
      disclosure controls and procedures are effective at doing so, a control
      system, no matter how well conceived and operated, can provide only
      reasonable, not absolute assurance that the objectives of the system are
      met. Further, the design of a control system must reflect the fact that
      there are resource constraints, and the benefits of controls must be
      considered relative to their costs. Because of the inherent limitations in
      all control systems, no evaluation of controls can provide absolute
      assurance that all control issues and instances of fraud, if any, within
      the Company have been detected. These inherent limitations include the
      realities that judgments in decision-making can be faulty, and that
      breakdowns can occur because of simple error or mistake. Additionally,
      controls can be circumvented if there exists in an individual a desire to
      do so. There can be no assurance that any design will succeed in achieving
      its stated goals under all potential future conditions.

Item 8.B Other Information

None.

PART III

Item 9. Directors, Executive Officers, Promoters and Control
Persons;

Our executive officers, key employees
and outside Directors and their respective ages and positions are set forth
below:

46

---

|Name           | Age | Position                                                                              
|-------------- | --- | --------------------------------------------------------------------------------------
|               |     |                                                                                       
|Laith I. Nosh  | 59  | Director, President, Chief
      Executive Officer and interim Chief Financial Officer
|Joe Vosburgh   | 39  | Director, Executive Vice President                                                    
|Gheorge Stefan | 42  | Chief Operating Officer                                                               
|Sasa Tesic     | 40  | Chief Engineer                                                                        
|Brendan Burns  | 44  | Director                                                                              

Brendan Burns, one of our directors is
"independent" within the meaning of Nasdaq's listing standards. For this
purpose, an "independent director" is defined to exclude officers or employees
of the company or its subsidiaries or other individuals having a relationship
with the issuer that, in the opinion of the board of directors, would interfere
with the exercise of independent judgment in carrying out the responsibilities
of a director.

Laith Nosh, Director, President, Chief Executive Officer and
interim Chief Financial OfficerMr. Nosh has served as a director and our
president and chief executive officer since October 2003. Mr. Nosh was a founder
of our predecessor company and the current operating subsidiaries, where he
worked as president and chief executive officer since inception in August 2001.
He has been instrumental in the development, refinement and patenting of the
Ikona Gearing System over the last eight years. He has also developed and
patented consumer product devices for the construction industry. He received his
degree from the University of Alberta in Mechanical Engineering and has over 30
years of experience in engineering, business management and marketing.

Gheorge Stefan, Chief Operating OfficerMr. George
Stefan B.Sc.(Eng), MBA, PMP has been with Ikona since September 2005, first in
the role of director of manufacturing and subsequently joined the management
team, as chief operating officer. Stefan is an engineering, project management
and operations management professional with more than 15 years experience in the
design, development, and management of new products and new operational
processes with applications in the oil and gas, marine, heavy machinery, and
boat building industries. For the past 8 years Stefan has led development for
Pacific Rim Engineered Products, a designer and manufacturer of mechanical power
transmission equipment. Previously, Stefan has held various operation management
positions with Pacific Rim Engineered Products, WestBay Sonship Yachts, Bel-Air
Enterprises, and the Romanian Navy. Stefan has an MBA (2005), as well as
Master's Degree in Project Management (2003) from City University in Vancouver,
Canada. He also has a Bachelor of Science Degree in Engineering (1987), with a
focus on electro-mechanical systems and operations management from Romania.
Stefan is a registered Project Management Professional (PMP®), a member of the
Project Management Institute, the Society of Project Management Professionals of
Greater Vancouver, and the Society of Internationally Trained Engineers of
British Columbia.

Sasa Tesic,Chief Engineer Mr. Sasa Tesic, B.Eng.,
has been part of Ikona executive team since October 2005, in the role of chief
engineering officer. Tesic is an engineering professional with 15 years
experience in mechanical and industrial engineering, and software development,
with applications in the oil and gas, automotive, marine, mining, dredging, and
medical industries. For the past 8 years Tesic has been employed by Pacific Rim
Engineered Products, a designer and manufacturer of mechanical power
transmission equipment. Previously, Tesic has held various engineering and
design positions with Pacific Rim Engineered Products, Cassola Management
(Canada), Spectar, and Cobra System Engineering (Yugoslavia), and has extensive
technical experience in engineering using various CAD packages, especially
Pro/Engineer. Tesic has a Bachelor of Engineering Degree in Mechanical
Engineering (1992) from Yugoslavia (Serbia and Montenegro). He is also a
published author, with articles in The Scientific Technical Review in
Yugoslavia.

Joe Vosburgh, Director and Executive Vice PresidentMr. Vosburgh served as an independent director from July 2005 to
November 2006. In November of 2006, Mr. Vosburgh joined Ikona as Executive Vice
President, retaining the position of related director on Ikonas board. Mr.
Vosburgh joined Ikona after more than twelve years experience in product
strategy, product marketing and development, global product portfolio planning,
and risk analysis. As of August 31st, 2006 Mr. Vosburgh was senior
product manager, strategic marketing, for Ballard Power Systems, a global leader
in fuel cell development and manufacture. In this role, Joe has redefined
Ballard's international product strategy for light-duty fuel cell

47

---

products, developed global portfolio strategies, and
spearheaded corporate-wide business realignment and product cost reduction
projects. From 1997-2001 Mr. Vosburgh held senior level product management
positions in marketing, business development and professional services positions
with Creo Inc. (now owned by Kodak). From 2001 to 2002, Joe was Director,
Professional Services with Infowave Software Inc. From 2002 to 2003, he was a
Product Marketing Director with Norsat International Inc., and from 2003 to 2005
he was Senior Product Manager for Chancery Software Inc. Mr. Vosburgh holds a
Master's of Business Administration (MBA) in marketing and accounting from
Queen's University (1995), and a Bachelor's Degree of Engineering from the
University of Victoria (1993). Joe has also received certification in managing
new product development from Kellogg Graduate School of Management (2001), and
lectures on Strategic Marketing, Business Strategy and Economics at the
University of Phoenix and Kwantlen University College.

Brendan Burns, DirectorJ. Brendan Burns currently
serves as manager of corporate planning of Ballard Power Systems Inc., a
recognized world leader in the design, development and manufacture of
zero-emission proton exchange membrane (PEM) fuel cells. Mr. Burns, the primary
architect of Ballards annual operating budget, has responsibility for managing
the companys income statement, statement of cashflows and balance sheet, all of
which incorporates responsibilities such as labor resource balancing, test stand
allocations and production planning. In support of Ballards annual strategic
planning process, Mr. Burns is responsible for forecasting product costs and
providing guidance for strategic market introduction of each of the companys
product lines. Prior to joining Ballard Power in 1998, Mr. Burns spent five
years as a management consultant to heavy manufacturing companies for whom he
specialized in industry competitiveness issues. Mr. Burns earned a Bachelor of
Science in Mechanical Engineering from the University of Toronto and a MBA from
the University of Ottawa.

Except as indicated above, during the last five years none of
our directors or officers have:

| | a. | had any bankruptcy petition filed by or against any
      business of which such person was a general partner or executive officer
      either at the time of the bankruptcy or within two years prior to that
      time;                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                               
| | b. | been convicted in a criminal proceeding or subject to a
      pending criminal proceeding;                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                               
| | c. | been subject to any order, judgment, or decree, not
      subsequently reversed, suspended or vacated, of any court of competent
      jurisdiction, permanently or temporarily enjoining, barring, suspending or
      otherwise limiting his involvement in any type of business, securities or
      banking activities; or
| |    |                                                                                                                                                                                                                                                                                                                               
| | d. | been found by a court of competent jurisdiction in a
      civil action, the Commission or the Commodity Futures Trading Commission
      to have violated a federal or state securities or commodities law, and the
      judgment has not been reversed, suspended, or
vacated.                                             

Our directors are elected for a term of 1 year and stand for
re-election at the Companys annual general meeting.

Committees of the Board of Directors

The board appoints committees to
help carry out its duties. In particular, board committees work on key issues in
greater detail than would be possible at full board meetings. Each committee
reviews the results of its meetings with the full board.

Audit Committee

The audit committee was composed
of Nicola Simon and Joe Vosburgh from September 1, 2006, to February 8, 2007.
From February 9, 2007, to April 16, 2007, Joe Vosburgh was the only member of
the audit committee. From April 17, 2007 to August 31, 2007, the audit committee
was composed of Joe Vosburgh and Brendan Burns. The audit committee is without a
member who would be deemed an audit committee financial expert within the
meeting of Item 401(e)(2) of regulation S-B. Efforts are under way to find a
suitable independent audit committee financial expert. The audit committee is
responsible for accounting and internal control matters.

The audit committee:

48

---

- reviews with management, the internal auditors and the independent
  auditors, policies and procedures with respect to internal controls;
- reviews significant accounting matters;
- approves the audited financial statements prior to public distribution;
- approves any significant changes in accounting principles or financial
  reporting practices;
- reviews independent auditor services; and
- recommends to the board of directors the firm of independent auditors to
  audit our consolidated financial statements.

In addition to its regular activities, the committee is
available to meet with the independent accountants, controller or internal
auditor whenever a special situation arises.

Audit Committee Report

The audit committee of the board of
directors has:

1.     
reviewed and discussed the Company's audited financial statements for the fiscal
year ended August 31, 2007 with management and representatives of Dohan and
Company, CPAs, P.A.

2.     
discussed with Dohan and Company the matters required to be discussed by SAS 61,
as modified or supplemented; and

3.     
received the written disclosures and letter from Dohan and Company required by
Independence Standards Board Standard No. 1 and discussed Dohan and Company's
independence with representatives of Dohan and Company.

Based on the review and
discussions referred to above, the audit committee recommends to the board of
directors that the audited financial statements for the fiscal year ended August
31, 2007, be included in the Company's annual report on Form 10-KSB filed with
the Securities and Exchange Commission.

During the fiscal year ended August 31, 2007, the board
established the following committee:

Compensation Advisory Committee

Until January 19, 2006, there was
no compensation advisory committee. The compensation advisory committee was
struck on January 19, 2006 and was composed of Joe Vosburgh and Nicola Simon
until February 8, 2007. From February 9, 2007, to April 16, 2007, Joe Vosburgh
was the only member of the compensation advisory committee. From April 17, 2007
to August 31, 2007, the compensation advisory committee was composed of Joe
Vosburgh and Brendan Burns.

The board of directors has not
adopted a policy with regard to the consideration of any director candidates
recommended by security holders, since to date the board has not received from
any security holder a director nominee recommendation. The board of directors
will consider candidates recommended by security holders in the future. Security
holders wishing to recommended a director nominee for consideration should
contact Mr. Laith Nosh, President, at the Company's principal executive offices
located in Coquitlam, British Columbia and provide to Mr. Nosh, in writing, the
recommended director nominee's professional resume covering all activities
during the past five years, the information required by Item 401 of Regulation
S-B, and a statement of the reasons why the security holder is making the
recommendation. The Company must receive such recommendation before August 31,
2007.

The board of directors believes
that any director nominee must possess significant experience in business and/or
financial matters as well as a particular interest in the Company's activities.

Shareholder Communications

Any shareholder of the Company
wishing to communicate to the board of directors may do so by sending written
communication to the board of directors to the attention of Mr. Laith Nosh,
President, at the principal

49

---

executive offices of the Company. The board of directors will
consider any such written communication at its next regularly scheduled
meeting.

Any transactions between the Company
and its officers, directors, principal shareholders, or other affiliates have
been and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties on an arms-length basis and will be
approved by a majority of the Company's independent, outside disinterested
directors.

Item 10. Code of Ethics

The directors of our current board
have adopted a Code of Ethics on December 12, 2006. Code of Ethics is posted on
our internet website www.ikona.ca. We will
provide to any person without charge, upon request, a copy of our Code of
Business Conduct and Ethics. Such request should be made in writing and
addressed to Investor Relations, Ikona Gear International, Inc., 1650 Brigantine
Drive, Unit #100, Coquitlam, British Columbia, Canada, V3K 7B5.

Item 11. Compliance With Section 16(a) of the Exchange Act

Under the Securities Laws of the
United States, the Company's directors, its executive (and certain other)
officers, and any persons holding more than ten percent (10%) of our common
stock are required to report their ownership of the Company's common stock and
any changes in that ownership to the Securities and Exchange Commission.
Specific due dates for these reports have been established and the Company is
required to report in this report any failure to file by these dates. All of
these filing requirements were not satisfied by our officers, directors, and
ten-percent holders. Messrs Nosh and Nasser M. Al-Jarallah each failed to file
on a timely basis reports covering one transaction. In making these statements,
we have relied on the written representation of its directors and officers or
copies of the reports that they have filed with the Commission.

Item 12. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Introduction.This
Compensation Discussion and Analysis (CD&A) provides an overview of the
Companys executive compensation program together with a description of the
material factors underlying the decisions which resulted in the compensation
provided for 2007 to the Companys Chief Executive Officer (CEO) ( the Named
Executive Officers or NEOs), as presented in the tables which follow this
CD&A. The following discussion and analysis contains statements regarding
future individual and Company performance targets and goals. These targets and
goals are disclosed in the limited context of the Companys compensation
programs and should not be understood to be statements of managements
expectations or estimates of financial results or other guidance. The Company
specifically cautions investors not to apply these statements to other
contexts.

Compensation Committee.The Compensation Committee (the Committee) of the Board of Directors is
composed of three non-employee Directors, all of whom are independent under the
guidelines of the American Stock Exchange listing standards. The current
Committee members are Joe Vosburgh and Brendan Burns. The Committee has
responsibility for determining and implementing the Companys philosophy with
respect to executive compensation. To implement this philosophy, the Committee
oversees the establishment and administration of the Companys executive
compensation program.

Compensation Philosophy and
Objectives.The guiding principle of the Committees executive compensation
philosophy is that the executive compensation program should enable the Company
to attract, retain and motivate a team of highly qualified executives who will
create long-term value for the Shareholders. To achieve this objective, the
Committee has developed an executive compensation program that is
ownership-oriented and that rewards the attainment of specific annual, long-term
and strategic goals that will result in improvement in total shareholder return.
To that end, the Committee believes that the executive compensation program
should include both cash and equity-based compensation that rewards specific
performance. In addition, the Committee continually monitors the effectiveness
of the program to ensure that the compensation provided to executives remains
competitive relative to the compensation paid to executives in a peer group
comprised of select engineering and manufacturing companies. The Committee
annually evaluates the components of the compensation program as well as the
desired mix of compensation among these components. The Committee believes that
a substantial portion of the compensation paid to the Companys NEOs should be
at risk, contingent on the Companys operating and market performance.
Consistent with this philosophy, the Committee will continue to place
significant emphasis on stock-based

50

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compensation and performance measures, in an effort to more
closely align compensation with Shareholder interests and to increase
executives focus on the Companys long-term performance.

Committee Process.The
Committee meets as often as necessary to perform its duties and
responsibilities. The Committee usually meets with the CEO and CFO. In addition,
the Committee periodically meets in executive session without management.

The Committees meeting agenda is
normally established by the Committee Chairperson in consultation with the CEO
and CFO. Committee members receive and review materials in advance of each
meeting. Depending on the meetings agenda, such materials may include:
financial reports regarding the Companys performance, reports on achievement of
individual and corporate objectives, reports detailing executives stock
ownership and options, tally sheets setting forth total compensation and
information regarding the compensation programs and levels of certain peer group
companies.

Role of Executive Officers in
Compensation Decisions.The Committee makes all compensation decisions for
the CEO and the CFO. Decisions regarding the compensation of other employees are
made by the CEO and CFO in consultation with the Committee. In this regard, the
CEO and CFO provide the Committee evaluations of executive performance, business
goals and objectives and recommendations regarding salary levels and equity
awards.

51

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Market-Based Compensation Strategy. The Committee
adopted the following market-based compensation strategy:

| | Pay levels are evaluated and calibrated relative to other
      companies of comparable size operating in the engineering and
      manufacturing business (the Peer Group) as the primary market reference
      point. In addition, general industry data is reviewed as an additional
      market reference and to ensure robust competitive data.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                         
| | Target total direct compensation (target total cash
      compensation plus the annualized expected value of long-term incentives)
      levels for NEOs are calibrated relative to the Peer Group.                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                         
| | Base salary and target total cash compensation levels
      (base salary plus target annual incentive) for NEOs are calibrated to the
      Peer Group.                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                         
| | The long-term incentive component of the executive
      compensation program is discretionary and viewed in light of the target
      total direct compensation level.                                                                                                                                                                                 

The Committee retains discretion,
however, to vary compensation above or below the targeted percentile based upon
each NEOs experience, responsibilities and performance.

Total Direct Compensation

Our objective is to target total
direct compensation, consisting of cash salary, cash bonus and long term equity
compensation at levels consistent with the surveyed companies, if specified
corporate and business unit performance metrics and individual performance
objectives are met. We selected this target for compensation to remain
competitive in attracting and retaining talented executives. Many of our
competitors are significantly larger and have financial resources greater than
our own. The competition for experienced, technically proficient executive
talent in the engineering industry is currently particularly acute, as companies
seek to draw from a limited pool of such executives.

We structure total direct
compensation to the named executive officers so that most of this compensation
is delivered in the form of equity awards in order to provide incentives to work
toward long-term profitable growth that will enhance stockholder returns. We
also structure their cash compensation so that a significant portion is at risk
under the cash bonus plan, payable based on corporate, business unit and
individual performance. In the following sections, we further detail each
component of total direct compensation.

Components of Compensation.For the year ended August 31, 2007, the sole component of compensation for
the CEO was base salary. We did not provide additional compensation in the form
of annual incentive bonus, long term incentives, retirement benefits, or
perquisites.

Base Salary.The Company
provides the CEO with base salaries to compensate him for services rendered
during the year. The Committee believes that competitive salaries must be paid
in order to attract and retain high quality executives. The Committee reviews
the CEOs salary at the end of each year, with any adjustments to base salary
becoming effective on January 1 of the succeeding year.

52

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In determining base salary level
for executive officers, the committee considers the following qualitative and
quantitative factors:

- job level and responsibilities,
- relevant experience,
- individual performance,
- recent corporate performance, and

We review base salaries annually,
but we do not necessarily award salary increases each year. From time to time
base salaries may be adjusted other than as a result of an annual review, in
order to address competitive pressures or in connection with a promotion.

The following table and discussions
summarizes all plan and non-plan compensation earned by or paid to our chief
executive officer and former chief financial officer for our last 3 completed
fiscal years. Except where noted, no other executive officer received total
annual salary and bonus of at least US$100,000 during those periods.

53

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SUMMARY COMPENSATION TABLE

|                                       |      |                     |       |         |            | Long Term Compensation |        
|-------------------------------------- | ---- | ------------------- | ----- | ------- | ---------- | ---------------------- | -------
|                                       |      | Annual Compensation |       | Awards  | Payouts   
|                                       |      |                     |       | Other   |            |                        |        
|                                       |      |                     |       | Annual  | Restricted |                        |        
|Name and                               |      |                     |       | Compen- | Stock      |                        | LTIP   
|Principal                              |      | Salary              | Bonus | sation  | Award(s)   | Options/               | Payouts
|Position                               | Year | ($)                 | ($)   | ($)     | ($)        | SARs(#)                | ($)    
|                                       |      |                     |       |         |            |                        |        
|Laith I. Nosh, President & CEO
      1 | 2007 | $121,546            | -0-   | 12,420  | -0-        | 295,3332               | -0-    
|Laith I. Nosh, President & CEO 1       | 2006 | $118,396            | -0-   | 12,000  | -0-        | 150,0003               | -0-    
|Laith I. Nosh, President & CEO
      1 | 2005 | $110,632            | -0-   | 13,700  | -0-        | 40,0004                | -0-    
|Joseph Vosburgh, Executive VP 5        | 2007 | $119,796            | -0-   | -0-     | -0-        | 1,000,0006             | -0-    
|Joseph Vosburgh, Executive VP 5        | 2006 | -0-                 | -0-   | -0-     | -0-        | 120,0007               | -0-    
|Joseph Vosburgh, Executive VP          | 2005 | -0-                 | -0-   | -0-     | -0-        | 100,0008               | -0-    
|Gheorghe Stefan, COO 9                 | 2007 | $108,323            | -0-   | 4,291   | -0-        | 781,00010              | -0-    
|Gheorghe Stefan, COO 9                 | 2006 | $78,300             | -0-   | 4,176   | -0-        | 762,50011              | -0-    
|Gheorghe Stefan, COO 9                 | 2005 | -0-                 | -0-   | -0-     | -0-        | -0-                    | -0-    
|Sasa Tesic, Chief Engineer 12          | 2007 | $108,323            | -0-   | -0-     | -0-        | 778,41713              | -0-    
|Sasa Tesic, Chief Engineer 12          | 2006 | $76,560             | -0-   | -0-     | -0-        | 762,50014              | -0-    
|Sasa Tesic, Chief Engineer 12          | 2005 | -0-                 | -0-   | -0-     | -0-        | -0-                    | -0-    

1Mr. Nosh became President & CEO of Ikona Gear
International, Inc. on October 27, 2003 when Oban Mining Inc. acquire Ikona Gear
USA, Inc. Mr. Nosh received no compensation prior to this date for his services,
except from Ikona Gear USA, Inc. Mr. Nosh received his compensation in the form
of management fees paid to his consultancy, Diversified Sciences Limited.
2On April 16, 2007, pursuant to our Amended 2003 Equity
Incentive Plan, Mr. Nosh was granted 295,333 options with an exercise price of
$0.52 per share pursuant to his services as a director and committee member and
to his performance. Of 295,333 options granted, 250,000 vested immediately and
45,333 are subject to quarterly vesting over a period of three years. 3On July 24, 2006, pursuant to our 2003 Equity Incentive Plan, Mr. Nosh was
granted 150,000 options with an exercise price of $0.27 per share pursuant to
his services as a director and committee member. All the options granted, vested
immediately.4On July 13, 2005, pursuant to our 2003
Equity Incentive Plan, Mr. Nosh was granted 40,000 options with an exercise
price of $0.56 per share pursuant to his services as a director and committee
member. All the 40,000 options granted, vested immediately. 5Mr.
Vosburgh became Executive VP of Ikona Gear International, Inc. on November 14,
2006. Mr. Vosburgh has been acting as a Director of the Company since 2005 and
received no stock options prior to this date for his services. 6On April 16, 2007, pursuant to our Amended 2003 Equity Incentive Plan, Mr.
Vosburgh was granted 1,000,000 options with an exercise price of $0.52 per share
pursuant to his services as a director, officer, committee member and his
employment. Of 1,000,000 options granted, 475,000 vested immediately, and
525,000 are subject to quarterly vesting over a period of three years.
7On July 24, 2006, pursuant to our 2003 Equity Incentive Plan,
Mr. Vosburgh was granted 120,000 options with an exercise price of $0.27 per
share pursuant to his services as a director and committee member. All the
options granted, vested immediately. 8On July 13, 2005, pursuant
to our 2003 Equity Incentive Plan, Mr. Vosburgh was granted 100,000 options with
an exercise price of $0.56 per share pursuant to his services as a director and
committee member. All the options granted, vested immediately. 9Mr. Stefan commenced his employment with Ikona Gear International, Inc. on
September 15, 2005 as Director of Manufacturing and Supply Chain and became a
COO on October 1, 2006.. Mr. Stefan has been acting as an Officer of the Company
since 2005 and received no stock options prior to this date for his services.
10On April 16, 2007, pursuant to our Amended 2003 Equity
Incentive Plan, Mr. Stefan was granted 781,000 options with an exercise price of
$0.52 per share pursuant to his services as an officer and his performance. Of
781,000 options granted, 750,000 vested immediately, and 31,000 is subject to
quarterly vesting over a period of three years.

54

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11 On November 3, 2005, pursuant to our 2003 Equity
Incentive Plan, Mr. Stefan was granted 150,000 options with an exercise price of
$0.47 per share pursuant to his services as an officer. All the options granted
are subject to quarterly vesting over a period of three years. On August 22,
2006, pursuant to our 2003 Equity Incentive Plan, Mr. Stefan was granted 612,500
options with an exercise price of $0.35. All the options granted, vested
immediately. 12Mr. Tesic commenced his employment with Ikona
Gear International, Inc. on October 17, 2005 as Chief Engineer. Mr. Tesic has
been acting as an Officer of the Company since 2005 and received no stock
options prior to this date for his services. 13 On April 16,
2007, pursuant to our Amended 2003 Equity Incentive Plan, Mr. Tesic was granted
778,417 options with an exercise price of $0.52 per share pursuant to his
services as an officer and his performance. Of 778,417 options granted, 750,000
vested immediately, and 28,417 are subject to quarterly vesting over a period of
three years.. 14 On November 3, 2005, pursuant to our 2003 Equity
Incentive Plan, Mr. Tesic was granted 150,000 options with an exercise price of
$0.47 per share pursuant to his services as an officer. All the options granted
are subject to quarterly vesting over a period of three years. On August 22,
2006, pursuant to our 2003 Equity Incentive Plan, Mr. Tesic was granted 612,500
options with an exercise price of $0.35. All the options granted, vested
immediately.

None of the current executive
officers were either employed or served in an executive or employment capacity
with the company prior to assuming their duties for Ikona on October 28, 2003,
subsequent to the last fiscal year of Ikona Gear. Upon acquiring Ikona Gear
International, Inc., we adopted the fiscal year end of Ikona, being August 31,
2003. Prior to acquiring Ikona, our fiscal year end was December 31, 2002.

No executive officer has received
or will receive perquisites and other personal benefits which, in the aggregate,
exceed the lesser of either $50,000 or 10% of the total of annual salary and
bonus paid during the fiscal year.See Director Compensation
below for options granted during the fiscal year ended August 31, 2007, to any
of the named executive officers. No options were exercised during the year ended
August 31, 2007 by our current officers and directors.

Director Compensation

Each of our current directors received
an option grant to purchase shares of our common stock under our Amended Equity
Incentive Plan. Directors generally receive options to purchase 150,000 shares
of our common stock upon joining the board and further options to purchase
50,000 shares of our common stock for each committee on which they serve. We
also have annual grants of options to purchase 100,000 shares of our common
stock to directors who continue to serve. Directors who are also officers of our
company generally receive an option to purchase an additional 150,000 shares of
our common stock. Both, chairman of the board and secretary of the board,
generally receive options to purchase 100,000 shares each. Directors who are
employees of our company may be granted a further "dollar-weighted" option to
acquire common stock when first employed by our company, whereby they receive an
option to acquire one share of common stock per dollar of salary that they earn
on an annualized basis. We may grant additional options to other directors
commensurate with their roles and other subjective assessments of the
compensation committee. Options are priced based on a 100% of their market value
on the date of the grant. Options terminate ninety (90) days after services as a
director or committee member are terminated.

In a grant on July 13, 2005, Mr. Nosh
was granted an option to purchase 40,000 shares of common stock at a purchase
price of $0.56 and fully vested upon issuance, related to his services as a
director and an audit committee member.

In a grant on July 24, 2006, Mr. Nosh
was granted an option to purchase 150,000 shares of common stock at a purchase
price of $0.27 and fully vested upon issuance, related to his services as a
director and an audit committee member.

In a grant on April 16, 2007, Mr. Nosh
was granted an option to purchase 295,333 shares of common stock at a purchase
price of $0.52 of which 250,000 relate to his services as a director and officer
and vested upon issuance. The remaining 45,333 shares relate to his employment
and vest on a quarterly basis over a three-year period. Vesting of these options
is contingent on Mr. Nosh being employed as contemplated and on his continued
employment.

In a grant on July 13, 2005, Mr. Nosh
was granted an option to purchase 40,000 shares of common stock at a purchase
price of $0.56 and fully vested upon issuance, related to his services as a
director and an audit committee member.

In a grant on April 16, 2007, Mr.
Vosburgh was granted an option to purchase 1,000,000 shares of common stock at a
purchase price of $0.52. Of 1,000,000 options granted, 550,000 vested
immediately and the rest

55

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of options vest quarterly over the period of three years.
750,000 options granted related to his employment and 250,000 options granted
related to his services as a director and audit and compensation committee
member.

In a grant on July 24, 2006, Mr. Nosh
was granted an option to purchase 150,000 shares of common stock at a purchase
price of $0.27 and fully vested upon issuance, related to his services as a
director.

In a grant on July 24, 2006, Mr.
Vosburgh was granted an option to purchase 120,000 shares of common stock at a
purchase price of $0.27 and fully vested upon issuance, related to his services
as a director.

In a grant on April 16, 2007, Mr.
Burns was granted an option to purchase 350,000 shares of common stock at a
purchase price of $0.52 and fully vested upon issuance, related to his services
as a director and audit and compensation committee member.

The following table sets forth
information concerning compensation paid to the Companys directors during the
most recently completed fiscal year:

DIRECTOR COMPENSATION TABLE

Name
    Fees Earned or Paid in Cash
    Stock Awards
    Option Awards
    Non- Equity Incentive Plan
      Compensa tion
    Nonqualified Deferred Compensation
      Earnings
    All Other Compensati on
    TotalLaith I. Nosh
    $121,546
    $ - 0
      -
    $153,573
    $ - 0
      -
    $ - 0
      -
    $ - 0
      -
    $275,119Joe Vosburgh
    $119,796
    $ - 0
      -
    $520,000
    $ - 0
      -
    $ - 0
      -
    $ - 0
      -
    $639,796Brendan Burns
    $ - 0 -
    $ - 0 -
    $182,000
    $ - 0 -
    $ - 0 -
    $ - 0 -
    $182,000


2003 Equity Incentive Plan

On October 28, 2003, the board of
directors authorized and our stockholders approved, the 2003 Equity Incentive
Plan (Equity Incentive Plan or the Plan) for our officers, directors and
other employees, plus outside consultants and advisors. Under the Equity
Incentive Plan, our employees, outside consultants and advisors may receive
awards of non-qualified options and incentive options, stock appreciation rights
or restricted stock. A maximum of 4,400,000 shares of our common stock are
subject to the Equity Incentive Plan. At the annual meeting of shareholders held
on April 16, 2007, the 2003 Stock Plan was amended to increase the number of
options that may be issued under the plan to 8,400,000. As of the date of this
report, no stock appreciation rights or restricted stock has been granted under
the Equity Incentive Plan, and we have granted options to purchase 8,400,000
shares of our common stock. To date no 80,000 options have been exercised by our
former Director Nicola Simon at a price of $0.27 per share. The purpose of the
Equity Incentive Plan is to provide employees, including our officers and
employee directors, and non-employee consultants and advisors, with an increased
incentive to make significant and extraordinary contributions to our long-term
performance and growth, to join their interests with the interests of our
shareholders, and to facilitate attracting and retaining employees of
exceptional ability.

Currently under the Plan we have
issued 8,400,000 options of which 8,320,000 remain unexercised. The options have
a weighted average exercise price of $0.52 per share. The stock that we may
issue under our Equity Incentive Plan shall not exceed 8,320,000 shares of
common stock (determined without giving effect to any stock split) but we may
reclaim stock and re-issue terminated options. The exercise price of each
incentive stock option shall be not less than 100% of the fair market value and
such options may not be transferable. The exercise price of each non-statutory
stock option shall be not less than 100% of the fair market value. The total
number of shares of stock subject to an option may, but need not, be allotted in
periodic installments at the discretion of the board of directors or the
compensation committee. Options terminate on the earliest of (i) the date three
months after termination, (ii) seven years from the date of grant, or (iii) an
earlier date as previously agreed upon the by the board of directors or the
compensation committee.

56

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The Plan may be administered by the
board, or in the board's sole discretion by the compensation committee of the
board or such other committee as may be specified by the board to perform the
functions and duties of the committee under the Plan. Subject to the provisions
of the Plan, the committee and the board shall determine, from those eligible to
be participants in the Plan, the persons to be granted stock options, stock
appreciation rights and restricted stock, the amount of stock or rights to be
optioned or granted to each such person, and the terms and conditions of any
stock option, stock appreciation rights and restricted stock.

The following table sets forth
information concerning unexercised options, stock that has not vested and equity
incentive plan awards for each named executive officer outstanding as of the end
of the most recently completed fiscal year:

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE

Option Awards
    Stock AwardsName
    Award Grant
      Date
    Number of
      Securities Underlying Unexercised Options
      Exercisable
    Number of
      Securities Underlying Unexercised Options
      Unexercisable
    Equity Incentive
      Plan Awards; Number of Securities Underlying
      Unexercised Unearned Options
    Option
      Exercise Price
    Option
      Expiration Date
    Number of
      Shares or Units of Stock That Have Not Vested
    Market Value of
      Shares of Units That Have Not Vested
    Equity Incentive Plan Awards;
      Number of Unearned Shares, Units or Other
      Rights That Have Not Vested
    Equity Incentive Plan Awards;
      Market or Payout Value of Unearned Shares, Units
      or Other Rights That Have Not VestedLaith Nosh
    07/13/05
    40,0001
    -0-
    -0-
    $0.56
    07/13/11
    -0-
    -0-
    -0-
    -0-Laith Nosh
    07/24/06
    150,0001
    -0-
    -0-
    $0.27
    07/24/12
    -0-
    -0-
    -0-
    -0-Laith Nosh
    04/16/07
    250,0001
    -0-
    -0-
    $0.52
    04/16/13
    -0-
    -0-
    -0-
    -0-Laith Nosh
    04/16/07
    5,0371
    40,2962
    -0-
    $0.52
    04/16/13
    -0-
    -0-
    -0-
    -0-Joe Vosburgh
    07/13/05
    100,0001
    -0-
    -0-
    $0.56
    07/13/11
    -0-
    -0-
    -0-
    -0-Joe Vosburgh
    07/24/06
    120,0001
    -0-
    -0-
    $0.27
    07/24/12
    -0-
    -0-
    -0-
    -0-Joe Vosburgh
    04/16/07
    250,0001
    -0-
    -0-
    $0.52
    04/16/13
    -0-
    -0-
    -0-
    -0-Joe Vosburgh
    04/16/07
    250,0001
    500,0002
    -0-
    $0.52
    11/13/16
    -0-
    -0-
    -0-
    -0-George Stefan
    11/03/05
    150,0001
    -0-
    -0-
    $0.45
    11/03/11
    -0-
    -0-
    -0-
    -0-George Stefan
    08/22/06
    612,5001
    -0-
    -0-
    $0.35
    08/22/12
    -0-
    -0-
    -0-
    -0-George Stefan
    04/16/07
    750,0001
    -0-
    -0-
    $0.52
    04/16/13
    -0-
    -0-
    -0-
    -0-George Stefan
    04/16/07
    3,4441
    27,5562
    -0-
    $0.52
    04/16/13
    -0-
    -0-
    -0-
    -0-


57

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1These options are fully vested as of August 31,
2007. 2These options vest in quarterly installments of 8.34%
three years form the grant date.

58

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Employment Agreements

As part of the merger agreement with
our predecessor company, we assumed a consulting services agreement with Mr.
Laith I. Nosh, our president and chief executive officer, dated November 1,
2002, amended on April 1, 2005. The agreement continues until Mr. Nosh provides
six months' notice of termination. Mr. Nosh received $118,396 in the year ended
August 31, 2006. The salary is to be approved by the board on November 1 of each
year. There is no commitment to increase Mr. Nosh's salary, but his salary is
subject only to upward review. We also provide to Mr. Nosh a car allowance of
$863 per month. The Board will implement suitable provisions by the Company
towards the Executives pension arrangements in respect of his service with the
Company from the first anniversary of the commencement of consulting services
pursuant to agreement being an amount no less than 20% per annum of the
executives basic gross salary

Our consulting agreement with Raymond
L. Polman, CA, our former chief financial officer and former director, is dated
December 1, 2003. The agreement was terminated and Mr. Polman ceased to be our
chief financial officer as of November 8, 2006. Mr. Polman received $42,800 in
the year ended August 31, 2007 and $104,483 in the year ended August 31, 2006.
Pursuant to the termination agreement, the Company agreed to pay Mr. Polman
$26,000 and issue 200,000 restricted shares at $0.35 per share.

Item 13. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters

The following table sets forth
information with respect to security ownership of certain beneficial owners of
our common stock by:

* each person who beneficially owns
more than 5% of the common stock

The table shows the number of shares
owned as of November 30, 2007, and the percentage of outstanding common stock
owned as of November 30, 2007. Each person has sole voting and investment power
with respect to the shares shown, except as noted.

|                                                                                                         | Number of Shares | Percentage of Outstanding      
|-------------------------------------------------------------------------------------------------------- | ---------------- | -------------------------------
|                                                                                                         | Of Common Stock  | Shares Owned                   
|                                                                                                         | Beneficially     | Current                        
|Name and
      Address of Beneficial Owner                                                               | Owned
      (1)  | (as of
      Sept 30, 2007) (2)
|                                                                                                         |                  |                                
|                                                                                                         |                  |                                
|Nasser M. Al-Jarallah c/o Dr. Jameel K.
      Matar Bin Tami Center King AbdulAziz St. Riyadh 11491, KSA | 7,469,998(3)     | 20.44                          

|(1) | Security ownership of certain beneficial owners is based
      on information provided to us, and the beneficial owner has no obligation
      to inform us of or otherwise report any changes in beneficial ownership.
      Except as indicated, and subject to community property laws when
      applicable, the persons named in the table above have sole voting and
      investment power with respect to all shares of common stock shown as
      beneficially owned by them.                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | The percentages shown are calculated based upon
      36,457,790 shares of common stock outstanding on November 30, 2007. In
      calculating the percentage of ownership, unless as otherwise indicated,
      all shares of common stock that the identified person or group had the
      right to acquire within 60 days of the date of this report upon the
      exercise of options and warrants are deemed to be outstanding for the
      purpose of computing the percentage of shares of common stock owned by
      such person or group, but are not deemed to be outstanding for the purpose
      of computing the percentage of the shares of common stock owned by any
      other person.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(3) | Mr. Jarallah would be deemed the beneficial owner of an
      aggregate of 7,469,998 units of our common                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

59

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stock (4,979,999 shares and 2,489,999
warrants).

The following table sets forth
information with respect to security ownership of management of our common stock
by:

| | * | each of our executive officers named in the Management
      section;
| | - | ---------------------------------------------------------------------
| | * | each of our directors; and                                           
| | * | all executive officers and directors as a
  group.                   

The table shows the number of shares
owned as of November 30, 2007 and the percentage of outstanding common stock
owned as of November 30, 2007. Each person has sole voting and investment power
with respect to the shares shown, except as noted.

|                                                                         | Number of Shares | Percentage of Outstanding
|------------------------------------------------------------------------ | ---------------- | -------------------------
|                                                                         | Of Common Stock  | Shares Owned             
|                                                                         | Beneficially     | Current                  
|Name and
      Address of Beneficial Owner                               | Owned (1)        | (as of Sept 30, 2007) (2)
|                                                                         |                  |                          
|Laith Nosh 1041 Millstream Road
      West Vancouver, BC Canada, V7S 2C6 | 6,995,037(3)     | 15.59                    
|George Stefan 840 Vedder Place Port Coquitlam, BC
      Canada, V3B 8G4  | 1,457,611(4)     | 3.25                     
|Sasha Tesic 68-2678 King George Hwy
      Surrey, BC, Canada, V4P 1H6    | 1,457,324(5)     | 3,25                     
|Joe Vosburgh 11018 164a Street Surrey, BC V4N 5G8                        | 550,000(6)       | 1.22                     
|Brendan Burns 3926 West 31stAvenue
      Vancouver, BC Canada, V6S 1Y5   | 350,000(7)       | 0.78                     
|All Officers and Directors as a Group                                    | 10,809,972       | 24.09                    

|(1) | Security ownership of management is based on information
      provided to us, and the beneficial owner has no obligation to inform us of
      or otherwise report any changes in beneficial ownership. Except as
      indicated, and subject to community property laws when applicable, the
      persons named in the table above have sole voting and investment power
      with respect to all shares of common stock shown as beneficially owned by
      them.                                                                                                 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(2) | The percentages shown are calculated based upon
      44,867,763 shares of common stock outstanding on November 30, 2007. In
      calculating the percentage of ownership, unless as otherwise indicated,
      all shares of common stock that the identified person or group had the
      right to acquire within 60 days of the date of this report upon the
      exercise of options and warrants are deemed to be outstanding for the
      purpose of computing the percentage of shares of common stock owned by
      such person or group, but are not deemed

60

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|    | to be outstanding for the purpose of computing the
      percentage of the shares of common stock owned by any other
  person.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(3) | Mr. Nosh is a director and our president and chief
      executive officer. Of the 6,995,037 shares, 3,250,000 are held directly by
      Mr. Nosh; an aggregate of 2,725,000 shares are held by Diversified
      Sciences Limited, a controlled corporation of Mr. Nosh; and an aggregate
      of 25,000 shares are held of record by Ikona, also a controlled
      corporation of Mr. Nosh. This includes 995,037 shares of common stock that
      are subject to an option. Of the shares subject to an option, 995,037 are
      fully vested and could be purchased within 60 days from the date of this
      report.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(4) | Mr. Stefan is our chief operating officer. This
      represents a grant of shares of common stock of 1,457,611 that are subject
      to option. Of the shares subject to an option, 1,457,611 are fully vested
      and could be purchased within 60 days from the date of this
  report.                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(5) | Mr. Tesic is our chief engineering officer. This
      represents a grant of shares of common stock of 1,457,324 that are subject
      to option. Of the shares subject to an option, 1,457,324 are fully vested
      and could be purchased within 60 days from the date of this
  report.                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(6) | Mr. Vosburgh is one of our directors and executive VP.
      This represents a grant of shares of common stock of 550,000 that are
      subject to option. Of the shares subject to an option, 550,000 are fully
      vested and could be purchased within 60 days from the date of this
      report.                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(7) | Mr. Burns is one of our directors. This represents an
      option to purchase 350,000 shares of common stock that is fully vested. Of
      the shares subject to an option, 350,000 are fully vested and could be
      purchased within 60 days from the date of this
report.                                                                                                                                                                                                                                                                                                                                               

Item 14. Certain Relationships and Related Transactions

Diversified, a consulting firm that is
100% owned by our president and chief executive officer provides services to us
including the services of Laith I. Nosh as president and chief executive officer
and in developing and executing our business plan. Total payments to Diversified
in the year ended August 31, 2007 were $118,396 (2006 - $121,546, all of which
was payment for Mr. Nosh's services.

Nomadic Financial Corp., a consulting
firm that is 100% owned by our former chief financial officer, provided
corporate finance services to us including the services of Raymond L. Polman, CA
as chief financial officer in the year ended August 31, 2007. Total payments to
Nomadic Financial Corp. in the year ended August 31, 2007 were $43,600 (2006 -
$104,473), all of which was payment for Mr. Polmans services.

Item 15. Exhibits and Reports on Form 8-K

|(a) Exhibit No. |       | Title                                                                                                                                                     
|--------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|*               | 2.1   | Agreement and
        Plan of Reorganization, dated effective as of October 10, 2003, between
        Oban Mining, Inc. and Ikona Gear International, Inc.
|**              | 3.1   | Articles of Incorporation
        effective September 19, 2000                                                                                            
|X               | 3.1.1 | Amendment to
        Articles of Incorporation effective December 1, 2003                                                                                 
|***             | 3.2   | Amended Bylaws
        effective July 8, 2004                                                                                                             
|Section 906     | 31.1  | Certification
        under Sarbanes Oxley                                                                                                                
|Section 906     | 31.2  | Certification
      under Sarbanes Oxley                                                                                                                  
|Section 302     | 32    | Certification
        under Sarbanes Oxley                                                                                                                
|*****           | 10.1  | 2003 Equity Incentive
        Plan                                                                                                                        
|****            | 10.2  | Consulting Agreement
        dated November 1, 2002 with Laith I. Nosh                                                                                    
|****            | 10.3  | Consulting Agreement
        dated March 1, 2003 with 110980 Investments Ltd.                                                                             
|****            | 10.4  | Consulting Agreement
        dated December 1, 2003 with Raymond L. Polman                                                                                
|****            | 10.7  | Magna Advanced
        Technologies Letter Agreement dated April 8, 2003, and amendment dated
        April 30, 2004                                      
|******          | 10.8  | Aircast Letter
        Agreement dated April 8, 2003, and amendment dated April 30, 2004                                                                  
|*******         | 17.1  | Letter regarding
        directors resignation from Raymond L. Polman                                                                                    

61

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|******     | 21.0                                                                                                                                                                | List of Subsidiaries          
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|           | 22.1                                                                                                                                                                | Code of Ethics                
|********   | 4.1                                                                                                                                                                 | Form of Subscription Agreement
|*********  | 4.2                                                                                                                                                                 | Form of Warrant               
|********** | 4.3                                                                                                                                                                 | Form of Promissory Note       
|*          | Incorporated by reference from Quarterly Report on Form
      10-QSB, filed with the Commission on October 23, 2003                                                
|**         | Incorporated by reference from the Registration Statement
      on Form SB-2, filed with the Commission on January 18, 2001                                        
|***        | Incorporated by reference from Quarterly Report on Form
      10-QSB, filed with the Commission on July 14, 2004                                                   
|****       | Incorporated by reference from Quarterly Report on Form
      10-QSB, filed with the Commission on January 20, 2004                                                
|*****      | Incorporated by reference from the Information Statement
      on Form 14C, filed with the Commission on November 10, 2001                                         
|******     | Incorporated by reference from Quarterly Report on Form
      10-QSB, filed with the Commission on April 14, 2004                                                  
|*******    | Incorporated by reference from the registrants Form 8-K
      filed with the SEC on December 14, 2006                                                             
|********   | Form of Warrant, incorporated by reference to Exhibit 4.2
      to the registrant's Form 8-K filed with the SEC on March 16, 2006 (file
      000-49664).          
|*********  | Form of Promissory Note, incorporated by r reference to
      Exhibit 4.3 to the registrant's Form 8-K filed with the SEC on March 16,
      2006 (file 000-49664).
|X          | Incorporated by reference from a Current Report on Form
      8-K, filed with the Commission on December 5, 2003                                                   

|(b) | Reports on Form 8-K.
|--- | --------------------

update to fourth quarter fiscal 2007

Item 16. Principal Accountant Fees and Services

The following table details the
aggregate fees billed to the Company by Dohan & Company, CPAs, P.A., its
independent auditors, for each of the last two fiscal years:

2007
    2006Audit Fees
    $ 81,592
    $ 33,700Audit-Related Fees
    -0
    -0Tax Fees
    -0
    -0All Other Fees
    -0
    -0Total
    $ 81,592
    $ 33,700


The caption "Audit Fees"
includes professional services rendered for the audit of the annual consolidated
financial statements and review of the quarterly consolidated financial
statements.

It is the policy of the audit
committee to pre-approve all services to be performed by the independent
accountants.

62

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SIGNATURES

In accordance with the
requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                        | IKONA GEAR
      INTERNATIONAL, INC.  
|----------------------- | --------------------------------------
|Date: December 10, 2007 | By:                                   
|                        | Laith I. Nosh,
      President and CEO

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

|Signature         |  | Title                             | Date             
|----------------- |  | --------------------------------- | -----------------
|                  |  |                                   |                  
|/s/ Laith I. Nosh |  | President, CEO and Director       | December 10, 2007
|Laith I. Nosh     |  | (Interim Chief Financial Officer) |                  
|                  |  |                                   |                  
|                  |  |                                   |                  
|/s/ Brendan Burns |  | Director                          | December 10, 2007
|Brendan Burns     |  |                                   |                  
|                  |  |                                   |                  
|/s/ Joe Vosburgh  |  | Director                          | December 10, 2007
|Joe Vosburgh      |  | Executive VP                      |                  

63

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