**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





(Mark
      One)




x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934.




For
      the
      Fiscal Year Ended October 31, 2005




OR




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934.





*Commission
      file number* : *0-20317*





**friendlyway
      Corporation**


(Name
      of
      Small Business Issuer In Its Charter)





Nevada
              (State
                or Other Jurisdiction
              of
                Incorporation or Organization)
            
            88-0270266
              (I.R.S.
                Employer
              Identification
                No.)




1255
      Battery Street, Suite 200, San Francisco, California 94111


(Address
      of Principal Executive Offices) (Zip Code)





(415)
      288-3333


(Issuer’s
      telephone number, Including Area Code)





Securities
      registered under Section 12(b) of the Exchange Act:





Securities
      registered under Section 12(g) of the Exchange Act:





Common
      Stock, par value $.001 per share


(Title
      of
      Class)





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





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


Yes x  No o




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 registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





The
      issuer’s consolidated revenues for the fiscal year ended October 31, 2005 were $
      2,005,739.





The
      aggregate market value of the registrant’s common stock held by non-affiliates
      on February 10, 2006 was approximately $5,010,984 determined by the closing
      sale
      price on that date. Shares of common stock known by the registrant to be
      beneficially owned by the registrant’s directors and executive officers are not
      included in the computation. The registrant, however, has made no determination
      that such persons are “affiliates” within the meaning of Rule 12b-2 under the
      Exchange Act. On January 31, 2006, 25,428,130 shares of common stock, par value
      $.001 per share, of the registrant were issued and outstanding.









**friendlyway
      Corporation**





**Table
      of Contents**








**Part I**
            Item 1.
            Description of Business
            1Item 2.
            Description of Property
            3Item 3.
            Legal Proceedings
            3Item 4.
            Submission of Matters to a Vote of Security
              Holders
            3**Part II**Item
              5.
            Market
              for Common Equity, Related Stockholder Matters and Small Business Issuer
              Purchases of Equity Securities
            4Item 6.
            Management’s Discussion and Analysis or Plan
              of Operation
            5Item 7.
            Financial Statements
            8Item
              8.
            Changes in and Disagreements with Accountants
              on Accountingand
              Financial Disclosure
            23Item 8A.
            Controls and Procedures
            23**Part III**Item 9.
            Directors, Executive Officers, Promoters
              and
              Control Persons; Compliance with Section 16(a) of the Exchange
              Act
            24Item 10.
            Executive Compensation
            25Item
              11.
            Security Ownership of Certain Beneficial
              Owners and Management and RelatedStockholder
              Matters
            26Item 12.
            Certain Relationships and Related
              Transactions
            26Item 13.
            Exhibits
            27Item 14.
            Principal Accountant Fees and
              Services
            28Index to Exhibits








**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





**Background**





friendlyway
      Corporation is in the business of providing user-friendly “self-service” systems
      and technologies for public access at points of sale, service and information
      to
      our clients. Our friendlyway *Interactive
      Information Stations (IIS)* TM
are
      suitable for various applications, such as ticketing, Internet access, “self
      check-in”, way-finding, lead management, e-commerce, banking, lobby management
      and access control, as well as information and education.





We
      were
      incorporated under the name Global Spill Management, Inc., on September 26,
      1990
      in the State of Nevada. Since then, we have undergone a series of corporate
      name
      changes and mergers and discontinued a number of businesses. Prior to our name
      change to friendlyway Corporation, we were named Biofarm, Inc. (“Biofarm”). On
      December 10, 2004, we consummated a share exchange agreement, also known as
      a
      reverse merger, with friendlyway, Inc., Delaware corporation (“friendlyway
      Delaware”), and its two (2) stockholders, friendlyway AG, its German parent
      corporation, and Alexander von Welczeck, pursuant to which we agreed to acquire
      all of the outstanding shares of capital stock of friendlyway Delaware in
      exchange for the issuance of 18,000,000 shares of our common stock, and the
      assumption of friendlyway Delaware’s outstanding employee stock options (the
“Acquisition”). On October 31, 2005, there were 1,593,000 shares of our common
      stock covered by such employee stock options. Pursuant
      to the terms of the Acquisition, we arerequired to issue to friendlyway AG and Mr. Welczeck an additional three shares
      of common stock for each share over 6,000,000 shares of common stock we had
      issued and outstanding, or were otherwise obligated to issue, as of the closing
      of the Acquisition.





On
      June
      11, 2004, we transferred substantially all of our then existing assets and
      liabilities to Ocwen Corp., a Nevada corporation (“Ocwen”), and the outstanding
      shares of capital stock of Ocwen were concurrently deposited in a trust account
      established for the benefit of our then existing stockholders of record as
      of
      such date. Pursuant to the terms of the Trust Agreement dated June 11, 2004
      by
      and among Ocwen, the trustees and us, the trustees will manage the trust assets
      and income, if any, for the benefit of such stockholders of record and may
      sell
      the shares of capital stock of Ocwen and distribute the trust assets, income
      and
      proceeds thereof to such stockholders of record.




**Business
      Overview**





We
      provide “self-service” systems and technologies for public access at points of
      sale, service and information to our clients. We seek to combine software,
      services and design in our friendlyway *Interactive
      Information Stations (IIS)* TM
to
      provide an integrated solution to our clients.





Because
      of internal development efforts and under a perpetual, exclusive license from
      friendlyway AG, we have developed self-service systems and solutions to support
      the convergence of classic brick and mortar businesses with Internet and
      e-commerce platforms in a public access environment. We believe that our *Interactive
      Information Stations (IIS)* TM
are
      financially attractive to our existing and potential clients, among other
      competing self-service solutions that are currently available in the
      marketplace. We plan to continue to deliver to our clients a range of products
      and services, including custom tailored solutions. We generate the substantial
      portion of our revenues from the sale and rental of our *Interactive
      Information Stations (IIS)* TM.
      Our
      clients include small, medium and large companies, including the following
      Fortune 500 companies: Bank of America; Boeing; The Walt Disney Company;
      Fidelity Investments; Marriott Hotels; Merck; Microsoft; Nike; and
      Pfizer.





1




**Markets
      and Competition**





We
        believe that our strategy of bundling technology solutions with our friendlyway *Interactive
        Information Stations (IIS)* TM
provide
        us with a competitive advantage. Our products and services are designed and
        marketed to appeal to clients that desire innovative, elegant and user-friendly
        solutions for interactive sales promotion, self-service e-commerce platforms,
        Internet customer communication, Wi-Fi, mobile communications and Internet
        kiosks. We serve niche markets, including the following:


·
              trade
                  shows, conferences, events and
                  promotions


·
            hospitality,
                tourism and travel


·
            healthcare
                and hospitals


·
            financial
                services and banking


·
            government,
                and


·
            fashion
                and retail sectors





We
        market
        our products and services in the United States, Europe and Asia through sales
        and marketing campaigns, conferences, one-on-one consultations, telemarketing,
        direct sales and client and vendor referrals. We also market our products
        and
        services through strategic relationships with third parties, value-added
        resellers and a rental partner network. We believe that our products and
        services are well-positioned to maintain and further serve our existing client
        base, as well as attract new clients who desire a practical and efficient
        self-service solution for their customers’ public access system needs.
  The
        public access self-service systems industry is a multi-billion dollar industry
        and growing. The industry is highly competitive and includes major corporations,
        as well as many smaller and medium-sized operations. Most of our competitors
        are
        more established than us and have substantially greater market share and
        resources than we do.
  **Technology
        and Suppliers**




Public
      access self-service systems owe their development, in large part, to the
      emergence of new technologies, such as low-cost, light-weight, flat-panel
      displays and CF card technology. The primary hardware required for the operation
      of our business consists of components that comprise the flat-panel displays
      we
      use in our friendlyway *Interactive
      Information Stations (IIS)* TM .
      We also
      develop and install software to assist us with the configuration, editing and
      operation of our *Interactive
      Information Stations (IIS)* TM . ****




We
        design
        the distinctive shape of our *Interactive
        Information Stations (IIS)* TM ,
        identify suppliers of component parts used in our displays and contract the
        manufacturing and assembly of our entire system to a third-party contract
        manufacturer. We share the purchasing responsibility with our contract
        manufacturer in procuring the component parts from suppliers we identify
        according to customer specifications. We select component suppliers based
        on
        price and quality. Since we commenced our current operations, we have used
        only
        one contract manufacturer at any one time, which we believe is logistically
        more
        efficient; cost-effective, and also enables us to better protect the design
        of
        our *Interactive
        Information Stations (IIS)* TM .
        Our
        relationship with our current contract manufacturer is not exclusive.
  **Government
      Regulation**





There
      are
      no existing laws or regulations that specifically define or regulate public
      access self-service systems. It is possible, however, that regulations governing
      public access self-service systems may be adopted. We cannot predict the timing
      and effects of such new regulations, if any.




**Patents
      and Trademarks**





To
      a
      great extent, our business model does not rely on advanced or sophisticated
      technology or on proprietary trade secrets, because our flat-panel displays
      in
      our *Interactive
      Information Stations (IIS)* TM are
      assembled with components purchased in off-the-shelf form from wholesale
      distributors. Friendlyway AG is responsible for patenting or protecting its
      technology and trade secrets that we use in our business.




2





**Research
      and Development**




We
        intend
        to continue to develop more advanced models of our *Interactive
        Information Stations (IIS)* TM,
        including models that use
        mobile communications and wireless technology to receive, store, configure
        and
        playback content. Whether we deploy this newer technology will depend on
        various
        considerations, including cost, network security and client demand. We are
        also
        developing software systems that will enable us to better configure and run
        the
        content on our *Interactive
        Information Stations (IIS)* TM ,
        including software used in conjunction with mobile communications systems.
  **Employees**





As
      of
      January 31, 2006, we had a total of nine (9) full-time employees and two (2)
      part-time employees. In order for us to attract and retain quality employees,
      we
      anticipate we will have to offer competitive salaries and payments to future
      employees. As we continue to expand, we will incur additional cost for
      personnel. This projected increase in personnel is dependent upon the level
      of
      revenues we may generate and our results of operations.








**ITEM
      2. DESCRIPTION OF PROPERTY**





Our
      principal executive offices are located in San Francisco, California, and occupy
      approximately 3,500 square feet. Our offices are currently leased on a
      month-to-month basis. We believe that our offices are well maintained, are
      covered by adequate insurance and are adequate for our current operations.





**ITEM
      3. LEGAL PROCEEDINGS**





In
        March
        2005, a civil action was commenced against us by John McConkie in the United
        States District Court, Central District of California. Mr. McConkie has alleged
        that, at the time we were conducting business under the name Biofarm, one
        of our
        former directors and an Ohio lawyer named Roger Kimmel defrauded him of funds
        in
        the amount of approximately $75,000. The complaint has alleged a scheme whereby
        Mr. Kimmel, purportedly acting as the general counsel of Biofarm, signed
        a
        letter agreement whereby Mr. McConkie would purchase a controlling interest
        in
        Biofarm for the sum of $200,000. Mr. McConkie claims that he transferred
        funds
        in the amount of approximately $75,000 to Mr. Kimmel in the nature of earnest
        money to initiate the transaction. After the transfer of the funds, Mr. McConkie
        has alleged that Mr. Kimmel refused to consummate the transaction and did
        not
        return such funds to him. Mr. McConkie seeks relief in the amount of
        approximately $75,000, plus interest and expenses.
  A
        civil
        action was commenced against us by Ginko Systems, LLC (“Ginko”), in the
        Montgomery County, Ohio Common Pleas Court. Ginko was previously our contract
        manufacturer of self-service systems. Ginko has alleged that we did not fulfill
        a purchase order issued to Ginko for the manufacturing of self-service systems.
        On December 12, 2005, the Court conducted a hearing on Ginko’s request for
        damages based on a default judgment against us on August 4, 2005. The Court
        awarded Ginko damages in the amount of $61,000. We have appealed this
        decision.
  From
      time
      to time, we become involved in various lawsuits, claims and proceedings related
      to the conduct of our business.





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





No
      matters were submitted to a vote of security holders during the quarter ended
      October 31, 2005.





3


**PART
      II**





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





Our
      common stock is quoted on the OTC Bulletin Board under the symbol “FDWY”.




The
      reported high and low bid and high and low ask quotations for our common stock
      for the periods indicated, as reported by the OTC Bulletin Board, are as
      follows:


Low
                Bid
            
            High
                Bid
            
            Low
                Ask
            
            High
                AskYear
                Ended October 31, 2004First
                Quarter
            
            $
            0.53
            
            $
            1.10
            
            $
            0.59
            
            $
            1.12Second
                Quarter
            
            $
            0.44
            
            $
            0.62
            
            $
            0.46
            
            $
            0.62Third
                Quarter
            
            $
            0.40
            
            $
            0.57
            
            $
            0.45
            
            $
            0.57Fourth
                Quarter
            
            $
            0.25
            
            $
            0.62
            
            $
            0.39
            
            $
            0.62Year
                Ended October 31, 2005First
                Quarter
            
            $
            0.23
            
            $
            0.65
            
            $
            0.35
            
            $
            0.80Second
                Quarter
            
            $
            0.33
            
            $
            0.55
            
            $
            0.40
            
            $
            0.80Third
                Quarter
            
            $
            0.25
            
            $
            0.48
            
            $
            0.35
            
            $
            0.53Fourth
                Quarter
            
            $
            0.19
            
            $
            0.37
            
            $
            0.20
            
            $
            0.57





Such
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commissions, and may not represent actual transactions.





As
        of
        January 31, 2006, there were 25,428,130 shares of our common stock issued
        and
        outstanding, and a total of approximately 600 holders of record. We have
        authorized 5,000,000 shares of preferred stock, par value $.001 per share;
        none
        of which are issued and outstanding.
  We
        have
        not paid any dividends on our shares of common stock in the past two years
        and
        do not anticipate the payment of dividends on our shares of common stock
        in the
        foreseeable future.
  4
 **ITEM
          6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
          OPERATION**





**FORWARD-LOOKING
      INFORMATION**





THE
        FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
        FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.
        STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
        AND
        ELSEWHERE IN THIS REPORT THAT ARE NOT STATEMENTS OF HISTORICAL OR CURRENT
        FACT
        CONSTITUTE “FORWARD-LOOKING STATEMENTS.”


Some
      of
      the information in this report contains forward-looking statements that involve
      substantial risks and uncertainties. Any statement in this report, and in the
      documents incorporated by reference into this report, that is not a statement
      of
      an historical fact constitutes a “forward-looking statement”. Further, when we
      use the words “may”, “expect”, “anticipate”, “plan”, “believe”, “seek”,
“estimate”, “intend” and similar words, we intend to identify statements and
      expressions that may be forward-looking statements. The forward-looking
      statements contained in this report are based on our current expectations and
      involve a number of risks and uncertainties. Such forward-looking statements
      are
      based on assumptions that the demand for our products and services will
      significantly increase, that our President and Chief Executive Officer and
      Chief
      Financial Officer will remain employed as such, that our forecasts accurately
      anticipate market demand, and that there will be no material adverse change
      in
      our operations or business or in the lack of governmental regulations affecting
      us, our clients and/or suppliers. The foregoing assumptions are based on
      judgments with respect to, among other things, future economic, competitive
      and
      market conditions, and future business decisions, all of which are difficult
      or
      impossible to predict accurately and many of which are beyond our control.
      Accordingly, although we believe that the assumptions underlying the
      forward-looking statements are reasonable, any such assumption could prove
      to be
      inaccurate; and therefore, there can be no assurance that the results
      contemplated in such forward-looking statements will be realized. In addition,
      there are a number of risks inherent in our business and operations, which
      could
      cause our operating results to vary markedly, and adversely from prior results
      or the results contemplated by the forward-looking statements. Growth in
      absolute and relative terms and selling, general and administrative expenses
      or
      the occurrence of extraordinary events could cause actual results to vary
      materially from the results contemplated by the forward-looking statements.
      Management decisions, including budgeting, are subjective in many respects
      and
      periodic revisions must be made to reflect actual conditions and business
      developments, the impact of which may cause us to alter marketing, capital
      investment and other expenditures, which may also materially adversely affect
      our results of operations. Other risks inherent in our business and operations
      include but are not limited to the following:


·
              delays
                  in shipment of new versions of our
                  products


·
            lack
                of acceptance of new versions of our
                products


·
            introduction
                of new products by our competitors


·
            weakness
                  in demand for public access “self-service”
                  systems


·
            lack
                of growth in worldwide personal computer
                sales


·
            corporate
                reductions in IT spending


·
            inability
                to integrate companies and products we
                acquire


·
            industry
                transitions to new business and information delivery
                models


·
            changes
                occurring in the global market conditions affecting our
                customers




In
      light
      of the significant risks and uncertainties inherent in the forward-looking
      statements included in this report, the inclusion of such statements should
      not
      be regarded as a representation by us or any other person that our objectives
      or
      plans will be achieved or occur. We have no obligation or intent to update
      publicly any forward-looking statements whether in response to new information,
      future events or otherwise.


**General**





friendlyway
      Corporation is in the business of providing user-friendly “self-service” systems
      and technologies for public access at points of sale, service and information
      to
      our clients. Our friendlyway *Interactive
      Information Stations (IIS)* TM
are
      suitable for various applications, such as ticketing, Internet access, “self
      check-in”, way-finding, lead management, e-commerce, banking, lobby management
      and access control, as well as information and education.





We
        were
        incorporated under the name Global Spill Management, Inc., on September 26,
        1990
        in the State of Nevada. Since then, we have undergone a series of corporate
        name
        changes and mergers and discontinued a number of businesses. Prior to our
        name
        change to friendlyway Corporation, we were named Biofarm. On December 10,
        2004,
        we consummated the Acquisition, pursuant to which we agreed to acquire all
        of
        the outstanding shares of capital stock of friendlyway Delaware in exchange
        for
        the issuance of 18,000,000 shares of our common stock, and the assumption
        of
        friendlyway Delaware’s outstanding employee stock options. Pursuant
        to the terms of the Acquisition, we arerequired to issue to friendlyway AG and Mr. Welczeck an additional three
        shares
        of common stock for each share over 6,000,000 shares of common stock we had
        issued and outstanding, or were otherwise obligated to issue, as of the closing
        of the Acquisition.
  On
        June
        11, 2004, we transferred substantially all of our then existing assets and
        liabilities to Ocwen, and the outstanding shares of capital stock of Ocwen
        were
        concurrently deposited in a trust account established for the benefit of
        our
        stockholders of record as of such date. The trustees will manage the trust
        assets and income, if any, for the benefit of our then existing stockholders
        of
        record and may sell the shares of capital stock of Ocwen and distribute the
        trust assets, income and proceeds thereof to such stockholders of record.
        We
        changed our fiscal year end from December 31 to October 31 during 2005.
        Accordingly, the following discussion compares the twelve month period ended
        October 31, 2005 to the ten months ended October 31, 2004.
  **Year
      Ended October 31, 2005 Compared to Ten Months Ended October 31, 2004**





**Revenue**




Revenue
      consists primarily of sales and rentals of self-service systems and professional
      services. Sales revenue is recognized when both title and risk of loss are
      transferred to the customer, provided that no significant obligations remain.
      Rental revenue is recognized as earned in accordance with the terms of rental
      agreements, which are generally short-term in duration. We provide for an
      estimate of product returns and doubtful accounts based on our historical
      experience.


Total
      revenue for the year ended October 31, 2005 increased $61,208, or 3.1%, to
      $2,005,739 from $1,944,531 for the ten months ended October 31, 2004. Systems
      sales revenue and systems rental and services revenue accounted for 68.8% and
      31.2%, respectively, of total revenue for the year ended October 31, 2005 and
      82.9% and 17.1%, respectively for the ten months ended October 31, 2004.





5




System
      sales revenue. We sell our systems to end user customers and value added
      resellers (VARs). Systems sales revenue for the year ended October 31, 2005
      decreased $232,152, or 14.4%, to $1,379,233 from $1,611,385 for the ten months
      ended October 31, 2004. The decrease in systems sales revenue during the year
      ended October 31, 2005 was principally attributed to a large enterprise sales
      order shipped during the 2004 period to a major pharmaceutical company.





Rental
      and services revenue. We maintain a pool of rental units for short-term
      deployments to end-user customers. In addition, we utilize our Certified Rental
      Partner Network for fulfilling short-term rental deployments for our customers.
      Systems rental and services revenue for the year ended October 31, 2005
      increased $293,360, or 88.1%, to $626,506 from $333,146 for the ten months
      ended
      October 31, 2004. The increase in systems rental and services revenue was
      principally driven by stronger demand for our systems at trade shows and
      conference venues from new and existing customers during the 2005 period.





**Cost
      of revenue**





Cost
        of
        sales revenue. Cost of sales revenue is primarily comprised of manufacturing
        and
        component costs in the production of our systems. We outsource our manufacturing
        to a contract manufacturing partner and, in most cases, directly purchase
        components for production from third-party vendors. For certain systems,
        we
        purchase them directly from friendlyway AG. Cost of sales revenue for the
        year
        ended October 31, 2005 increased $157,291, or 15.2%, to $1,192,467 from
        $1,035,176 for the ten months ended October 31, 2004. This increase was
        attributed to a higher cost per unit as we transitioned to a new manufacturing
        partner during the year ended October 31, 2005. Cost of sales revenue as
        a
        percentage of sales revenue was 86.5% and 64.2% for the year ended October
        31,
        2005 and ten months ended October 31, 2004, respectively, resulting in gross
        margins on sales revenue of 13.5% and 35.8%, respectively. The reduction
        in
        gross margins for the year ended October 31, 2005 was attributed to reduced
        economies of purchasing in smaller volumes as a result of the decrease in
        systems sales. Producing and purchasing in larger quantities enables more
        favorable pricing for us, which may result in improved gross margins.
  Cost
      of
      rental and services revenue. Cost of rental and services revenue is primarily
      comprised of fulfillment costs to our Certified Rental Partner Network for
      short-term rental deployments to end-user customers. Cost of rental and services
      revenue for the year ended October 31, 2005 increased $237,524, or 151.0%,
      to
      $394,822 from $157,298 for the ten months ended October 31, 2004. Cost of rental
      and services revenue as a percentage of rental and services revenue was 63.0%
      and 47.2% for the year ended October 31, 2005 and ten months ended 2004,
      respectively, resulting in gross margins on rental revenue of 37.0% and 52.8%,
      respectively.





**Selling,
      general and administrative expenses**





Total
        selling, general and administrative expenses for the year ended October 31,
        2005
        increased $992,879, or 99.1%, to $1,994,749 from $1,001,870 for the ten months
        ended October 31, 2004. The increase in selling, general and administrative
        expenses in the 2005 period was principally driven by an increase in legal
        fees
        and other transaction costs for the reverse merger transaction with friendlyway
        Delaware and a contemplated merger transaction with two other parties in
        2005,
        which did not occur. In addition, we incurred non-cash compensation costs
        for
        the issuance of equity securities in conjunction with the reverse merger
        transaction with friendlyway Delaware. We anticipate that recurring legal
        expenses will increase in conjunction with additional acquisition related
        activity and the related costs associated with being a public
        company.
  **Liquidity
      and Capital Resources**




Our
      primary source of liquidity has been cash from ongoing operations and borrowings
      from lenders. We have incurred significant losses to date, which we have
      financed primarily through the sale of equity securities and borrowings from
      lenders. During the year ended October 31, 2005, we raised $1,250,000 from
      the
      issuance of promissory notes to friendlyway AG and the sale of shares of our
      common stock in the amount of $103,500. With the exception of a promissory
      note
      in the amount of $100,000, all of the promissory notes issued to friendlyway
      AG
      have been converted into 4,818,577 shares of our common stock, and such shares
      are pending issuance.




Our
      current assets at October 31, 2005 totaled $631,439 and our current liabilities
      were $3,137,365, compared to current assets of $655,693 and current liabilities
      of $1,069,474 at October 31, 2004. The working capital deficit at October 31,
      2005 was $2,505,926, compared to a working capital deficit at October 31, 2004
      of $413,781. As of October 31, 2005, we had $57,508 in cash and cash
      equivalents.


6




During
      the year ended October 31, 2005, we used $1,329,170 in capital to fund
      operations, we received $1,253,000 from issuances of promissory notes and common
      stock. During the year ended October 31, 2005, we were able to obtain services
      valued at $60,007 through the issuance of shares of our common stock and options
      to purchase common stock.




We
      have a
      line of credit with a financial institution, which provides for maximum
      borrowings of $50,000. At October 31, 2005, there was $49,851 outstanding under
      this line of credit. Borrowings against this line of credit bear interest at
      the
      prime rate plus 2% (8.75% at October 31, 2005). This line of credit expires
      in
      January 2007, and may be extended on annual basis. Interest is payable monthly.
      Upon termination of the line of credit, any borrowings outstanding at that
      time
      are payable over a period of 48 months.


We
      believe that cash generated from operations may be insufficient to fund our
      ongoing operations through the next twelve months. Efforts are underway to
      secure additional financing to enable us to meet our obligations, as execution
      of our business plan will require additional capital to fund our operations.
      Funds raised through future equity financings will likely be dilutive to our
      current stockholders. The incurrence of indebtedness would result in an increase
      in our fixed obligations and could result in borrowing covenants that would
      restrict our operations. There can be no assurance that financing will be
      available in sufficient amounts or on terms acceptable to us, if at all. If
      financing is not available when required or is not available on acceptable
      terms, we may be unable to develop or enhance our products or services. In
      addition, we may be unable to take advantage of business opportunities or
      respond to competitive pressures. Any of these events could have a material
      and
      adverse effect on our business, results of operations and financial condition.
      Lack of additional funds will materially affect our business and may cause
      us to
      cease operations. Consequently, our stockholders could incur a loss of their
      entire investment.





Our
      financial statements were prepared on the assumption that we will continue
      as a
      going concern. The report of our independent accountants for the year ended
      October 31, 2005 acknowledges that we have incurred losses since our inception
      and that we will require additional funding to sustain our operations. These
      conditions cause substantial doubt as to our ability to continue as a going
      concern. Our financial statements included herein do not include any adjustments
      that might result should we be unable to continue as a going concern.




7


ITEM
      7.
      FINANCIAL STATEMENTS





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors


friendlyway
      Corporation





We
        have
        audited the accompanying consolidated balance sheet of friendlyway Corporation
        as of October 31, 2005, and the related consolidated statement of operations,
        stockholders’ deficit, and cash flows for the year then ended. These financial
        statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion of these financial statements based
        on
        our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of friendlyway Corporation
        as
        of October 31, 2005, and the results of its operations and its cash flows
        for
        the year then ended, in conformity with the accounting principles generally
        accepted in the United States of America.
  The
        accompanying consolidated financial statements have been prepared assuming
        that
        friendlyway Corporation will continue as a going concern. As discussed in
        Note 2
        to the consolidated financial statements, friendlyway Corporation has incurred
        losses from operations for the year ended October 31, 2005 totaling
        approximately $2,269,000 and has an accumulated deficit totaling approximately
        $2,940,000. friendlyway Corporation will require additional working capital
        to
        develop its business until friendlyway Corporation either (1) achieves a
        level
        of revenues adequate to generate sufficient cash flows from operations; or
        (2)
        obtains additional financing necessary to support its working capital
        requirements. These conditions raise substantial doubt about friendlyway
        Corporation’s ability to continue as a going concern. Management’s plans in
        regard to this matter are described in Note 2. The accompanying consolidated
        financial statements do not include any adjustments that might result from
        the
        outcome of these uncertainties.
  Lopez,
      Blevins, Bork & Associates, LLP


Houston,
      Texas


January
      20, 2006




8


REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 The
        Stockholders and Board of Directors
 friendlyway
        Corporation (formerly known as friendlyway, Inc.)
 
 We
        have
        audited the accompanying consolidated statements of operations, stockholders'
        equity (deficit) and cash flows for the ten month period ended October 31,
        2004
        of friendlyway Corporation (the “Company” - formerly known as friendlyway,
        Inc.). These financial statements are the responsibility of management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the results of operations and cash flows of friendlyway
        Corporation for the ten month period ended October 31, 2004, in conformity
        with
        accounting principles generally accepted in the United States of
        America.
 
 As
        discussed in Note 1 to the financial statements, the Company entered into
        a
        reverse merger transaction with Biofarm, Inc. on December 10, 2004, which
        was
        accounted for as a recapitalization of the Company, which is the accounting
        acquirer, effective on December 10, 2004. Also as discussed in Note 1 to
        the
        financial statements, in connection with its reverse merger transaction with
        Biofarm, Inc., the Company has changed its fiscal year end to October 31.
        Consequently, as discussed in Note 1 to the financial statements, the Company
        has presented the effects on share and loss per share data in its financial
        statements for the ten month period ended October 31, 2004 in a manner
        consistent with the recapitalization of the Company.
 
 
 
 /s/
        ASHER
& COMPANY, LTD.
 
 Philadelphia,
        PA
 February
        23, 2005




9




**FRIENDLYWAY
        CORPORATION**


**CONSOLIDATED
        BALANCE SHEET**
 **As
        of October 31, 2005**
 **ASSETS**CURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                57,508Accounts
                    receivable, net of allowance of doubtfulaccounts
                    of $71,500
                
                
                407,838Inventory
                
                
                159,403Other
                    current assets
                
                
                6,690Total
                    current assets
                
                
                631,439FURNITURE
                    AND EQUIPMENT, net
                
                
                54,874**Total
                    Assets**
                
                $
                686,313**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT**CURRENT
                    LIABILITIESNote
                    payable, bank
                
                $
                49,851Note
                    payable, other
                
                
                90,000Accounts
                    payable
                
                
                411,401Accrued
                    interest
                
                
                9,828Accrued
                    license and maintenance fees, Stockholder
                
                
                25,984Common
                    stock payable
                
                
                2,366,657Other
                    current liabilities
                
                
                183,644Total
                    current liabilities
                
                
                3,137,365LONG-TERM
                    DEBTNotes
                    payable, Stockholders
                
                
                294,113294,113Total
                    Liabilities
                
                
                3,431,478COMMITMENTS
                    AND CONTINGENCIESSTOCKHOLDERS'
                    DEFICITPreferred
                    Stock, $.001 par value; 5,000,000 sharesauthorized,
                    0 shares issued and outstanding
                
                
                —Common
                    Stock, $.001 par value; 100,000,000 sharesauthorized,
                    25,428,130 shares issued and outstanding
                
                
                25,428Additional
                    paid-in capital
                
                
                204,965Unearned
                    compensation
                
                
                (34,892
                )Accumulated
                    deficit
                
                
                (2,939,679
                )(2,744,178
                )Less
                    treasury stock, at cost, 385 shares
                
                
                (987
                )Total
                    stockholders' deficit
                
                
                (2,745,165
                )**Total
                    Liabilities and Stockholders' Deficit**
                
                $
                686,313
 The
          accompanying notes are an integral part of these consolidated financial
          statements.







10


**FRIENDLYWAY
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS** **YEAR
          ENDED OCTOBER 31, 2005 AND TEN MONTHS ENDED OCTOBER 31,
          2004**


**2005**
                
                **2004****REVENUES**Sales
                
                $
                1,379,233
                
                $
                1,611,385Rentals
                    and services
                
                
                626,506
                
                
                333,146Total
                    revenues
                
                
                2,005,739
                
                
                1,944,531**COST
                    OF REVENUES**Sales
                
                
                1,192,467
                
                
                1,035,176Rentals
                    and services
                
                
                394,822
                
                
                157,298Total
                    cost of revenues
                
                
                1,587,289
                
                
                1,192,474Gross
                    profit
                
                
                418,450
                
                
                752,057Selling,
                    general and administrative expenses
                
                
                1,994,749
                
                
                1,001,870Stock
                    based compensation
                
                
                130,256
                
                
                185,321Loss
                    from operations
                
                
                (1,706,555
                )
                
                (435,134
                )Loss
                    on extinguishment of debt
                
                
                (581,199
                )
                
                —Gain
                    on settlement of debt
                
                
                79,272
                
                
                —Other
                    income
                
                
                8,800
                
                
                17,017Interest
                    expense
                
                
                (69,382
                )
                
                (19,061
                )**NET
                    LOSS**
                
                $
                (2,269,064
                )
                $
                (437,178
                )Basic
                    and diluted loss per common share
                
                $
                (0.09
                )
                $
                (0.02
                )Weighted
                    average number of shares
                
                
                24,442,782
                
                
                18,000,000
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  11
  **FRIENDLYWAY
          CORPORATION**
 **CONSOLODATED
          STATEMENT OF STOCKHOLDERS' DEFICIT** **YEAR
            ENDED OCTOBER 31, 2005 AND TEN MONTHS ENDED OCTOBER 31,
            2004**
 Retained
                  
                  
                  
                  TotalCommon
                      stock
                  
                  Additional
                  
                  Unearned
                  
                  Earnings/
                  
                  Treasury
                  
                  Stockholders'Shares
                  
                  Amount
                  
                  Paid-in
                      Capital
                  
                  Compensation
                  
                  (Deficit)
                  
                  stock
                  
                  DeficitBalance
                      at December 31, 2003
                  
                  
                  18,000,000
                  
                  $
                  18,000
                  
                  $
                  39,143
                  
                  $
                  —
                  
                  $
                  (233,437
                  )
                  $
                  —
                  
                  $
                  (176,294
                  )Purchase
                      of treasury stock -1,633,334
                      shares
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (367,500
                  )
                  
                  (367,500
                  )Reissuance
                      of treasury stock -for
                      compensation - 833,334 shares
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (40,179
                  )
                  
                  
                  
                  
                  187,500
                  
                  
                  147,321Sales
                      of treasury stock -800,000
                      shares
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  180,000
                  
                  
                  180,000Stock
                      options granted for services
                  
                  
                  
                  
                  
                  
                  
                  
                  143,000
                  
                  
                  (105,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  38,000Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (437,178
                  )
                  
                  
                  
                  
                  (437,178
                  )Balance
                      at October 31, 2004
                  
                  
                  18,000,000
                  
                  $
                  18,000
                  
                  $
                  182,143
                  
                  $
                  (145,179
                  )
                  $
                  (670,615
                  )
                  $
                  —
                  
                  $
                  (615,651
                  )Effect
                      of reverse merger
                  
                  
                  6,978,130
                  
                  
                  6,978
                  
                  
                  (29,948
                  )
                  
                  
                  
                  
                  
                  
                  
                  (987
                  )
                  
                  (23,957
                  )Sale
                      of Common Stock
                  
                  
                  450,000
                  
                  
                  450
                  
                  
                  103,050
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  103,500Recognition
                      of stock issuancefor
                      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  40,179
                  
                  
                  
                  
                  
                  
                  
                  
                  40,179Stock
                      options expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  19,828
                  
                  
                  
                  
                  
                  
                  
                  
                  19,828Stock
                      options - cancellations
                  
                  
                  
                  
                  
                  
                  
                  
                  (50,280
                  )
                  
                  50,280
                  
                  
                  
                  
                  
                  
                  
                  
                  —Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,269,064
                  )
                  
                  
                  
                  
                  (2,269,064
                  )Balance
                      at October 31, 2005
                  
                  
                  25,428,130
                  
                  $
                  25,428
                  
                  $
                  204,965
                  
                  $
                  (34,892
                  )
                  $
                  (2,939,679
                  )
                  $
                  (987
                  )
                  $
                  (2,745,165
                  )
  The
            accompany notes are an integral part of these consolidated financial
            statements.
  12




**FRIENDLYWAY
        CORPORATION**


**CONSOLIDATED
        STATEMENTS OF CASH FLOWS** **YEAR
          ENDED OCTOBER 31, 2005 AND TEN MONTHS ENDED OCTOBER 31,
          2004**


**2005**
                  
                  **2004**OPERATING
                      ACTIVITIESNet loss
                  
                  $
                  (2,269,064
                  )
                  $
                  (437,178
                  )Adjustments to reconcile net loss to net cashutilized
                      by operating activities:Depreciation
                  
                  
                  37,906
                  
                  
                  13,929Bad
                      debt expense
                  
                  
                  105,900
                  
                  
                  48,795Net
                      loss on extinguishment of notes payable, stockholders
                  
                  
                  581,199
                  
                  
                  –Gain
                      on settlement of note payable, other
                  
                  
                  (69,000
                  )
                  
                  –Gain
                      on settlement of accounts payable
                  
                  
                  (10,272
                  )
                  
                  –Stock
                      based compensation
                  
                  
                  40,179
                  
                  
                  185,321Stock
                      option expense
                  
                  
                  19,828
                  
                  
                  –Net
                      change in:Accounts receivable
                  
                  
                  (101,655
                  )
                  
                  (325,276
                  )Inventory
                  
                  
                  (99,783
                  )
                  
                  (46,606
                  )Other current assets
                  
                  
                  40,019
                  
                  
                  (27,755
                  )Accounts payable
                  
                  
                  129,306
                  
                  
                  124,777Other current liabilities and accrued interest
                  
                  
                  266,267
                  
                  
                  57,489Net cash utilized by operating activities
                  
                  
                  (1,329,170
                  )
                  
                  (406,504
                  )INVESTING
                      ACTIVITIESPurchase of property and equipment
                  
                  
                  (6,225
                  )
                  
                  (94,764
                  )Net cash utilized by investing activities
                  
                  
                  (6,225
                  )
                  
                  (94,764
                  )FINANCING
                      ACTIVITIESProceeds from sale of common stock
                  
                  
                  103,500
                  
                  
                  –Proceeds from notes
                  
                  
                  1,150,000
                  
                  
                  –Net borrowings from line of credit
                  
                  
                  –
                  
                  
                  15,000Proceeds from sale of treasury stock
                  
                  
                  –
                  
                  
                  180,000Proceeds from convertible notes
                  
                  
                  –
                  
                  
                  409,947Net cash provided by financing activities
                  
                  
                  1,253,500
                  
                  
                  604,947**INCREASE / (DECREASE) IN CASH**
                  
                  
                  (81,895
                  )
                  
                  103,679Cash,
                      beginning of period
                  
                  
                  139,403
                  
                  
                  35,724Cash,
                      end of period
                  
                  $
                  57,508
                  
                  $
                  139,403SUPPLEMENTAL
                      DISCLOSURE OF CASH FLOW INFORMATION:Cash
                      paid for interest during the period
                  
                  $
                  9,272
                  
                  $
                  3,430
  SUPPLEMENTAL
                      DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:During
                      the year ended October 31, 2005, the Company recorded the effect
                      of the
                      reverse merger of $29,948 against additional paid-in-capital
                      for the
                      assets acquired of $243 and liabilities assumed of
                      $30,191.During
                      the year ended October 31, 2005, the Company extinguished notes
                      payable,
                      Stockholder plus accrued interest in the amount of  $1,356,458 into
                      Common Stock Payable of $1,937,637, and recognized a net loss
                      on
                      extinguishment of $581,199.During
                      the year ended October 31, 2005, the Company converted its
                      convertible
                      notes payable, Stockholders in the amount of $213,000 to Common
                      Stock
                      Payable.During
                      the year ended October 31, 2005, the Company converted notes
                      payable,
                      Other plus accrued interest in the amount of $216,000 to Common
                      Stock
                      Payable.During
                      the year ended October 31, 2005, the Company extinguished a
                      note payable
                      plus accrued interest in the amount of $69,000 and accounts
                      payable in the
                      amount of $10,272.During
                      the year ended October 31, 2005, the Company converted accounts
                      payable to
                      a note payable in the amount of $90,000.During
                      the year eneded October 31, 2005, the Company converted accrued
                      license
                      fees payable in the amount of $97,635 and prepaid license fees
                      in the
                      amount of $2,365 to a note payable in the amount of
                      $100,000.During
                      the ten month period ended October 31, 2004, the Company acquired
                      1,633,334 shares of treasury stock and issued a note payable
                      in the amount
                      of $367,500 as consideration.During
                      the ten month period ended October 31, 2004, the Company issued
                      833,334
                      shares of treasury stock to an employee and a Stockholder as
                      compensation
                      valued at $187,500, of which $40,179 is unearned at October
                      31,
                      2004.During
                      the ten month period ended October 31, 2004, the Company granted
                      non-qualified stock options to purchase 820,000 shares of its
                      common stock
                      to employees, with an aggregate intrinsic value of $123,000,
                      of which
                      $105,000 is unearned at October 31, 2004.During
                      the ten month period ended October 31, 2004, the Company granted
                      non-qualified stock options to purchase 100,000 shares of its
                      common stock
                      to an investor, with a fair value
                      $20,000.




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


13





**FRIENDLYWAY
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEAR ENDED OCTOBER 31, 2005 AND**


**TEN-MONTHS
      ENDED OCTOBER 31, 2004**





**1.
      Background and Summary of Significant Accounting Policies**





*Background*





friendlyway
      Corporation (“FDWY” or the “Company”), through its wholly-owned subsidiary,
      friendlyway Technologies, Inc. (“FWI”), is
      in the
      business of providing user-friendly “self-service” systems and technologies for
      public access at points of sale, service and information to our clients. The
      Companay’s*Interactive
      Information Stations (IIS)*TM
are
      suitable for various applications, such as ticketing, Internet access, “self
      check-in”, way-finding, lead management, e-commerce, banking, lobby management
      and access control, as well as information and education.





FWI
      was
      incorporated on June 8, 2000 in the State of Delaware by friendlyway, AG
      (“FWAG”). Through July 31, 2002, FWI was a wholly owned subsidiary of FWAG.
      Effective August 1, 2002, Alexander von Welczeck, FWI’s President acquired a 70%
      interest in FWI from FWAG pursuant to a Management Buyout Agreement (“MBO”) with
      FWAG. Following the MBO, FWAG retained a 30% ownership interest in FWI. In
      the
      reverse merger transaction noted below, BIOF became the sole shareholder of
      FWI.


*Basis
        of Presentation and Share Exchange Agreement*
 
 On
        December 10, 2004, Biofarm, Inc. and its subsidiaries ("BIOF") entered into
        a
        reverse merger transaction with FWI. As a result, BIOF became an operating
        company. BIOF was a non-operating public shell corporation prior to the reverse
        merger transaction. As a result of this transaction, the stockholders of
        FWI
        became the controlling stockholders of BIOF, and FWI became a public company
        registrant. On December 10, 2004, BIOF and FWI entered into a Share Exchange
        Agreement (the "Transaction") whereby the stockholders of FWI exchanged each
        share they owned of FWI common stock for 1.8
        shares of BIOF common stock. The Transaction has been accounted for as a
        recapitalization of FWI, as FWI is the accounting acquirer. As a result,
        the
        historical equity, share and per share data of the Company has been
        retroactively reflected in the Company's 2004 financial statements. On April
        19,
        2005, BIOF filed an Amendment to its Articles of Incorporation changing its
        name
        to friendlyway Corporation and, in conjunction with that name change,
        friendlyway Corporation trades under the new stock symbol FDWY on the OTC
        Bulletin Board as of April 22, 2005. The Company changed its fiscal year
        end
        from December 31 to October 31 during 2005.




*Principles
      of Consolidation*





The
      accompanying consolidated financial statements include our accounts and the
      accounts of our wholly-owned subsidiary. All significant intercompany
      transactions and balances have been eliminated in consolidation.





*Use
      of Accounting Estimates*





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





*Cash
      and Cash Equivalents*





Cash
      and
      cash equivalents consist of cash on hand and highly liquid investments purchased
      with an original maturity of three months or less.





*Accounts
      Receivable*





The
      allowance for doubtful accounts receivable represents management’s estimate of
      potential loss on the accounts receivable balance. The estimate of the allowance
      for doubtful accounts receivable is calculated based on past experience and
      an
      evaluation of current conditions.




14




*Inventory*





Inventory
      is stated at the lower of cost or market. Cost is determined by the first-in,
      first-out method. Inventory consists entirely of work-in-process and finished
      goods at October 31, 2005.





*Furniture
      and Equipment*





Furniture
      and equipment are recorded at cost. Depreciation is computed using accelerated
      and straight-line methods over the assets’ estimated useful lives of 3 to 5
      years.





Expenditures
      for repairs and maintenance are charged to expense as incurred. When depreciable
      assets are sold, retired or impaired, the cost and related accumulated
      depreciation are removed with the resulting gain or loss credited or charged
      to
      income.





*Fair
      Value of Financial Instruments*





Statement
      of Financial Accounting Standards (“SFAS”) No. 107, *Disclosure
      About Fair Value of Financial Instruments* ,
      requires disclosure of the fair value of certain financial instruments. The
      Company’s financial instruments include cash and cash equivalents, trade
      receivables, accounts payable, and debt. Due to their current maturities, the
      carrying amounts of financial instruments are considered a reasonable estimate
      of the fair value of these instruments. The fair value of the guarantee of
      debt
      by a Stockholder’s close relatives is considered de minimus due to the amount of
      the credit facility guaranteed.





*Long-Lived
      Assets*





We
      account for the impairment and disposition of long-lived assets in accordance
      with SFAS no. 144, Accounting for the Impairment or Disposal of Long-Lived
      Assets. We periodically review the recoverability of the carrying value of
      long-lived assets for impairment whenever events or changes in circumstances
      indicate their carrying value may not be recoverable. Recoverability of these
      assets is determined by analysis of the assets’ fair value by comparing the
      forecasted future undiscounted net cash flows from operations to which the
      assets relate, based on our best estimates using the appropriate assumptions
      and
      projections at the time, to the carrying amount of the assets. If the carrying
      value is determined not to be recoverable from future operating cash flows,
      the
      assets are deemed impaired and an impairment loss is recognized equal to the
      amount by which the carrying amount exceeds the estimated fair value of the
      assets. Based on our most recent analysis, we believe that no impairment exists
      at October 31, 2005.





*Revenue
      Recognition*





Revenue
      consists primarily of systems sales, rentals of self-service systems and
      professional services. Systems sales revenue is recognized when both title
      and
      risk of loss transfer to the customer, provided that no significant obligations
      remain. Rental revenue is recognized as earned in accordance with the terms
      of
      rental agreements, which are generally short-term in duration. The Company
      provides for an estimate of product returns and doubtful accounts, based on
      historical experience.





*Shipping
      and Handling Costs*





Shipping
      and handling costs are included in cost of sales.





*Advertising
      and Promotion Expense*





Advertising
      and promotion costs are expensed as incurred. For the year ended October 31,
      2005 and the ten months ended October 31, 2004, advertising and promotion
      expenses were $58,904 and $25,638, respectively.





*Income
      Taxes*





The
      Company adopted the provisions of Statement of Financial Accounting Standards
      (SFAS) No. 109, “Accounting for Income Taxes,” which requires a change from the
      deferral method of assets and liability method of accounting for income taxes.
      Timing differences exist between book income and tax income, which relates
      primarily to depreciation methods.




15




*Stock
      Based Compensation*





The
      Company has adopted the disclosure-only provisions of SFAS No.123, *Accounting
      for Stock-Based Compensation* ,
      and
      uses the intrinsic value method of accounting for stock-based awards granted
      to
      employees, as prescribed in Accounting Principles Board (“APB”) Opinion No. 25,
      Accounting for Stock Issued to Employees, and related interpretations. For
      stock-based awards granted to outside parties, the Company uses the fair value
      method as prescribed in SFAS No. 123.





Pro-forma
      information regarding net income is required to be presented as if the Company
      had accounted for all stock options granted under the provisions of SFAS No.
      123. The fair value of stock options granted has been estimated, as of
      respective dates of grant, using the Black-Scholes option-pricing model. The
      following assumptions were used for such estimates: no dividend yield; no
      expected volatility; risk-free interest rate of 3.5%; and a weighted average
      expected life of the options of 5 years. Had the accounting provisions of SFAS
      No. 123 been adopted, net loss and share data for the year ended October 31,
      2005 and ten-months ended October 31, 2004 would be as follows:


2005
              
              January
                  1, 2004 - October 31, 2004Net
                  loss:As
                  reported
              
              
              ($2,269,064
              )
              
              ($437,178
              )Add
                  back: stock based compensation expense includedin
                  net income
              
              
              19,828
              
              
              —Less:
                  stock based compensation expense determinedunder
                  fair value method for all awards, no tax effect
              
              
              (26,435
              )
              
              ($30,000
              )Pro
                  forma
              
              
              ($2,275,671
              )
              
              ($467,178
              )Loss
                  per share:As
                  reported
              
              
              ($0.09
              )
              
              ($0.02
              )Pro
                  forma
              
              
              ($0.09
              )
              
              ($0.03
              )




All
      transactions with parties other than employees or services are for the
      consideration received for the issuance of stock are accounted for based on
      the
      fair value of the consideration received or the fair value of the stock,
      whichever is more reliably measurable.





*Net
      Loss Per Share*





The
      Company accounts for loss per share under the provisions of SFAS No. 128, *Loss
      Per Share* ,
      which
      requires a dual presentation of basic and diluted loss per share. Basic loss
      per
      share excludes dilution and is computed by dividing income available to common
      stockholders by the weighted average number of common shares outstanding for
      the
      year. Diluted loss per share is computed assuming the conversion of common
      stock
      equivalents, when dilutive. For the years ended October 31, 2005 and 2004,
      the
      Company’s common stock equivalents, which consist of convertible debt and stock
      options, were anti-dilutive, and therefore, basic and diluted loss per share
      were the same. The basic and diluted loss per share data and weighted average
      number of shares data for the year ended October 31, 2004 have been restated
      to
      present the Company’s data on a recapitalized basis.





*Reclassifications*





Certain
      amounts have been reclassified in the prior year’s financial statements to
      conform with the current period’s presentation.





*Recent
      Accounting Pronouncements*





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets,
      an amendment of APB Opinion No. 29". SFAS 153 is effective for nonmonetary
      asset
      exchanges occurring in fiscal periods beginning after June 15, 2005, with
      earlier application permitted. The adoption of SFAS 53 is not expected to have
      a
      material impact on our results of operations or financial position.





16




In
        December 2004, the FASB issued SFAS No. 123R, “Share-Based Payments (revised
        2004)”. This statement eliminates the option to apply the intrinsic value
        measurement provisions of APB Board Opinion No. 25, “Accounting for Stock Issued
        to Employees”, to stock compensation awards issued to employees. Rather, the
        statement requires companies to measure the cost of employee services received
        in exchange for an award of equity instruments based on the grant date fair
        value of the award. That cost will be recognized over the period during which
        an
        employee is required to provide services in exchange for the award -- the
        requisite service period (usually the vesting period). In March 2005, the
        SEC
        staff expressed their views with respect to SFAS No. 123R in Staff Accounting
        Bulletin No. 107, “Share-Based Payment”, (SAB 107). SAB 107 provides guidance on
        valuing options. SFAS 123R will be effective for our interim period beginning
        February 1, 2006. We are currently evaluating the impact of the adoption
        of this
        statement on our financial statements.
  In
      March
      2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional
      Asset Retirement Obligations", (FIN 47). FIN 47 is an interpretation of SFAS
      No.
      143, "Asset Retirement Obligations", which was issued in June 2001. FIN 47
      was
      issued to address diverse accounting practices that have developed with regard
      to the timing of liability recognition for legal obligations associated with
      the
      retirement of a tangible long-lived asset in which the timing and/or method
      of
      settlement are conditional on a future event that may or may not be within
      the
      control of the entity. According to FIN 47, uncertainty about the timing and/or
      method of settlement of a conditional asset retirement obligation should be
      factored into the measurement of the liability when sufficient information
      exists. FIN 47 also clarifies when an entity would have sufficient information
      to reasonably estimate the fair value of an asset retirement obligation. FIN
      47
      is effective no later our fiscal year ending October 31, 2006. The Company
      is
      currently evaluating the impact of the adoption of FIN 47 on its financial
      statements.





**2.
      Going Concern Matters**





The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As reflected in the accompanying financial
        statements, the Company incurred a net loss of $2,249,469 for the year ended
        October 31, 2005 and had total assets of $686,313 and an accumulated deficit
        of
        $2,934,679 at October 31, 2005. The realization of a major portion of the
        Company’s assets is dependent upon its ability to meet future financing
        requirements, and the success of future operations. Additionally, the Company
        is
        seeking additional sources of financing, primarily for working capital purposes.
        The Company’s ability to continue as a going concern is highly dependent upon
        its ability to obtain financing.





These
      conditions raise substantial doubt about the Company’s ability to continue as a
      going concern. The financial statements do not include any adjustments that
      might result from this uncertainty.





**3.
      Inventory**





Inventory
      consists of the following at October 31:





**2005**Purchased
                parts and materials
            
            $
            37,992Finished
                goods
            
            
            121,411Total
                inventory
            
            $
            159,403





**4.
      Property and Equipment**




**2005**Rental
                equipment
            
            $
            92,674Office
                furniture and equipment
            
            
            14,035Total
                property and equipment, at cost
            
            
            106,709Less
                accumulated depreciation
            
            
            (51,835
            )Total
                property and equipment, net
            
            $
            54,874





Depreciation
      expense for the year ended October 31, 2005 and ten-months ended October 31,
      2004 was $37,906 and $13,929, respectively.




17





**5.
      Notes Payable**





*Note
      Payable, Bank*





The
      Company has a line of credit with a bank which provides for maximum borrowings
      of $50,000. At October 31, 2005, there was $49,851 outstanding against this
      line
      of credit. Borrowings against this line of credit bear interest at the bank’s
      prime rate plus 2% (8.75% at October 31, 2005). This line of credit expires
      in
      January 2007, and may be extended on annual basis. Interest is payable monthly.
      Upon termination of the line of credit, any borrowings outstanding at that
      time
      are payable over 48 months. This line of credit is guaranteed by close relatives
      of a Company’s Stockholder.





*Note
      Payable, Other*





In
      April
      2005, the Company extinguished its unsecured promissory note for $60,000 plus
      accrued interest of $9,000 with a law firm. This note was entered into between
      the Company and the law firm in December 2003 for services rendered. The Company
      recognized a $69,000 gain on this settlement for the year ended October 31,
      2005.





In
      April
      2005, the Company entered into a new unsecured promissory note for $90,000
      for
      services rendered by the law firm. The note constitutes a settlement of $100,272
      of outstanding payables which resulted in a $10,272 gain. The note bears
      interest of 10% per annum and matures on March 31, 2006. Payments required
      on
      the note are for quarterly payments of $22,500 beginning June 30, 2005. As
      of
      October 31, 2005, no payments have been made on this note.





*Notes
      Payable, Stockholder*


During
        the year ended October 31, 2005, the Company issued 10 promissory notes payable
        to FWAG (also a stockholder of the Company) (“FWAG Notes”) in the aggregate
        amount of $1,250,000 in exchange for $1,150,000 of cash and the conversion
        of
        approximately $100,000 of accrued license and maintenance fees payable to
        FWAG.
        Such notes are unsecured, bear interest at 6% per annum and mature on March
        31,
        2008.
 
 During
        the year ended October 31, 2005, nine of these FWAG Notes and accrued interest
        were extinguished through conversion to shares of Common Stock of the Company
        as
        follows:
 
 Principal
              
              Interest
              
              Share
                  Price Conversion
              
              Converted
                  to Common SharesFWAG
                  Note 1
              
              $
              150,000
              
              $
              2,525
              
              $
              0.24
              
              
              635,521FWAG
                  Note 2
              
              $
              100,000
              
              $
              1,217
              
              $
              0.24
              
              
              421,738FWAG
                  Note 3
              
              $
              200,000
              
              $
              1,933
              
              $
              0.24
              
              
              841,388FWAG
                  Note 4
              
              $
              100,000
              
              $
              783
              
              $
              0.24
              
              
              419,929FWAG
                  Note 5
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 6
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 7
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 8
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 9
              
              $
              200,000
              
              
              —
              
              $
              0.24
              
              
              833,333Total
              
              $
              1,150,000
              
              $
              6,458
              
              
              
              
              
              4,818,577
  In
        July
        2005, the Company extinguished and converted a portion of the note payable,
        Stockholder of $367,500, in the amount of $200,000 to 454,545 shares of Common
        Stock. The remaining portion of this note payable of $167,500 plus accrued
        interest of $26,613 was converted to a new note payable in the amount of
        $194,113. The note bears interest at 6% per annum and matures on June 30,
        2008.







18




Aggregate
      maturities of debt at October 31, 2005 are as follows:




Year
            
            
            Amount2006
            
            $
            90,0002007
            
            $
            —2008
            
            $
            294,113







In
      total,
      the Company extinguished $1,356,458 of notes payable and accrued interest into
      $1,937,657 of Common Stock and recognized in a net loss on extinguishment of
      notes payable in the amount of $581,199 during the year ended October 31, 2005.
      As
      further discussed in Note 6, the 4,818,577 shares of Common Stock referred
      to
      above were pending issuance as of January 20, 2006.




*Convertible
      Notes Payable, Stockholder*




During
      the year ended October 31, 2005, the Company converted three convertible notes
      payable, Stockholders to shares of Common Stock (which,
      as further discussed in Note 6, such shares were pending issuance as of January
      20, 2006)as follows:




Principal
            
            Share
                Price Conversion
            
            Converted
                to Common SharesConvertible
                Note 1, Stockholder
            
            $
            18,000
            
            $
            0.18
            
            
            100,000Convertible
                Note 2, Stockholder
            
            $
            15,000
            
            $
            0.18
            
            
            83,333Convertible
                Note 3, Stockholder
            
            $
            180,000
            
            $
            0.18
            
            
            1,000,000Total
            
            $
            213,000
            
            
            
            
            
            1,183,333




*Convertible
      Notes Payable, Others*




During
      the year ended October 31, 2005, the Company converted two convertible notes
      payable to third parties, to shares of Common Stock (which,
      as further discussed in Note 6, such shares were pending issuance as of January
      20, 2006)as follows:




Principal
            
            Interest
            
            Share
                Price Conversion
            
            Converted
                to Common SharesConvertible
                Note 1, Other
            
            $
            18,000
            
            $
            0
            
            $
            0.18
            
            
            100,000Convertible
                Note 2, Other
            
            $
            180,000
            
            $
            18,000
            
            $
            0.18
            
            
            1,100,000Total
            
            $
            198,000
            
            $
            18,000
            
            
            
            
            
            1,200,000




**6.
        Common Stock Payable**
  As
          discussed in Note 5, during the year ended October 31, 2005, the Company
          converted the following debt into 7,656,455 Common Shares:
  Notes
                  Payable, Stockholders
              
              $
              1,937,657Convertible
                  Notes Payable, Stockholder
              
              $
              213,000Convertible
                  Notes Payable, Others
              
              $
              216,000Total
              
              $
              2,366,657
 
 The
        Company appointed a new transfer agent effective as of December 31, 2005.
As
        these
        shares of Common Stock are pending issuance from our new transfer agent,
        the
        amounts have been reflected as Common Stock Payable in the accompanyingConsolidated
        Balance Sheet.
  **7.
      Stockholders’ Equity**




*Increase
      in Authorized Common Shares*




In
      April
      2005, the Company filed an Amendment to its Articles of Incorporation to
      increase the Company’s authorized shares to 100,000,000 shares of common stock,
      par value $0.001 per share. There was no increase in the existing 5,000,000
      authorized shares of preferred stock, par value $0.001 per share.




*Common
      Stock Issuances*




In
      April
      2005, the Company entered into a Stock Purchase Agreement with a former officer
      of the Company and sold 450,000 shares of the Company’s common stock for
      $103,500.




19




**8.
      Stock Option Plan**




The
        Company’s Stock Option Plan (the “Plan”) has reserved 3,600,000 shares of common
        stock for issuance to employees, directors and consultants of the
        Company.


Under
      the
      Plan, eligible individuals may be granted incentive options or non-qualified
      options. The exercise price of incentive stock options granted under the Plan
      must be at least equal to the fair market value of the common stock on the
      date
      of grant. The exercise price of non-qualified options granted under the Plan
      must not be less than 85% of the fair market value of the common stock on the
      grant date, as determined by the Board of Directors. In addition, incentive
      and
      non-qualified options may be granted to persons owning more than 10% of the
      voting power of all classes of stock, at a price no lower than 110% of the
      fair
      market value at the date of grant, as determined by the Board of Directors.
      The
      Board also has the authority to set the terms of the options (no longer than
      ten
      years from the date of grant). Options granted generally vest at the rate of
      25%
      one year from the date of grant, and 1/36 each month thereafter.




A
      summary
      of the activity of the Plan for the period from January 1, 2003 through October
      31, 2005 is as follows:




Number
                of Shares
            
            Weighted
                Average Exercise Price**Outstanding
                at January 1, 2004**
            
            
            **900,000**
            
            **$**
            **0.03**Granted
                during period ended October 31, 2004
            
            
            1,656,000
            
            $
            0.09**Outstanding
                at October 31, 2004**
            
            
            **2,556,000**
            
            **$**
            **0.07**Granted
                during year ended October 31, 2005
            
            
            —
            
            
            —Forfeited
                during year ended October 31, 2005
            
            
            (963,000
            )
            $
            0.09**Outstanding
                at October 31, 2005**
            
            
            **1,593,000**
            
            **$**
            **0.06**




At
      October 31, 2005, the weighted average remaining contractual life of outstanding
      stock options was 8.2 years and the exercise price for the options outstanding
      range from $0.03 to $0.09. Of the total outstanding stock options granted during
      the period ended October 31, 2005, exercisable stock options totaled 799,223,
      with a weighted average exercise price of $0.03 per share.




**9.
      Related Party Transactions**




In
      August
      2002, FWI entered into a license agreement (“License Agreement”) with FWAG.
      Under the terms of the License Agreement, FWI is required to pay a license
      and
      maintenance fee as a percentage of gross revenue to FWAG. For the year ended
      October 31, 2005 and ten months ended October 31, 2004, FWI has incurred license
      and maintenance fees in the amounts of $53,184 and $48,613,
      respectively. ****




In
      November 2004, a Stockholder advanced the Company $35,000 for working capital
      purposes. As of October 31, 2005, outstanding advance from Stockholder was
      $22,500 and is included under other current liabilities.




During
      the year ended October 31, 2005 and for the ten months ended October 31, 2004,
      the Company made purchases of finished goods inventory for resale amounting
      to
      $95,920 and $100,688, respectively from FWAG.




During
        the year ended October 31, 2005, FWI secured $1,250,000 of additional financing
        from FWAG, in exchange for $1,150,000 of cash and conversion of approximately
        $100,000 of accrued license and maintenance fees payable due FWAG.


20




**10.
      Income Tax**




The
      Company follows FASB Statement Number 109 (SFAS 109),*Accounting
      for Income Taxes*.
      Deferred income taxes reflect the net effect of (a) temporary differences
      between carrying amounts of assets and liabilities for financial purposes and
      the amounts used for income tax reporting purposes, and (b) net operating loss
      carryforwards. No net provision for refundable Federal income tax has been
      made
      in the accompanying Statement of Operations, because no recoverable taxes were
      paid previously. Similarly, no deferred tax asset attributable to the net
      operating loss carryforward has been recognized, as it is not deemed likely
      to
      be realized.





The
      provision for refundable Federal and State income tax for year ending October
      31
      2005 and ten months ended October 31, 2004 consists of the
      following:





**2005**
            
            **2004**Refundable
                Federal income tax attributable to:Current
                operations
            
            $
            908,000
            
            $
            175,000Less,
                Change in valuation allowance
            
            
            (908,000
            )
            
            (175,000
            )Net
                refundable amount
            
            
            —
            
            
            —





The
      cumulative tax effect at the expected rate of 40% (34% Federal and 6% State)
      of
      significant items comprising the Company’s net deferred tax asset is as
      follows:





**2005**Deferred
                tax asset attributable to:Net
                operating loss carryover
            
            $
            2,688,000Depreciation
            
            
            119,000Less,
                Valuation allowance
            
            
            (2,807,000
            )Net
                deferred tax asset
            
            
            —




At
      October 31, 2005, the Company had an unused net operating loss carryover of
      $6,718,000 which may be used to offset future taxable income subject to certain
      limitations. The net operating loss expires beginning in 2020.





**11.
      Concentration of Risks**





Financial
      instruments that potentially subject us to concentrations of credit risk consist
      primarily of trade accounts receivable and accounts payable. We do not require
      collateral or other securities to support customer receivables. For the year
      ended October 31, 2005 our accounts receivable from two customers were 13%
      and
      11% respectively of net accounts receivable.




Purchases
      of inventory from one vendor amounted to $411,000 for the year ended October
      31,
      2005.




**12.
        Commitments and Contingencies**


*Leases*




The
      Company currently leases its office space on a month-to-month basis as the
      lease
      agreement expired in June 2004. Rent expense for the year ended October 31,
      2005
      and ten months ended October 31, 2004 were $115,400 and $51,380,
      respectively.




*Litigation*




In
          March
          2005, a civil action was commenced against us by John McConkie in the United
          States District Court, Central District of California. Mr. McConkie has
          alleged
          that, at the time we were conducting business under the name Biofarm, one
          of our
          former directors and an Ohio lawyer named Roger Kimmel defrauded him of
          funds in
          the amount of approximately $75,000. The complaint has alleged a scheme
          whereby
          Mr. Kimmel, purportedly acting as the general counsel of Biofarm, signed
          a
          letter agreement whereby Mr. McConkie would purchase a controlling interest
          in
          Biofarm for the sum of $200,000. Mr. McConkie claims that he transferred
          funds
          in the amount of approximately $75,000 to Mr. Kimmel in the nature of earnest
          money to initiate the transaction. After the transfer of the funds, Mr.
          McConkie
          has alleged that Mr. Kimmel refused to consummate the transaction, and
          did not
          return such funds to him. Mr. McConkie seeks relief in the amount of
          approximately $75,000, plus interest and expenses.


21




A
          civil
          action was commenced against us by Ginko Systems, LLC (“Ginko”), in the
          Montgomery County, Ohio Common Pleas Court. Ginko was previously our contract
          manufacturer of self-service systems. Ginko has claimed that we did not
          fulfill
          a purchase order issued to Ginko for the manufacturing of self-service
          systems.
          On December 12, 2005, the Court conducted a hearing on Ginko’s request for
          damages based on a default judgment against us on August 4, 2005. The Court
          awarded Ginko damages in the amount of $61,000. We have appealed this
          decision.


**13.
      Segments**




The
      Company reports segments in accordance with SFAS No. 131, Disclosure about
      Segments of an Enterprise and Related Information. SFAS 131 requires disclosure
      of certain information about operating segments, geographic areas in which
      the
      Company operates, major customers, and products and services. In accordance
      with
      SFAS 131, the Company has determined it has two operating segments: the Systems
      Sales segment and Systems Rental segment. These segments are managed separately
      and there are no significant differences in the systems deployed via sales
      or
      rental.




The
      markets served by System Sales segment is North and South America (sales are
      predominantly in the United States). The Systems Rental segment serves primarily
      the United States. Sales and rental to any individual customer did not exceed
      10% of consolidated sales.




The
      Company does not maintain separate stand-alone financial statements prepared
      in
      accordance with generally accepted accounting principles for each of its
      operating segments. In accordance with SFAS 131, the following table presents
      information related to each operating segment included in, and in a manner
      consistent with, internal management reports.




Year
                ended
              October
                31, 2005
            
            Ten
                months ended
              October
                31, 2004RevenueSystem
                Sales
            
            $
            1,379,233
            
            $
            1,611,385Rentals
                and services
            
            
            626,506
            
            
            333,146Total
                revenue
            
            
            2,005,739
            
            
            1,944,531Cost
                of revenueSystem
                Sales
            
            
            1,192,467
            
            
            1,035,176Rentals
                and services
            
            
            394,822
            
            
            157,298Total
                cost of revenue
            
            
            1,587,289
            
            
            1,192,474Gross
                profit
            
            $
            418,450
            
            $
            752,057




**14.
      Subsequent Events (Unaudited)**




On
      November 14, 2005, the Company issued a promissory note in the amount of
      $100,000 to FWAG. The note is unsecured, bears interest at 6% per annum and
      matures on March 31, 2008.




22




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




On
        December 12, 2005, Asher and Company, Ltd. advised us that it resigned as
        our
        auditors effective as of such date.
  On
        December 20, 2005, we appointed the accounting firm of Lopez, Blevins, Bork
        & Associates, LLP to serve as our auditors.
  **ITEM
      8A. CONTROLS AND PROCEDURES**





Our
      disclosure controls and procedures are designed to ensure that information
      required to be disclosed in reports that we file or submit under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”), was recorded, processed,
      summarized and reported within the time periods specified in the rules and
      forms
      of the Securities and Exchange Commission (“SEC”). Our management, with the
      participation of our President and Chief Executive Officer and Chief Financial
      Officer, have evaluated the effectiveness, as of October 31, 2005, of our
“disclosure controls and procedures”, as that term is defined in Rule 13a-15(e)
      under the Exchange Act. Based upon that evaluation, our President and Chief
      Executive Officer and our Chief Financial Officer concluded that the disclosure
      controls and procedures as of October 31, 2005, were effective to provide a
      reasonable assurance that information required to be disclosed by us in the
      reports filed or submitted by us under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC's rules
      and
      forms, and to provide reasonable assurance that information required to be
      disclosed by the us in such reports is accumulated and communicated to our
      management, including our principal executive officer and principal financial
      officer, as appropriate to allow timely decisions regarding required disclosure.





There
      was
      no change in our “internal control over financial reporting”, as such term is
      defined in Rule 13a-15(f) under the Exchange Act that occurred during the year
      ended October 31, 2005, that has materially affected, or is reasonably likely
      to
      materially effect, our internal control over financial reporting.




23


PART
      III





**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**




Our
      executive officers and sole director and their ages as of January 31, 2006,
      are
      as follows:





Name
              
              Alexander
                von Welczeck
              
              Henry
                Lo
            Age
              
              42
              
              42
            Positions
              
              President,
                Chief Executive Officer and Sole Director
              
              Chief
                Financial Officer and Secretary




*Alexander
      von Welczeck* serves
      as our President, Chief Executive Officer, and sole Director. Since 1998, Mr.
      Welczeck has been the president and chief executive officer of friendlyway
      Delaware. During 2002, Mr. Welczeck orchestrated the management buyout of
      friendlyway Delaware, from friendlyway AG, its parent corporation. Prior to
      joining friendlyway Delaware in 1998, Mr. Welczeck spent two years as marketing
      manager at Thyssen GmbH in Stuttgart, Germany. Prior to his years at Thyssen
      GmbH, he spent over 10 years at Dover Elevators in various managerial positions,
      including in sales, marketing and business development. During his tenure at
      Dover Elevators, Mr. Welczeck played a key role in the acquisition of 11
      companies in a roll-up consolidation strategy. Mr. Welczeck has approximately
      19
      years of sales, marketing and business development experience with
      multi-national companies.




*Henry
      Lo* serves
      as our Chief Financial Officer and oversees all of our finance, accounting
      and
      administrative activities. Mr. Lo founded and served as chief financial officer
      of Planet-Intra Software, a web-based portal software company, since its
      inception in 2000. During his tenure at Planet-Intra Software, Mr. Lo raised
      over $10,000,000 from venture capital firms and orchestrated its sale in 2003.
      Prior to joining Planet-Intra Software, Mr. Lo was chief financial officer
      at
      Versata Software and served in this capacity during its initial public offering
      in March 2000. Mr. Lo served as treasurer and director of investor relations
      at
      StorMedia Incorporated, which conducted an initial public offering in 1995.
      Mr.
      Lo served as chief financial officer at SyQuest Technology and orchestrated
      its
      sale to Iomega Corporation. Mr. Lo’s prior experience includes various
      managerial positions at GE Capital, and Mr. Lo was a senior manager at
      PriceWaterhouseCoopers LLP. Mr. Lo is a certified public accountant, and is
      a
      member of the AICPA and the California Society of CPAs.




No
      director received compensation or reimbursement of expenses for his services
      as
      a director during the fiscal year ended October 31, 2005.





Our
      Board
      of Directors does not have audit, compensation or nominating committees, and
      no
      determination has been made as to whether our sole director qualifies as an
      “audit committee financial expert”, as defined in Item 401 of Regulation
      S-B.





**Compliance
      with Section 16(a) of the Act**





Section
      16(a) of the Exchange Act requires our officers and directors, and persons
      who
      own more than ten percent (10%) of our shares of common stock, to file reports
      of ownership and changes in ownership with the SEC. Officers, directors and
      greater than ten percent (10%) stockholders are required by regulations
      promulgated by the SEC to furnish us with copies of all Section 16(a) forms
      that
      they file. With reference to transactions during the fiscal year ended October
      31, 2005, to our knowledge, based solely on review of the copies of such reports
      furnished to us and written representations, all Section 16(a) forms required
      to
      be filed with the SEC were filed.





**Code
      of Ethics**





We
      do not
      currently have a code of ethics applicable to our principal executive and
      financial officers. Prior to the Acquisition, we did not believe such a code
      was
      necessary because we were not an operating company. Our Board of Directors
      intends to consider adopting such a code.




24





**ITEM
      10. EXECUTIVE COMPENSATION**





No
      compensation in excess of $100,000 per year was awarded to, earned by, or paid
      to any of our executive officers during the fiscal years 2005, 2004 and 2003.
      The following table provides summary information for the years 2005, 2004 and
      2003 concerning annual compensation paid by us to the person serving as our
      President and Chief Executive Officer.





**SUMMARY
      COMPENSATION TABLE**





**Annual
                Compensation****Name
                and Principal Position**
            
            **Year**
            
            **Salary
                ($)**Alexander
                von Welczeck
            
            
            2005
            
            $
            60,000President
                and CEO
            
            
            2004
            
            $
            60,000David
                R. Stith
            
            
            2003
            
            
            —President





**Stock
      Option Plan**





We
      adopted the friendlyway Corporation Stock Incentive Plan (the “Plan”) in 2005 to
      provide an incentive to our employees, officers, directors and consultants
      to
      achieve our financial goals and enhance stockholder value. An aggregate of
      3,600,000 shares of our common stock are authorized for issuance under the
      Plan.
      The purpose of the Plan is to attract and retain qualified personnel, to provide
      additional incentives to our employees, officers and directors and to promote
      the success of our business. In furtherance of this purpose, the Plan authorizes
      the granting of incentive and non-statutory stock options to purchase shares
      of
      our common stock. The Board of Directors has complete discretion to determine
      which eligible individuals are to receive option grants, the number of shares
      subject to each such grant, the status of any granted option as either an
      incentive stock option or a non-statutory option, the vesting schedule to be
      in
      effect for the option grant and the maximum term for which any granted option
      is
      to remain outstanding.




25


**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





The
      following table sets forth as of January 31, 2006, certain information regarding
      the beneficial ownership of our common stock by:





(1)
      Each
      person who is known us to be the beneficial owner of more than 5% of the common
      stock,





(2)
      Each
      of our executive officers and sole director and





(3)
      All
      of executive officers and sole director as a group.





Except
      as
      otherwise indicated, the persons or entities listed below have sole voting
      and
      investment power with respect to all shares of common stock beneficially owned
      by them, except to the extent such power may be shared with a spouse.




**NAME
                  AND ADDRESS OF BENEFICIAL OWNER**
              
              **SHARES
                  BENIFICIALLY OWNED (1)**
              
              **PERCENTAGE
                  OF SHARESOUTSTANDING (1)**Alexander
                  von Welczeck (2)
              
              
              7,205,175
              (3)
              
              20.0
              %Henry
                  Lo (2)
              
              
              975,000
              (3)
              
              2.7
              %friendlyway
                  AG
              
              
              12,348,400
              
              
              34.3
              %Muencnerstr.
                  1285774
                  UnterfoehringGermanyAll
                  executive officers and sole director as a group (2)
              
              
              8,180,175
              
              
              22.7
              %
  (1)
              The
                  number of shares and percentage of class beneficially owned set
                  forth
                  above is determined under rules promulgated by the SEC and the
                  information
                  is not necessarily indicative of beneficial ownership for any other
                  purpose. Under such rules, beneficial ownership includes any shares
                  as to
                  which the individual has sole or shared voting power or investment
                  power
                  and also any shares that the individual has the right to acquire
                  within 60
                  days through the exercise of stock options. Unless otherwise indicated
                  and
                  pursuant to applicable community property laws, each person or
                  entity
                  named in the table has sole voting power and investment power with
                  respect
                  to all shares of common stock listed as owned by such person or
                  entity.





(2)
            The
                address of the reporting person is c/o friendlyway Corporation, 1255
                Battery Street, Suite 200, San Francisco, California 94111.





(3)
            Includes
                75,000 shares of our common stock subject to options that are exercisable
                within 60 days of the date hereof.





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





In
      August
      2002, we entered into a license agreement with friendlyway AG. Under the terms
      of this license agreement, we are required to pay a license and maintenance
      fee
      as a percentage of gross revenue to friendlyway AG. For the years ended October
      31, 2005 and 2004, we incurred license and maintenance fees in the amount of
      $53,184 and $59,415, respectively. ****




During
      the years ended October 31, 2005 and 2004, we made purchases of finished goods
      inventory for resale amounting to $95,920 and $100,688, respectively, from
      friendlyway AG.




26




During
        the year ended October 31, 2005, we secured $1,250,000 of additional debt
        financing from friendlyway AG, through the issuance of 10 promissory notes
        payable to friendlyway AG (each a “FWAG Note”), of which approximately $100,000
        was for the conversion of accrued license and maintenance fees. Such promissory
        notes were unsecured and paid interest at the rate of six percent (6%) per
        annum. During 2005, nine of these promissory notes were cancelled and converted
        into shares of our common stock as follows:


Principal
              
              Interest
              
              Share
                  Price Conversion
              
              Converted
                  to Common SharesFWAG
                  Note 1
              
              $
              150,000
              
              $
              2,525
              
              $
              0.24
              
              
              635,521FWAG
                  Note 2
              
              $
              100,000
              
              $
              1,217
              
              $
              0.24
              
              
              421,738FWAG
                  Note 3
              
              $
              200,000
              
              $
              1,933
              
              $
              0.24
              
              
              841,388FWAG
                  Note 4
              
              $
              100,000
              
              $
              783
              
              $
              0.24
              
              
              419,929FWAG
                  Note 5
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 6
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 7
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 8
              
              $
              100,000
              
              
              —
              
              $
              0.24
              
              
              416,667FWAG
                  Note 9
              
              $
              200,000
              
              
              —
              
              $
              0.24
              
              
              833,333Total
              
              $
              1,150,000
              
              $
              6,458
              
              
              
              
              
              4,818,577
 
 During
        the year ended October 31, 2005 and for the ten months ended October 31,
        2004,
        we made purchases of finished goods inventory for resale amounting to $95,920
        and $100,668, respectively, from friendlyway AG.





**ITEM
      13. EXHIBITS**





The
      following Exhibits are filed herein:




ExhibitsExhibit
            2.1
            
            Separation, Transfer and Distribution
              Agreement dated as of June 11, 2004 among the registrant, Ocwen Corp.,
              Herbert McDonald, David R. Stith and Allan Esrine (incorporated by
              reference to Exhibit 2.1 to registrant’s report on Form 10-KSB for the
              fiscal year ended October 31, 2004 filed on February 15,
              2005)Exhibit
            2.2
            
            Trust
              Agreement dated as of June 11, 2004 among the registrant, Ocwen Corp.,
              Herbert McDonald, David R. Stith and Allan Esrine (incorporated by
              reference to Exhibit 2.2 to registrant’s report on Form 10-KSB for the
              fiscal year ended October 31, 2004 filed on February 15,
              2005)Exhibit
            2.3
            
            Share
                Exchange Agreement dated as of August 13, 2004 among the registrant,
                friendlyway Technologies, Inc., friendlyway AG and Alexander von
                Welczeck
                (incorporated by reference to Exhibit 2.1 to registrant’s report on Form
                8-K filed on December 16, 2004)Exhibit
            2.4
            
            Closing
                Agreement dated as of December 10, 2004 among the registrant, friendlyway
                Technologies, Inc., friendlyway AG, Alexander von Welczeck, Derma
                Plus,
                Inc., Pacific Capsource, Inc., Henry Lo and Karl Heinz Johannsmeier
                (incorporated by reference to Exhibit 2.2 to registrant’s report on Form
                8-K filed on December 16, 2004)Exhibit
            3.1
            
            Amended and Restated Articles of
              Incorporation of registrant (filed herewith)Exhibit
            3.2
            
            Amended and Restated Bylaws of registrant
              (filed herewith)Exhibit
            4.1
            
            Stock Certificate of registrant (filed
              herewith)Exhibit
            4.2
            
            Instruments
                defining the rights of security holders (included in Exhibit
                3.1)Exhibit
            21.1
            
            List
              of subsidiaries of registrant (filed herewith)Exhibit
            31.1
            
            302 Certification - Alexander von Welczeck
              (filed herewith)Exhibit
            31.2
            
            302
              Certification - Henry Lo (filed herewith)Exhibit
            32.1
            
            906 Certification - Alexander von Welczeck
              (filed herewith)Exhibit
            32.2
            
            906
              Certification - Henry Lo (filed herewith)






27




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





The
        following table sets forth fees billed to us for principal accountant fees
        and
        services during the periods ended October 31, 2005 and the ten months ended
        October 31, 2004 (in thousands).




**2005**
              
              **2004**Audit
                  Fees
              
              $
              31.1
              
              $
              36.2Audit-Related
                  Fees (1)
              
              
              37.7
              
              
              —Tax
                  Fees
              
              
              —
              
              
              —All
                  Other Fees
              
              
              —
              
              
              —Total
                  Audit and Audit-Related Fees
              
              
              68.8
              
              $
              36.2
 
 (1)
              Audit-related
                  fees incurred during 2005 include billings for services related
                  to a
                  filing on Form 8-K/A ($11.3) and filings on Form 10-QSB
                  ($26.4)


28


**SIGNATURES**




In
        accordance with 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, on the 8th day of March, 2006.


friendlyway
                CORPORATIONBy:
            /s/ Alexander
              von WelczeckAlexander
              von WelczeckPresident
              and
              Chief Executive Officer


Pursuant
      to the requirements of Section 13 or 15(d) of the Exchange Act, this report
      has
      been duly signed below by the following persons on behalf of the registrant
      and
      in the capacities and on the dates indicated.





Signatures
              
              /s/Alexander
                von Welczeck
              Alexander
                von
                Welczeck
              
              
              /s/Henry
                Lo
              Henry
                Lo
            Title
              
              President
                and Chief Executive
              Officer
                and Director
              (Principal
                Executive Officer)
              
              Chief
                Financial Officer
              (Principal
                Financial Officer)
            Date
              
              March
                8, 2006
              
              
              
              March
                8, 2006




29




friendlyway
      Corporation





Index
      to
      Exhibits




Exhibit
            
            3.1
            
            Amended and Restated Articles of
              Incorporation of registrantExhibit
            
            3.2
            
            Amended and Restated Bylaws of
              registrantExhibit
            
            4.1
            
            Stock Certificate of registrantExhibit
            
            4.2
            
            Instruments
                defining the rights of security holders (included in Exhibit
                3.1)Exhibit
            
            21.1
            
            List
              of subsidiaries of registrantExhibit
            
            31.1
            
            302 Certification - Alexander von
              WelczeckExhibit
            
            31.2
            
            302
              Certification - Henry LoExhibit
            
            32.1
            
            906 Certification - Alexander von WelczeckExhibit
            
            32.2
            
            906
              Certification - Henry Lo